TN 21 (01-98)

Citations:

Section 209(a)(15) of the Act Social Security Act

A. POLICY — GENERAL

Payments or benefits to an employee under educational and dependent care assistance programs are excluded from wages if the employee is able to exclude such payments or benefits from income under sections 127 or 129 of the IRC.

B. PROCEDURE

Assume the employer has correctly treated payments as to whether or not they are wages. If development is necessary, refer to RS 01402.510 for developing questionable pay.

C. POLICY — EDUCATIONAL ASSISTANCE PROGRAM

Amounts paid or expenses incurred by the employer under a qualified educational assistance program are excluded from the employee's wages if the amounts are excluded from gross income under section 127 of the IRC.

1. The Revenue Reconciliation Act of 1997

This legislation extends the exclusion for employer-provided educational assistance. The exclusion applies retroactively to June 1, 1997 (the date the former exclusion expired) and extends through May 31, 2000.

2. Monetary Limitation

The wage exclusion applies to amounts up to $5,250 for employer-provided educational assistance. Prior to 1986, the exclusion was limited to $5,000.

3. Wage Exclusion Expires

The exclusion applies to taxable years beginning before June 1, 2000.

NOTE: Graduate level courses are excluded from wages for taxable years beginning January 1, 1991 and ending with taxable years beginning after June 30, 1996.

4. Working Condition Fringe Benefit

Educational assistance that does not qualify for the exclusion (e.g., the amount that exceeds the $5,250 limit) can be excluded from wages only if it qualifies as a working condition fringe benefit under section 132 of the IRC. This rule is effective for taxable years beginning after December 31, 1988.

D. POLICY — DEPENDENT CARE ASSISTANCE PROGRAM

1. General

Amounts paid or expenses incurred by an employer for dependent care assistance under a qualified dependent care assistance program (section 129 of the IRC) are excluded from wages.

2. Monetary Limitation

The exclusion is limited to $5,000 in a taxable year ($2,500 for a separate return filed by the married taxpayer). The exclusion does not apply if the payment is made to a dependent of the employee; the employee's spouse; or, a child under age 19 for whom the employee claims a dependent allowance.

3. Form W-2 Reporting

The employer must furnish the employee a written statement showing the amounts incurred or paid for dependent care assistance by January 31 before reporting the amount on the Form W-2.