No 127 education reimbursements for employees with bachelor degrees.

[Guest Do]

Under Code Section 127, educational reimbursement amounts for graduate level courses were taxable to the employee before 1991. From 1991 to June 30, 1996, such reimbursement amounts were not taxable. As a result of SBJPA, educational reimbursement amounts for graduate level courses under Code Section 127 became taxable again.

Notice 96-68 defines graduate level courses as any course taken by an employee who: (1) has a bachelor's degree; OR (2) is receiving credit toward a more advanced degree, if the particular course can be taken for credit by any individual in a program leading to a law, business, medical, or other advanced academic or professional degree. Paragraph (2) is in the Code but (1) is not. Under (1) appears to preclude anyone with a bachelors degree from receiving NON-taxable tuition reimbursement. The effective date of this was June 30, 1996.

Every employer I've talked to about their 127 plan does not restrict non-taxable education reimbursements to employees who do not have a bachelors degree. Employees who have bachelors degrees are getting reimbursed unless they are taking a graduate level course under condition (1) above.

Am I misunderstanding 96-68? Is the IRS wrong and there is a case as authority? If I'm right, is this news to anyone?