Educational Assistance Programs

[Guest ERISAGuy]

Hello All:

Strange question for you all -- My company provides an educational assistance program. For now, let's assume it qualifies under Section 127. The company will reimburse up to the statutory limits. However, if the employee quits within one year after reimbursement, the employee would have to pay back the company with a pro-rata portion of the reimbursement. Under Section 127, it is not discriminatory to require a reasonable condition subsequent with respect to reimbursement (and the Code mentions "such as remaining employed for one year after completing the course"). However, I read that as the Company can "wait" a year before reimbursement -- not pay the reimbursement today (and take a deduction) - and then possibly have income when the reimbursement is repaid at a later date. Also, what happens to the employee who quits? Does the employee get a tax deduction with respect to the amount he/she "paid back" to the Company (as if the employee paid for the course himself/herself?

Any help would be greatly appreciated. There is not much on this topic (at least that I can find).

ERISA Guy

[Guest Harry O]

The company gets a deduction for the educational expenses in the year it pays the expenses or incurs a fixed obligation to do so. If the employee subsequently pays back the employer, the employer will have income in the year of repayment or the year the employer is entitled to repayment if earlier. Since the employee never paid tax on the original reimbursement because of section 127, he would generally not be entitled to any deduction upon repayment. The only exception would be if the course was job-related. In that case the repayment to the employer essentially means the employee is paying his own educational expenses himself. If the course was job related, he would be entitled to an educational expense deduction for the repayment.

My two cents and, as always, contact a tax professional for assistance!

[Guest ERISAGuy]

Thanks Harry. Your thoughts completely jibed with mine - but it gets trickier (in my opinion)

What happens if the amount paid is greater than the applicable limit? The amount over that is taxable to the employee (assuming that it does not qualify as a working condition fringe benefit) - If the amount that is over the limit is taxable to the employee -- but may have to be paid back by the employee at a future date - does that make the whole thing a loan? I believe that you look to the time when the transaction is done -- and at the time - it is a fringe benefit up to the limit and then taxable thereafter - and if paid back at a later date, then you look to the time then - and it is income to the participant. I do not even begin to know what happens to the employee (other than he may be s.o.l.)?

[Guest Harry O]

I don't think this is a loan. A *conditional* obligation to repay does not create a debt. There generally is no intention of creating a debtor-creditor relationship and no fixed obligation to repay. The intent is that a debtor-creditor relationship would only arise in the future if the employee failed to render the required services. The initial contingent repayment obligation would be satisfied by performing services, not by cash.

This contingent repayment scenario is not uncommon in the employment area. For example, many employers reimburse moving expenses subject to a repayment obligation if the employee quits within a specified period after the move. These are usually not "loans" . . .

If the original payment was taxable (e.g., it exceeded the section 127 threshold and was not job-related), a repayment in a subsequent year would be deductible by the employee as a miscellaneous itemized deduction subject to the 2% of AGI floor (the IRS's position in Rev. Rul. 79-311) or, in my view, a claim of right adjustment under section 1341 that is not subject to the 2% floor. If the repayment is made in the same year that the reimbursement was made, it is a nothing for tax purposes.