HCEs / Coverage Test?

[Guest fender5150]

Children of HCEs are also considered HCEs, right? I'll assume so.

Is there a coverage test-type requirement with a tuition reimb. plan?

This wording in pub 970 makes me wonder:

This program only qualifies if..... The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees.

I'd like to interpret this to mean the benefit offered to eligable HCE's is not greater than the benefit offered to eligable non-HCEs. And also; The eligibility requirements weren't set up to favor HCEs.

Am I on the right track?

Thanks in advance for your input.

[J Simmons]

Children of HCEs are also considered HCEs, right? I'll assume so.

As a general proposition about HCEs, no, but for qualified tuition reduction, yes. For general use of the term HCE, it depends on what makes the parent an HCE. Does the parent have more than 5% stock ownership in the employer? If so, then yes the stock ownership of the parent will attribute to the child, rendering the child to be an HCE as well. Otherwise, no.

However use of the qualified tuition reduction by a dependent child of the employee, while the child is under age 25, is considered use by the employee. Thus, I do think that the qualified tuition reduction must not favor HCEs and their under age 25, dependent children.

I'd like to interpret this to mean the benefit offered to eligable HCE's is not greater than the benefit offered to eligable non-HCEs. And also; The eligibility requirements weren't set up to favor HCEs.

Am I on the right track?

The language of IRC 117(d)(3) suggest nondiscrimination is measured against availability, not actual usage: "available on substantially the same terms".

Yes, I think you are on the right track.

[Guest Sieve]

I don't find the language you quote in the 2008 edition of Pub 570 (dated 2/23/2009), so . . .

IRC Section 117(d): Dependent children of HCEs. If you are talking about qualified tuition reduction programs (IRC Section 117(d)) provided to employees (& their spouses & dependent children) of an educational institution--which I think you are--then, as John indicates, use by the dependent child is treated as use by the employee, so non-discrimination in favor of HCEs would include non-discrimination in favor of the HCEs' dependent children. Of course, the status of an emplyee as an HCE of a tax-exempt institution could not be based on ownership (see below), just on HCE-level compensation in the prior year. I would agree that it is the availability of the benefit, not its usage, which is determinative, but I don't think it's the discriminatory intent of the benefit availability rules which is important, but rather the mere discriminatory results of that benefit availability. So, even if the eligibilty standards are not intentionally discriminatory, nevertheless discrimination is discrimination.

IRC Section 117(d): Employees who happen to be children of HCEs. Qualified tuition reduction programs (IRC Section 117(d)) provided to employees (& their spouses & dependent children) of an educational institution utilize the regular HCE rules (as pointed out by John) in determining whether a specific employee is an HCE, meaning that stock ownership by an employee who is the child of an owner includes any ownership by the parent: if parent owns more than 5%, then so does child. However, the parent's HCE status does not pass to a child based on the parent's prior year's compensation. So, under IRC Section 117(d), there will be no employees of the institution who are children HCEs (unless based on the child's own compensation) if the educational institution is a tax-exempt entity, since there is no individual ownership of tax exempts, but there might be HCEs based on parental ownership if the institution is for-profit.

IRC Section 127 (in case that's what you're talking about). If you are talking about educational assistance programs (IRC Section 127), where an employer (whether or not an educational institution) gives educational assistance to employees, then that arrangement specifically cannot discriminate in favor of more than 5% owners (& their spouses & dependents) with regard to "amounts paid or incurred . . . for eduational assistance during the year". (IRC Section 127(b)(3).) In that case, discrimination is measured as being more than 5% of the amounts paid or incurred by the employer with respect to those in favor of whom the discrimination cannot occur. For those purposes, a child who is an employee is treated as owning a parent's stock under the rules of IRC Section 1563 (IRC Section 127©(4)), meaning that a minor child is treated as owning the stock owned by the parent but an adult child is treated as owning the stock of his/her parent only if the adult child owns more than 50%. The traditional HCE definition is not used.