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Governing Policy
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The University of Minnesota (University) Regents Tuition Benefit Program (Program) is covered by two separate Internal Revenue Code (IRC) sections: Section 117(d) covers undergraduate level courses, and Section 127 covers graduate level courses.
Undergraduate Level Courses
Under IRC Section 117(d), a qualified tuition reduction offered by the University to its employees for undergraduate level coursework is excluded from taxable income. Therefore, University employee recipients of the Program taking eligible undergraduate level courses will not be taxed on the value of the qualified tuition reduction.
Tax Reporting:
Since this is not a taxable benefit, the value of the benefit for undergraduate level courses is not reported on the employee’s Form W-2. The portion of any tuition and required fees paid by the employee will be reported in Box 1 on Form 1098-T. Tuition benefits provided to employees under the Regents Tuition Benefit Program are not reported in Box 5 of Form 1098-T.
| Form | Benefits Reported |
|---|---|
| Form W-2 | No benefits reported |
| Form 1098-T Box 1 | Tuition and required fees paid by the employee |
| Form 1098-T Box 5 | No benefits reported |
Graduate Level Courses
Employees enrolled in graduate level classes can have employer-paid tuition benefits excluded from taxable income, up to a maximum annual amount of $5,250. The value exceeding $5,250 in a calendar year will be added to income as a taxable fringe benefit and the appropriate taxes will be withheld from regular pay, unless the below job-related exclusion applies. IRC Section 127 governs this benefit.
Job-Related Exclusion:
If a course is directly related to an employee’s job and other IRS-specified criteria are met, an employee may be eligible for an income tax exclusion applied to the value of such course. For each job-related course, employees and their supervisors must complete and submit a Job-Related Graduate Course Exclusion Application to the Tax Management Office by the first billing due date for the term. If approved as job-related, the value of such course does not count towards the $5,250 threshold.
Employees are encouraged to timely submit an application for all job-related courses if there is any chance that they may exceed the threshold during the calendar year. There is no penalty for submitting an application even if an employee never reaches the threshold.
The application for exclusion requires review and approval from the employee’s supervisor and the Tax Management Office. The employee and their supervisor are most knowledgeable about the employee’s position and how the course relates to that position. Through the application process, the employee and supervisor are documenting the job-relatedness and certifying that the answers on the form are accurate. The Tax Management Office relies on the information provided in the application.
The employee and department will be responsible for any taxes or penalties assessed on audit by the Internal Revenue Service. If this occurs, the University may also be required to issue corrected W-2s to the employee and the IRS, and the employee could be required to file amended tax returns.
Late submissions are not guaranteed to be processed as specific time restrictions may apply. Applications submitted after the close of the term during which the course was taken will not be processed.
Payroll Administration:
Unless approved as job-related, any benefit for graduate level courses that exceeds $5,250 in a calendar year will result in the excess amount being added to the employee’s taxable income during the semester in which they exceed the limit. The employee’s total graduate tuition values are monitored each period and appropriate adjustments are made due to added or dropped classes. The benefit does not become taxable until it actually exceeds the exclusion limit, so nothing is added as a taxable benefit to an employee’s gross income until such amount is actually exceeded.
Generally, the total value of the taxable amount will be prorated over four pay periods in the term (three during summer term) and added to the employee’s gross income as a taxable fringe benefit. The federal and state income taxes are calculated based on the employee’s W-4 withholding allowances. Social Security and Medicare taxes are also calculated as a percentage of taxable income.
Pay and Taxes on the Office Human Resources website provides general information on tax withholding and links to other resources. An employee can change their W-4 allowances at any time by going to the My Pay tab in MyU and clicking on “W-4 Tax Information.”
Tax Reporting:
The taxable portion of the benefit will be reported on the employees Form W-2, along with the corresponding taxes withheld. Tuition and required fees paid by the employee will be reported in Box 1 on Form 1098-T. Amounts subject to tax and reported on Form W-2 are included in Box 1 of Form 1098-T. Tuition benefits provided to employees under the Regents Tuition Benefit Program are not reported in Box 5 of Form 1098-T.
| Form | Benefits Reported |
|---|---|
| Form W-2 | Taxable portion of benefits reported |
| Form 1098-T Box 1 | Tuition and required fees paid by the employee |
| Form 1098-T Box 1 | Taxable portion of benefits reported |
| Form 1098-T Box 5 | No benefits reported |
Example:
In the spring term, two employees take the same graduate-level course that is related to their jobs. The 75% benefit is valued at $6,000 for each employee. Employee 1 completes the Job-Related Graduate Course Exclusion Application, and it is approved. Employee 2 does nothing. Employee 1 will have no taxable income related to this benefit nor additional withholding. Employee 2 will have $750 of taxable income, with the appropriate taxes withheld from future paychecks.
In the fall term, the same two employees take another course, with the 75% benefit valued at $6,000 for each employee. This course is not related to either employee’s job. Employee 1 will have $750 of taxable income, with the appropriate taxes withheld from future paychecks. Employee 2 will have $6,000 of taxable income, with the appropriate taxes withheld from future paychecks. This could have been avoided if Employee 2 had completed a timely application during spring term, since the $5,250 applies cumulatively through the calendar year. It is too late to apply now, after the spring term ended.
Employee 1’s Box 1 of Form 1098-T will show the $750 that was taxed, their 25% tuition paid, plus any fees paid. Employee 2’s Box 1 of Form 1098-T will show the $6,750 that was taxed, their 25% tuition paid, plus any fees paid.
| Employee 1 Tax Reporting | Employee 2 Tax Reporting |
|---|---|
| Form W-2 - $750 taxable income and corresponding taxes withheld | Form W-2 - $6,750 taxable income and corresponding taxes withheld |
| Form 1098-T Box 1 includes $750 plus 25% tuition paid and any fees paid | Form 1098-T Box 1 includes $6,750 plus 25% tuition paid and any fees paid |
Former Employees on the Layoff List
With the required approval, former eligible civil service and labor represented staff employees who are on the layoff list have access to the Program. However, because they are no longer employees of the University, they do not qualify for the exclusions noted above. Instead, any benefits received are treated as scholarships under Section 117(a), which also excludes any amounts received as a qualified scholarship from taxable income.
Tax Reporting:
Since this is not a taxable benefit, the value of the benefit is not reported on the former employee’s Form W-2. The tuition and required fees paid by the former employee will be reported in Box 1 on Form 1098-T. Scholarships provided to former employees under the Program are reported on Form 1098-T in Box 5.
| Form | Benefits Reported |
|---|---|
| Form W-2 | No benefits reported |
| Form 1098-T Box 1 | Tuition and required fees paid |
| Form 1098-T Box 5 | Tuition benefit provided as a scholarship |
Responsibilities
Employee requesting Regents Tuition Benefit Program:
- Takes responsibility to learn about the relevant tax implications of the Program.
- Timely reviews the instructions and completes the Job-Related Graduate Course Exclusion Application when a course is directly related to their job.
- Provides the exclusion application to their supervisor for review and approval of job-related criteria.
- Timely submits the approved exclusion application to the Tax Management Office at [email protected].
Supervisor:
- Takes responsibility to learn about the relevant tax implications of the Program.
- Timely reviews the Job-Related Graduate Course Exclusion Application when submitted by their employee.
- Reaches out to the Tax Management Office with any questions pertaining to the job-related analysis.
- Timely signs and returns the approved exclusion application to the employee or provides the employee with a detailed explanation of denial.
Tax Management Office:
- Provides resources regarding applicable income tax implications of the Program.
- Receives and reviews Job-Related Graduate Course Exclusion Applications.
- Timely submits the approved exclusion application to Payroll and informs the employee, or returns the application to the employee with a detailed explanation of denial.
Payroll:
- Tracks the taxable portion of the employee benefit.
- Processes the taxable fringe benefits and withholds taxes.
- Informs employees of potential taxable income and withholding.
Additional Resources
An employee who receives a taxable tuition benefit might qualify for education related tax benefits on their tax return. Refer to the IRS Publication 970 for more information.
The University of Minnesota does not provide personal tax advice. Employees should consult with a personal tax advisor or the Internal Revenue Service for answers to specific questions.