The Tax Cuts and Jobs Act (TCJA) eliminated a host of miscellaneous itemized deductions through 2025, including a deduction for job-related education expenses pursuant to Code Section 162. Simple enough.
Except that many employer-provided education benefits are directly tied to the employee’s right to claim a deduction under Section 162. These include tax-free employer payments and reimbursements for college courses and continuing education, as well as an employer’s in-kind provision of such education. If no individual deduction is available for such expenses under Section 162, can the employer still provide, pay for, or reimburse employees for education without it being taxable to the employee?
If we look at what the TCJA does — and more importantly, what it did not do — it becomes clear that Congress did not intend to eliminate tax-free employer-provided education benefits. Unless further guidance from the IRS or Congress says otherwise, such benefits should continue to be permissible.
Before 2018, Section 67 of the Tax Code limited the deduction for miscellaneous itemized expenses to the amount by which they, in the aggregate, exceeded 2 percent of adjusted gross income. Section 11045 of the TCJA added Section 67(g), which states that all deductions subject to the 2 percent limitation — including deductions under Section 162 — are suspended through 2025.
Before the TCJA, three provisions of the Tax Code could be used by employers to pay for employees’ education expenses: (1) educational assistance programs under Section 127; (2) working condition fringe benefits under Section 132 and Treasury Regulation 1.132-5; and (3) accountable plan reimbursements under Section 62.
Educational assistance programs
There is no doubt that EAPs are still available. Though the House tried to repeal Section 127, it lives on. Section 127 is also broader than Section 162, as reimbursable education expenses are not limited to job-related education. However, an EAP requires a written plan, must meet certain non-discrimination requirements, and is limited to $5,250 per year.
Working condition fringe benefits
Section 132 excludes working condition fringe benefits from gross income. A working condition fringe benefit is defined as “property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.” For these purposes, the term “employee” includes current employees, partners, directors, and independent contractors.
A cash payment is not a working condition fringe benefit, unless: (1) it is for a specific or prearranged business activity; (2) the employer verifies the payment is used for that activity; and (3) any excess is returned to the employer. Otherwise, to be excluded from income, a cash payment would have to qualify as a reimbursement under an accountable plan (see below).
Though the TCJA suspended the deduction, the fringe benefit should survive, for two primary reasons:
- Congress did not say otherwise. Section 217 of the Tax Code provides a deduction for qualified moving expenses. The TCJA added Section 217(k), suspending the deduction for everyone but members of the military through 2025. Section 132(g) provided for a “qualified moving expense reimbursement” by an employer if the expense would be allowed as a deduction under Section 217. Did the elimination of the deduction also eliminate the fringe benefit in Section 132? Yes. We know that because Congress said so. Specifically, the TCJA added Section 132(g)(2), which also suspends the fringe benefit for non-military employees through 2025. In stark contrast, the TCJA left working condition fringe benefits completely untouched. The absence of a corresponding suspension under Section 132 shows a clear intent to allow such benefits to continue. That’s not the only example, either. Congress also added Section132(f)(8), suspending bicycle commuting benefits through 2025. Again, this shows that if Congress had wanted to suspend the working condition fringe, it would have said so in Section 132 itself.
- Section 67 should be ignored. Section 132 only requires that a payment would be allowable as a deduction under Section 162, not Section 67. In addition, Treasury Regulation 1.132-5(a)(1)(vi) states that “[t]he limitation of section 67(a) . . . is not considered when determining the amount of a working condition fringe.” This is strong evidence that the limitations imposed by Section 67 should be ignored when determining a working condition fringe benefit under Sections 132 and 162. Thus, so long as Section 162 is satisfied, the fringe benefit should still apply. This is also further reason why, if Congress had intended to suspend the working condition fringe benefit, it would have said so in Section 132.
Perhaps most importantly, the IRS agrees with this position. On Feb. 8, 2018, the IRS released Publication 15-B, the “Employer’s Tax Guide to Fringe Benefits,” which takes into account changes made by the TCJA. The document clearly reflects that the working condition fringe benefit is still available, specifically including “job-related education provided to an employee.”
Section 62(a)(2)(A) excludes from adjusted gross income “deductions allowed by part VI (section 161 and following)” that are paid or incurred by an employee and then reimbursed by the employer under a “reimbursement or other expense allowance arrangement.” Section 62(a)(2) also deducts from adjusted gross income four other types of expenses allowable under Section 162.
A reimbursement or other expense allowance arrangement that meets the following requirements under Section 62 is referred to as an “accountable plan”: (1) there is a business connection between the expense and the employee’s job; (2) the expenses are substantiated; and (3) any excess amounts are returned to the employer.
Education reimbursements under an accountable plan should still be permitted, for similar reasons:
- Congress did not say otherwise. Section 215 of the Tax Code provided an itemized deduction for alimony payments. The TCJA repealed Section 215 in its entirety. Section 62(a)(10) allowed a corresponding “above-the-line” deduction from adjusted gross income for alimony deductions allowable under Section 215. Did the elimination of Section 215 also eliminate the corresponding deduction in Section 62? Yes. Again, we know that because Congress said so. To make it clear, Congress also repealed Section 62(a)(10). If Congress had similarly intended to eliminate or suspend all accountable plan deductions based on Section 162 — and all other deductions under Section 62(a)(2) that are derived from Section 162 — then Congress would similarly have repealed or suspended applicable portions of Section 62(a)(2). The House, in fact, tried to repeal those deductions. But that repeal did not make it to the final bill, as the Conference Committee made a decision to retain the above-the-line deductions under Section 62(a)(2). Thus, the fact that the TCJA leaves Section 62(a)(2) completely intact shows that Congress intended to retain all such deductions, as noted in the Conference Committee Report.
- Section 67 should be ignored. In addition, just like Section 132, Section 62 only requires that a payment would be allowable as a deduction under Section 162, not Section 67. And, just as Treasury Regulation 1.132-5 requires that Section 67(a) be ignored when determining the amount of the deduction, Treasury Regulation 1.62-1T(e)(1) states that Section 62 deductions from adjusted gross income are “determined without regard to Section 67.” This is further evidence that the suspension under Section 67 should be ignored when determining above-the-line deductions under a Section 62 accountable plan.
Unfortunately, it does not look like the IRS has confirmed this position, yet.
Though the individual deduction under Section 162 for job-related education expenses is no longer valid, tax-free employer-provided education benefits should continue to be treated as available under Sections 127, 132, and 62, absent contrary guidance from the IRS or Congress.