Qualification of Graduate Coursework for Employer-Provided Tuition Assistance

Current Law:

• Under the IRS Tax Code 26 USC Sec. 127 the first $5,250 of employer-provided tuition assistance used for undergraduate-but not graduate-tuition is tax exempt.

Issue:

• Not extending the tax exemption to graduate-level coursework deters employees from pursuing graduate-level education. With our nation's need for a highly educated workforce, this policy is counterproductive.

• Employers are required to pay employment taxes on the provided benefits. By taxing tuition assistance, employers may be hesitant to afford assistance for graduate coursework. Additionally, the tax burden borne by the employee reduces the net effect of this employment benefit and therefore reduces the marginal utility of the benefit for recruitment purposes.

• Encouraging employees to pursue graduate education benefits not only the employer and the employee, but also our economy as a whole. An individual with a graduate degree earns significantly more than an individual without and therefore will pay substantially more in taxes. Moreover, in an economy increasingly driven by knowledge-based service institutions, employees should be encouraged rather than discouraged from ensuring their education is up to the challenge.

• While the tax burden assumed by the employee is partially mitigated by the Lifetime Learning Credit (graduate coursework paid for by employer assistance qualifies for the Lifetime Learning Credit as it is a taxed benefit), it directly affects the employer. Many employers currently cap their tuition assistance at the undergraduate exemption amount of $5,250. This implies that employers are motivated by the level of tax burden they are asked to assume on their employee's behalf.

Proposed:

• Extend the $5,250 exemption to graduate level coursework.

Possible Objections:

• Extending the benefit to graduate coursework will reduce tax revenues.

Counter Argument:

• Because graduate coursework already qualifies for the Lifetime Learning Credit, there is already reduced tax revenues from the employee. Additionally, the tendency for graduate-level training to increase earning power results in an increased amount of taxes paid.