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Physician-Parents and the Cost of Education
[By Staff Reporters]
IRS Section 127 plans are used to pay and deduct college costs. These plans allow your practice to pay up to $5,250 of college expenses per year, but do not require your child to recognize the tuition payment as income. The following questions and answers relate to the IRS Section 127 Educational Assistance Plan which became effective on July 1, 2002
1. What benefits are provided under the Section 127 Plan?
The Section 127 Plan is intended to provide favorable tax benefits only. The Plan will exclude from taxation graduate-level courses provided to eligibles up to a maximum of $5,250 per calendar year. Section 127 plans provide relief from taxation for those eligibles whose graduate-level educational benefits are not covered under other Code provisions.
2. Who will benefit under the Plan?
Employees enrolled in graduate-level courses under the Reduced Fee Enrollment Policy that are not job-related will benefit from the Plan. The value of such courses will not be taxed, up to the $5,250 annual limit. Employees enrolled in non-job-related graduate courses taken for professional development at another educational institution are also covered by the Plan and will not be taxed on the value of those courses, subject to the annual limit.
3. What kinds of graduate courses are covered under the Plan?
The Plan covers graduate-level courses of a kind normally taken by an individual leading to a law, business, medical, or other advanced academic or professional degree. Covered courses do not include courses or other education involving sports, games, or hobbies. Courses covered by the Plan may be taken at another educational institution.
4. Are any undergraduate courses covered under the Plan?
No. Undergraduate courses are excluded from taxation under IRC section 117.
5. Why are job-related courses not covered under the Plan?
Job-related courses are already exempt from taxation under IRC section 162. Thus, only courses taken for professional development that are not directly related to an employee’s current position are covered by the Plan.
6. What is the definition of a job-related course?
A job-related course is a course taken by an employee either to maintain or improve skills required in the employee’s current job; or to meet the express requirements of the employer; or the requirements of law or regulations, imposed as a condition to retaining the employee’s salary, status, or employment.
7. Are Section 127 educational benefits reportable on the Form W-2?
No. The instructions for Form W-2 provide that payments qualifying under a Section 127 educational assistance program are not reportable in box 1 as wages. Only waivers or reimbursements (for non-job-related graduate courses) in excess of the $5,250 annual exclusion limit would be reported on the Form W-2 as taxable compensation, subject to withholding. Accordingly, such excess amounts should be paid through a payroll system.
8. What are the requirements for a Section 127 Plan?
Section 127 requires that an employer prepare a separate written plan for the exclusive benefit of its employees to provide such employees with educational assistance. In addition, eligible employees must be provided reasonable notification of the availability and terms of the plan; and the plan must not discriminate in favor of highly compensated employees. Section 127 does not require the educational assistance program to be funded.
9. May benefits be provided on a retroactive basis?
No. Section 127 requires that employees be provided with reasonable notice about the benefits available under the plan. If benefits are provided before the plan is in effect, employees have not been provided with the requisite notice.
10. Are there any IRS information reporting requirements related to 127 Plans?
No. The IRS has indefinitely suspended the reporting of data related to the administration of a Section 127 Plan (IRS Notice 2002-24).
Assessment
To properly use a Section 127 plan, physicians must adhere to several rules: the student must be 21 years old; the student cannot be a tax dependent of the physician; the student must be an employee of the medical practice; and the plan cannot discriminate against employees not related to the physician.
Conclusion
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Filed under: Financial Planning, Funding Basics | Tagged: college funding, IRS, Section 127 plans |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
I was not aware of this plan before this post.
Gilford
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Good post.
Gil: Here are a few sources for additional reading on savings vehicles for education expenses:
College Savings (Boglehead Wiki)
Your College Saving Options (collegeboard.com)
Compare Savings Options (savingforcollege.com)
Compare College Savings Options (collegeinvest.org).
Carter
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Advisors Question Prepaid College Plans
It sounded like a marvelous deal when prepaid state tuition plans first rolled out: Pay for your child’s college tuition now at a particular school at a fraction of what the actual cost will be years later when s/he attends. But … now?
http://www.fa-mag.com/fa-news/10514-advisors-question-prepaid-college-plans.html
Norman
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The Winners (and Losers) of College Financial Aid
[PODCAST]
Universities have become increasingly strategic about how they use their financial aid, but who they’re awarding money to and for what remains unclear.
http://www.propublica.org/podcast/item/podcast-the-winners-and-losers-of-college-financial-aid/?utm_source=et&utm_medium=email&utm_campaign=dailynewsletter
In this podcast, Marian Wang and Eric Umansky discuss the information imbalance at the center of the admissions and financial-aid process.
Bridgette
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Ivy League schools?
Alan Krueger, the famous Princeton economist, coauthored two landmark studies that demonstrated quite convincingly that the largely wealthy students who go to Ivy League schools will fare just as well graduating from other schools.
In the first study released 12 years ago, the researchers looked at students who attended one of the eight Ivy League schools and those who were accepted to these schools, but went elsewhere. When they examined their later earnings, however, the grads were essentially making the same income.
Even more compelling was Krueger’s second study, published in 2011, where he looked at the earnings of students who attended Ivy League schools and those who had the same excellent academic profiles but were rejected from the Ivies. Krueger documented the same salary phenomenon.
Collin
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