Employee tuition benefits are facing major tax change

Tuition Benefit Change

One of the joys of working at Penn is the ability to earn an advanced degree using the University’s graduate tuition benefit. However, employees planning to use the benefit this spring should be aware of an impending tax change that may affect their tax bills.

In past years, the first $5,250 of an employee’s graduate tuition benefit per calendar year was tax-free, making it possible for some Penn employees to earn an Ivy League diploma at a nominal cost. Tuition payments exceeding that benefit amount were subject to tax withholding at 36.5 percent.

But the entire benefit soon may be considered taxable income.

The current Internal Revenue Service (IRS) exemption allowing for the first $5,250 in graduate tuition benefits to be tax-free is set to expire on Dec. 31, 2010. Since Congress has not yet renewed the exemption, Penn is treating all Spring 2011 graduate tuition benefits as taxable.

“Employees should note that Penn’s actual graduate tuition benefit is not changing,” says Meg Lewis, a University tuition benefit specialist. “What is changing are the government regulations surrounding the taxability of graduate tuition benefits. This is a federal regulation and not a change in Penn policy.”

If the exemption is not renewed, the IRS will consider all graduate tuition assistance to be taxable compensation. Penn will withhold the taxes from the total employee benefit payment at the current tax rate of 36.5 percent. Employees’ student accounts will show a balance due equal to the amount owed in taxes because the University will pay those taxes on their behalf.

Graduate tuition benefits will be listed as taxable income on employees’ W-2 forms and the taxes withheld—federal, Social Security, Medicare and Philadelphia wage taxes—will be listed as taxes paid.

If Congress renews the exemption, the Tuition Benefit Office will alert employees and reimburse them for the federal taxes paid. Although the exemption has been extended often since it was enacted, there is no guarantee that it will be extended again.

The undergraduate tuition benefit for Penn employees, spouses and dependent children will not be affected.

For more information about Penn tuition benefits, visit Human Resources at www.hr.upenn.edu/tuition.

 

Originally published on November 11, 2010