- PURPOSE
The purpose of this memorandum is to provide notification of a change in the Internal
Revenue Code (IRC) affecting how educational assistance payments are treated by the
Internal Revenue Service (IRS). This memorandum will outline how tuition reimbursements
for state employees should now be processed. Memorandum No. 97-38, "Reportability of
Reimbursed Employee Undergraduate Tuition Payments - Expiration of Section 127 of the
Internal Revenue Code," is rescinded. Memoranda Nos. 97-7 and 97-7a remain in effect.
- AUTHORITY
Public Law 105-34, The Taxpayer Relief Act of 1997, contains a provision extending the
exclusion for employer-provided educational assistance. Section 127 of the Internal
Revenue Code, "Educational Assistance Programs," has been reinstated
retroactively to June 1, 1997 for undergraduate courses. The exclusion expires with
respect to undergraduate courses beginning after May 31, 2000. The exclusion does
not apply to graduate courses.
- EDUCATIONAL ASSISTANCE PROGRAMS - SECTION 127 IRC
Section 127 states: "Employee benefits under an employer's nondiscriminatory
educational assistance plan are not includable in the employee-recipient's gross income.
The exclusion is limited to $5,250 per year. Reimbursements in excess of $5,250 per
year are not excludable." Section 127 continues: "The term 'education'
includes any form of instruction that improves or develops the capabilities of an
individual. The educational courses covered by the plan need not be job-related or part of
a degree program. Courses in sports, games or hobbies (unless involved in the employer's
business) cannot be covered. However, education that instructs employees as to how to
maintain and improve health can be covered as long as it is not recreational in
nature."
- SECTION 132 IRC
However, educational assistance exceeding the $5,250 limit may be excludable under IRC
Section 132, "Exclusion of Certain Fringe Benefits from Gross Income".
Please refer to Comptroller's Memorandum 95-36 dated May 26, 1995 for specific criteria
for determining reportability.
- REQUESTS FOR PAYMENT
The following procedures are to be used when processing employee tuition reimbursement
payments:
- Non-Reportable Tuition Reimbursements
Payments that meet the criteria outlined in Section III of this memorandum are
non-reportable and the processing of the payment should be submitted on form CO-17XP and
processed in the usual manner through the Comptroller's Accounts Payable Division.
- Reportable Tuition Reimbursements
If the reimbursement does not meet the criteria outlined in Section III of this
memorandum, the payment is reportable and should be paid through payroll. If the
reimbursement is over the $5,250 maximum and does not meet the criteria outlined in
Comptroller's Memorandum No. 95-36, dated May 26, 1995, the amount of the payment
exceeding $5,250 is reportable and the excess amount should be paid through payroll.
- Fund 9916 - Tuition Reimbursements
Payment requests for reimbursement of tuition and other professional development costs
from Fund 9916 must meet the same criteria as outlined in Section III of this memorandum.
However, the payment should be processed by completing a form CO-17XP - Employee Voucher
and submitting the form and two copies of all applicable documentation. The employee
number, payroll unit level 2 code and D/OE code must appear in the remarks section of the
form. Submit all documentation to the Comptroller's Business Office for approval and
payment.
- REPORTABLE PAYMENTS PREVIOUSLY PROCESSED
Calendar Year 1997 All education assistance payments processed as reportable between
June 1, 1997 and the issuance of this memorandum will be adjusted centrally to be
non-reportable. Agency payroll offices must notify the Comptroller's Payroll Services
Division of any tuition payments including graduate tuition payments that would still be
considered reportable under the new guidelines by October 20, 1997. The non-reportable
tuition amounts will be backed out of each employee's taxable wages, including retirees.
Social security and Medicare taxes for 1997 will be refunded to all applicable employees
with the payroll check dated November 7, 1997.
- GENERAL
It is expected that the processing of tuition and travel reimbursements will be revised
for the new calendar year and all employee reimbursements will be paid through the payroll
system. New procedures will be distributed at the end of this calendar year. The State
Accounting Manual, Expenditure Section, regarding "Reportability of Educational
Expenses and Reimbursements" will be revised with the next update.
- QUESTIONS
Questions may be directed to the Office of the State Comptroller as follows: Accounts
Payable Procedures: Accounts Payable Division, (860) 702-3395.
Payroll Procedures: On-Line: Payroll Services Division, (860) 702-3463;
Remote Job Entry: Payroll Services Division, (860) 702-3462.
Memorandum Interpretation:
Policy Evaluation and Review Division, (860) 702-3437 or (860) 702-3443.
