Last month, we hosted a webinar for our independent school clients entitled “Tuition Remission: Ensuring Compliance and Maximizing Benefits,” where we discussed tuition remission benefits for independent school employees.  As a handy reference, we have prepared the following FAQs summarizing some of the topics addressed at the webinar and some tips from our lawyers.

Q1: What does Section 117(d) of the Internal Revenue Code–the tuition remission statute–say in plain language?

The statute says that a school may provide its employees with tuition reductions or cash grants for the payment of tuition, without that benefit being considered taxable income to the employee. The only exception to this rule is if the availability of the benefit discriminates in favor of highly compensated employees. If this discrimination occurs, the benefit is taxable, but only to the highly compensated employees. Highly compensated employee for 2025 means an employee who earned more than $160,000 in the prior calendar year.

Q2: Who is eligible to receive tuition remission as a tax-free benefit? Can an employee who is a grandparent benefit from a tuition remission policy?

The following individuals are considered employees for the purposes of qualified tuition reductions:

• A current employee
• A former employee who retired or left on disability (Note that Tax Courts have held this does not include former employees who left for reasons other than retirement or disability)
• A widow or widower of an individual who died while an employee
• A widow or widower of a former employee who retired or left on disability
• A dependent child or spouse of one of the above

Regarding grandparents, eligible children as defined in the Internal Revenue Code do NOT include grandchildren; therefore, grandparents cannot benefit from the tuition remission policy.

Q3: How is “child” defined? 

A child is defined in the Internal Revenue Code as a son or daughter, stepson or stepdaughter, any legally adopted child, or a foster child who is a member of the employee’s household and whose principal place of residence is the employee’s home. This child must also be a dependent — that is, the child must fall into one of the following categories: (1) the employee provides over one-half of the child’s support for the year; (2) both of the child’s parents are deceased and the child is less than 25 years old; (3) the child’s parents are divorced or separated and the child receives one-half of his or her support from either or both parents; or (4) the employee is allowed to treat the child as a tax dependent under special rules that apply to multiple support orders.

Q4: Does remission cover only tuition, or can it encompass other fees or charges such as after-school program fees, expenses for school trips, books and other supplies?

Section 117(d) of the Internal Revenue Code only refers to tuition itself as being eligible for remission. Section 127 of the Code for Education Assistance Plans, however, spells out a longer list of expenses connected to education, including tuition, fees and similar payments, books, supplies and equipment that would be covered. Unlike Section 127 plans, qualified tuition remission plans may only be offered by employers that are schools, are not subject to any dollar limit, are available for the education of employees, spouses, and dependent children, and are available for tuition only. Thus, if a school wants to allow these other expenses to be paid for on a non-taxable basis, adopting a Section 127 Education Assistance Plan may be necessary.

Q5: What happens if an employee leaves the school before the end of the year?

It will depend on exactly how the school has defined the eligibility section of its tuition remission policy.  Very often, the school will write its tuition remission policy to require that the employee remain employed for the entire length of the semester or school year in order to qualify for the full tuition remission amount.  The policy would go on to provide that should the employee terminate his or her employment before those dates, then the former employee must pay the school for the pro-rated portion of the tuition that relates to the time period following the end of his or her employment with the school.  Sometimes the School will draft its tuition remission policy to provide exceptions to the tuition payback obligation when the employee has passed away, or lost his or her job due to a layoff or other reduction in force.  As noted in Q&A2 above, for continuing tuition remission coverage for future costs of tuition, only retired employees and disabled employees would continue to be eligible to receive that tuition assistance under Code Section 117(d) on a tax-free basis. 

Q6: Can the school provide a greater tuition remission benefit for a specific employee?

Generally, a school can offer different levels of tuition remission but with one big caveat:  if the better tuition remission is going to highly compensated employees, their receipt of that larger tuition remission would be viewed as a discriminatory benefit, which would make it taxable to the highly compensated employee.  For all employees to be eligible for a tax-free benefit of tuition remission, the statute requires that the tuition remission must be available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer that does not discriminate in favor of highly compensated employees.  As noted in Q & A 2,  highly compensated employee for 2025 means an employee who earned more than $160,000 in the prior calendar year.

Takeaways:

Given the uptick in tuition remission disputes, now is a good time for independent schools to review their tuition remission policies. Good policies should:

• Clearly define the categories of employees that are eligible for the tuition remission benefit.
• Outline the criteria for eligibility clearly and completely.
• Generally, avoid discrimination in favor of highly compensated employees, given the resulting inclusion of the discriminatory benefit amount in their taxable income.
• Note the school’s right to modify its policy as circumstances change.
• Integrate with the school’s overall compensation strategy.