Tax Expenditures: Information on Employer-Provided Educational Assistance
(Letter Report, 12/19/96, GAO/GGD-97-28).

Pursuant to a congressional request, GAO reported on employer-provided
educational assistance between 1992 and 1994 under section 127 of the
Internal Revenue Code (IRC), focusing on: (1) the characteristics of
employers providing educational assistance, such as the number of
providers and their size; (2) employees eligible for and receiving it,
such as the number of recipients and their level of study; and (3) other
tax provisions related to employer-provided educational assistance and
the differences between them and section 127.

GAO found that: (1) according to IRS data, employers annualy filed over
3,200 returns that reported information about educational assistance
they provided their employees during 1992 through 1994; (2) employers
filing returns varied in size, type of business, and amount of
assistance provided; (3) large employers, those employing 250 or more
employees, provided 99 percent of the dollar amount of the reported
assistance to 98 percent of the employees who received it; (4) IRS data
showed that about 900,000 employees received employer-provided
educational assistance annually during 1992 through 1994, but few
employees eligible for educational assistance under section 127 actually
received it; (5) according to National Postsecondary Student Aid Study
data, 74 percent of employees receiving educational assistance in
academic year 1992 to 1993 were undergraduates, and about 64 percent of
the undergraduates who identified their occupation were in clerical or
technical occupations; (6) of employees receiving assistance who were
graduate students and identified their occupation, about 89 percent were
in professional, managerial, administrative, or teaching occupations;
(7) generally, four tax provisions apply to employer-provided
educational assistance; and (8) the major differences between section
127 and the three other provisions are related to the type of education
supported, employee eligibility, limits on the value of assistance
provided, and the ease of administration.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-97-28
     TITLE:  Tax Expenditures: Information on Employer-Provided 
             Educational Assistance
      DATE:  12/19/96
   SUBJECT:  Tax returns
             Higher education
             Aid for education
             Personal income taxes
             Fringe benefits
             Reporting requirements
             Education or training
             Employee benefit plans
             Tax administration
             Eligibility criteria
IDENTIFIER:  National Postsecondary Student Aid Study
             
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Cover
================================================================ COVER


Report to the Chairman
Committee on Ways and Means
House of Representatives

December 1996

TAX EXPENDITURES - INFORMATION ON
EMPLOYER-PROVIDED EDUCATIONAL
ASSISTANCE

GAO/GGD-97-28

Employer-Provided Educational Assistance

(268729)


Abbreviations
=============================================================== ABBREV

  BLS - Bureau of Labor Statistics
  IRC - Internal Revenue Code
  IRS - Internal Revenue Service
  NCES - National Center for Education Statistics
  NPSAS - National Postsecondary Student Aid Study

Letter
=============================================================== LETTER


B-274817

December 19, 1996

The Honorable Bill Archer
Chairman, Committee on Ways and Means
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request for information about
employer-provided educational assistance between 1992 and 1994 under
section 127 of the Internal Revenue Code (IRC).\1 In this report, we
provide information about employer-provided educational assistance,
including the characteristics of employers providing educational
assistance, such as the number of providers and their size, and
employees eligible for and receiving it, such as the number of
recipients and their level of study.  As requested, we also identify
other tax provisions related to employer-provided educational
assistance and discuss the differences between them and section 127. 

To compile the profile of educational assistance providers and
recipients, we analyzed data from the Internal Revenue Service (IRS),
the Department of Education's National Postsecondary Student Aid
Study (NPSAS), and Department of Labor's Bureau of Labor Statistics
(BLS) reports.  Our discussion of tax provisions related to
employer-provided educational assistance is primarily based on our
review of relevant sections of the Internal Revenue Code and IRS and
Department of the Treasury rulings and regulations. 


--------------------
\1 Section 127 expired Dec.  31, 1994, and was extended until June
1997 in Aug.  1996 as part of the Small Business Job Protection Act
of 1996. 


   BACKGROUND
------------------------------------------------------------ Letter :1

Employer-provided educational assistance refers to educational
expenses, such as courses, tuition, and books, that are paid for
either directly by the employer or indirectly through reimbursement
to employees.  Under section 127 of the IRC, the amount for
educational assistance that employees receive from their employers is
generally excludable from employees' gross income.  Generally, the
assistance may be for any type of course, except those related to
sports, games, or hobbies, and covers such expenses as tuition,
books, supplies, and equipment. 


      SECTION 127 WAS ENACTED IN
      1978
---------------------------------------------------------- Letter :1.1

Section 127 went into effect in 1979 with passage of the Revenue Act
of 1978.  Three major reasons for the enactment of section 127 were
cited in a June 1988 Department of the Treasury report:  (1) to
reduce the complexity of the tax system, (2) to reduce possible
inequities among taxpayers, and (3) to provide opportunities for
upward mobility for less educated individuals.\2 This report also
explained that prior law required individuals to pay income taxes on
the amount paid for training for new jobs or occupations if an
employer had paid for it, a situation that was considered inequitable
for those least able to pay but most in need of the education. 

Since section 127 was first authorized, it has expired and has been
extended eight times.  Several changes were made by these extensions,
including setting an annual limit on the amount that can be excluded
from employees' gross income (currently $5,250)\3 and establishing an
annual reporting requirement (Form 5500).\4 Based on our 1989 report
which noted an absence of data on the use of employer-provided
educational assistance, IRS developed Schedule F to supplement Form
5500.\5 This form and schedule require employers to report
information on (1) the number of employees eligible for such
assistance, (2) the number of employees who received such assistance,
and (3) the value of the assistance provided. 

The series of expirations and extensions of section 127 has
contributed to problems with the quality of available IRS data.  For
example, the 1993 extension was not enacted until several months
after section 127 had expired and the tax filing year had ended. 
Companies experienced uncertainty about how and whether to report
educational assistance as employee income and withhold taxes from it. 
Some companies included assistance in employees' income and withheld
taxes, others did not.  Ultimately, the extension was passed
retroactively, which resulted in those companies that had reported
the assistance as employee income having to refile employee wage
statements and tax returns.  Because of this, IRS has acknowledged
that some employers may not have filed the required IRS forms, thus
information about section 127 reported to IRS may not be complete. 
However, IRS officials told us that they believe most employers
complied with the reporting requirements during the last expiration
period. 


--------------------
\2 See Report to the Congress on Certain Employee Benefits Not
Subject to Federal Income Tax, Department of the Treasury, June 1988. 

\3 Section 1162(a)(1) of the Tax Reform Act of 1986 (P.L.  99-514)
raised the annual limit to $5,250 and required employers to report
the number of highly compensated employees participating in the
program; it also extended the program to 1987. 

\4 This was established as an annual reporting requirement under
section 6039D of the IRC. 

\5 See Tax Policy:  Insufficient Information to Assess Effect of Tax
Free Education Assistance (GAO/GGD-89-76, June 1989). 


      OTHER TAX TREATMENT OF
      EDUCATIONAL ASSISTANCE
---------------------------------------------------------- Letter :1.2

Aside from section 127, three tax provisions generally determine the
tax treatment of educational assistance:  Section 117--Qualified
Scholarships; Section 132--Certain Fringe Benefits; and Section
62(a)(2)(A)--Reimbursed Expenses of Employees.  Under section 117,
educational assistance provided by qualified educational institutions
to employees and their dependents can be excluded from employees'
gross income.  Under section 132, employees can exclude
employer-provided educational assistance from their gross income if
it qualifies as a working condition fringe benefit.  A working
condition fringe benefit is any property or service an employer
provides to an employee that, had the employee paid for such property
or services, the employee could deduct the payment from his/her
income as a business expense.  Under section 62, employees can
exclude educational assistance from their income if the assistance is
provided as part of an employer's "accountable plan," which requires
that assistance be business-related, expenses be documented, and
employees be required to return any excess payments.\6 These three
provisions do not have a dollar limit on the amount of assistance
that can be excluded. 

Otherwise, employer-provided educational assistance must be included
in employees' gross income.  Under certain conditions, however,
employees may deduct educational assistance that has been included in
their income.  Decisions as to whether such assistance included in an
employee's gross income can be deducted depend on whether the
assistance qualifies as a business expense under section 162 of the
IRC.  Section 162 discusses the circumstances under which an
employer's educational assistance expenses are related to an
employee's job and therefore are deductible.\7 It allows individuals
who itemize deductions on their tax returns to deduct qualifying
job-related educational expenses and other miscellaneous itemized
deductions from gross income.  Moreover, qualifying educational
expenses and other miscellaneous itemized deductions are deductible
only to the extent that they exceed 2 percent of the individual's
adjusted gross income. 

Figure 1 illustrates an IRS aid to assist taxpayers in determining
whether educational expenses are deductible.\8

   Figure 1:  Process for
   Determining Deductibility of
   Educational Expenses from
   Individual Taxes

   (See figure in printed
   edition.)

Source:  IRS Publication 508, Educational Expenses. 


--------------------
\6 See page 18 for more information about accountable plans. 

\7 See app.  I for IRS examples of qualifying job-related expenses. 

\8 See IRS Publication 508, Educational Expenses. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

According to IRS data, employers annually filed over 3,200 returns
that reported information about educational assistance they provided
their employees during 1992 through 1994.\9 IRS officials told us
that this included most of the employers who provided section 127
assistance but that some employers may not have filed because of
confusion resulting from the series of section 127 expirations and
extensions. 

The dollar amount of education assistance employers reported
increased steadily over the 3 years from $525.3 million for 1992 to
$691.3 million for 1994.  However, the increase may be related to the
increase in the percentage of employer returns that reported the
amount of assistance to IRS for the 3-year period, from 65 percent
for 1992 to 80 percent for 1994. 

Employers filing returns varied in size, type of business, and amount
of assistance provided.  Large employers, those employing 250 or more
employees, provided 99 percent of the dollar amount of the reported
assistance to 98 percent of the employees who received it. 

IRS data showed that about 900,000 employees received
employer-provided educational assistance annually during 1992 through
1994.  However, few employees eligible for educational assistance
under section 127 actually received it.  Data we reviewed did not
provide information that explained the level of participation.  The
percentage of the eligible employees that employers reported as
having received educational assistance varied from 8 percent to 9
percent for the 3-year period, according to IRS data.\10

According to NPSAS data, 74 percent of employees receiving
educational assistance in academic year 1992 to 1993 were
undergraduates.  About 64 percent of the undergraduates who
identified their occupation were in clerical or technical
occupations.  Of employees receiving assistance who were graduate
students and identified their occupation, about 89 percent were in
professional, manager/ administrative, or teaching occupations. 

Generally, four tax provisions apply to employer-provided educational
assistance:  Sections 127, 117, 62, and 132.\11 These sections allow
employers to provide educational assistance to their employees and to
deduct the cost of the educational assistance provided as a business
expense in determining their tax liability.  The four provisions also
allow employees receiving the assistance to exclude the value of
qualifying assistance from their federal gross income. 

The major differences between section 127 and the three other
provisions are related to the type of education supported, employee
eligibility, limits on the value of assistance provided, and the ease
of administration.  Unlike sections 62 and 132, section 127 makes no
distinction between job-related and nonjob-related education and is
administratively less burdensome.  Sections 127, 62, and 132 apply to
all employees.  Section 117 applies only to employees of qualified
educational institutions and their spouses and dependents, although
both job-related and nonjob-related education are covered.  Section
127, unlike the other tax provisions, has a $5,250 cap on the amount
of educational assistance that can be excluded from income. 


--------------------
\9 IRS provided data from all 1992 and 1993 returns and data from
1994 returns it had collected and processed through May 31, 1996. 
IRS officials told us they considered the 1994 returns to represent
about 90 percent of the 1994 returns they ultimately expect to
receive. 

\10 Employers determine who is eligible for educational assistance. 

\11 Sections 62 and 132 also require referring to section 162, which
delineates what constitutes job-related education and what is
required for it to be deductible as a business-related expense. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

Our objectives were to provide information about (1)
employer-provided educational assistance, including the
characteristics of employers providing educational assistance and
employees eligible for and receiving it, and (2) other tax provisions
related to employer-provided educational assistance and how they
differ from section 127. 

To achieve the first objective, we identified and obtained relevant
data.  We did this by contacting the IRS, searching the Internet to
identify relevant organizations and research, and contacting various
associations. 

Because no one source of information provided comprehensive data, we
used available data from a variety of sources.  We relied primarily
on data from Form 5500 and Schedule F, provided to us by IRS, and
data from NPSAS to develop our profile of employers and employees. 
We also used information about the eligibility of employees for
educational assistance from BLS reports on employee benefits. 

The IRS data consisted of information about employers providing
educational assistance and employees eligible for and receiving
section 127 assistance.  Employers reported this information to IRS
on Form 5500 and its Schedule F for 1992 through 1994.  IRS provided
us with a database of these employer returns for 1992 and 1993, and
for 1994 returns filed with IRS through May 31, 1996, which IRS
officials told us represented 90 percent of the data it expects to
receive from employers for 1994.  We used these data to develop
information about employer characteristics, such as how many programs
employers have that offered educational assistance and employer size. 
We also used these data to identify the number of employees eligible
for and receiving this assistance and the dollar amount of the
assistance provided. 

NPSAS data consisted of information about postsecondary student aid,
including section 127 assistance, from postsecondary students, their
parents, and educational institutions.  The Department of Education's
National Center for Education Statistics (NCES) conducted this
national study for the academic year 1992 to 1993 and compiled the
results in the NPSAS database.  We obtained the NPSAS database from
the NCES and used the data primarily to develop information on
characteristics of employees, such as their level and type of
education. 

The BLS reports contained estimated data about employee eligibility
for educational assistance.  This information was collected by BLS as
part of its surveys on employee benefits in small, medium, and large
private establishments.  These reports were done over a 2-year
period:  the survey of employee benefits in medium and large private
establishments covered 1993, and the survey of employee benefits in
small private establishments covered 1994. 

We did not verify the validity or reliability of the data collected
by IRS or the other agency study sponsors.  Because of the series of
expirations and extensions of section 127, some employers may not
have filed Form 5500 and Schedule F with IRS as required.  Further,
not all employers who filed provided all required data on Form 5500
and Schedule F.  For example, of the employer returns that reported
providing educational assistance, 65 percent reported the amount of
assistance in 1992; 74 percent, in 1993; and 80 percent, in 1994. 
Appendix II includes a list of employer and employee characteristics
and the percentage of returns that reported this information for
1992, 1993, and 1994. 

In addition, the analyses generated from each of the three different
data sources cannot be compared with one another because of
variations in data collection methods, definitions, populations
covered, and periods covered.  Appendix II explains in detail the
data sources we used including populations covered, sampling errors
as appropriate, and data limitations. 

To obtain additional information about the databases and the results
of our analyses of them, we interviewed officials from the Department
of the Treasury, IRS, the Department of Education, and BLS.  We also
interviewed officials from selected associations, including the
National Association of Independent Colleges and Universities, the
American Payroll Association, the American Society for Training and
Education, and the Institute for Higher Education Policy. 

To achieve the second objective, we reviewed relevant sections of the
IRC, and IRS and Department of the Treasury rulings and regulations
pertaining to those sections.  We also interviewed officials from the
Department of the Treasury, IRS, and selected associations. 

We did not evaluate the effectiveness of section 127 in promoting
employee skills as it was beyond the scope of this assignment. 

We did our work from April through July 1996 in accordance with
generally accepted government auditing standards.  We obtained
comments on a draft of this report from IRS.  These comments are
discussed at the end of this report. 


   CHARACTERISTICS OF EMPLOYERS
   PROVIDING EDUCATIONAL
   ASSISTANCE
------------------------------------------------------------ Letter :4

According to IRS, for each of the 3 years we reviewed, employers
filed over 3,200 returns that reported information about educational
assistance they provided their employees under section 127.  IRS
officials believe that this number included most of the employers who
provided section 127 assistance but note that some employers may not
have filed because of confusion resulting from the series of section
127 expirations and extensions.  The employers included auto
manufacturers, hospitals and medical centers, utilities,
telecommunications and electronics companies, banks, and other types
of businesses. 

The dollar amount of educational assistance employers reported
increased steadily for the 3-year period we reviewed.  It increased
from $525.3 million for 1992 to $691.3 million for 1994.  This
increase may be related to the increase in the percent of employers
who reported the amount of assistance to IRS for the 3-year period. 
For 1992, the first year IRS required employers to report data on
Schedule F of Form 5500, employers filed 3,556 returns, 65 percent of
which (2,294) reported the amount of educational assistance they
provided employees.  The reporting rate increased to 80 percent for
the 1994 returns for which we have data.  Table 1 shows the number of
all returns employers filed and the number and percentage of returns
that showed the amount of assistance provided, as well as the amount
reported, for the 3 years we reviewed. 



                                Table 1
                
                    Number of Returns and Number and
                Percentage of Returns With Dollar Amount
                  of Section 127 Assistance Employers
                Provided Employees, as Reported to IRS,
                               1992-1994

                         (Dollars in millions)

                                                  Number and
                                                  percent of
                                                   returns
                                                  reporting
                                                  amount of
                                                  assistance
                                                --------------
                                                                Amount
                                                                    of
                                                                assist
                                                                  ance
                                                                provid
Year                    Total returns filed                         ed
----------------------  ----------------------  ------  ------  ------
1992                    3,556                    2,294     65%  $525.3
1993                    3,336                    2,478     74%   636.4
1994\a                  3,234                    2,590     80%   691.3
----------------------------------------------------------------------
\a 1994 returns received and processed by IRS through May 31, 1996. 

Note:  Differences from one year to the next should be interpreted
with caution.  The percentage of returns reporting the dollar amount
of assistance provided employees varied from year to year. 

Source:  GAO analysis of IRS Form 5500 and related Schedule F data. 

On a per-return basis, the total amount of educational assistance and
the total number of employees receiving it varied widely for each of
the 3 years we reviewed, according to IRS data.  For employer returns
that reported the amount of educational assistance provided to all
employees, IRS data showed total annual amounts ranging from less
than $500 to total amounts of more than $10 million.  Of those
returns that reported the number of employees receiving educational
assistance, the total number of recipients ranged from fewer than 10
to more than 10,000.  Overall, employer-provided educational
assistance per recipient averaged $1,081 for 1992, $1,046 for 1993,
and $1,253 for 1994. 


      EMPLOYERS PROVIDING
      ASSISTANCE VARIED IN SIZE
---------------------------------------------------------- Letter :4.1

According to IRS data, employers providing section 127 assistance
ranged in size from those with fewer than 50 employees to those with
more than 100,000.  Our analysis showed that large employers, those
with 250 or more employees, accounted for over 75 percent of the
returns that reported the amount of assistance provided annually for
the 3-year period we reviewed.  These employers provided 99 percent
of the dollar amount of section 127 assistance reported to IRS for
1992 through 1994.\12 Figure 2 shows the distribution of the reported
dollar amount of section 127 assistance by employer size. 

   Figure 2:  Reported Dollar
   Amount of Section 127
   Assistance Provided, by
   Employer Size, 1992-1994

   (See figure in printed
   edition.)

Note 1:  Small employers:  fewer than 100 employees; medium
employers:  100 - 249 employees; and large employers:  250 or more
employees. 

Note 2:  Differences from one year to the next should be interpreted
with caution.  The percentage of returns reporting the dollar amount
of assistance provided employees varied from year to year.  See app. 
II.1 for additional information. 

Source:  GAO analysis of IRS Form 5500 and related Schedule F data. 


--------------------
\12 We used BLS's definition of large employers, which is employers
with 250 or more employees. 


      IN TOTAL, MEDIUM AND LARGE
      EMPLOYERS HAD MORE FULL-TIME
      EMPLOYEES ELIGIBLE FOR
      EDUCATIONAL ASSISTANCE THAN
      DID SMALL EMPLOYERS
---------------------------------------------------------- Letter :4.2

According to BLS data, medium and large employers (100 or more
employees) in total reported a higher number of their employees were
eligible for educational assistance than small employers reported.\13
BLS estimated that 20.8 million full-time employees of medium and
large employers and 13.4 million full-time employees of small
employers were eligible for job-related educational assistance.  It
also estimated that 6.3 million full-time employees of medium and
large employers were eligible for nonjob-related educational
assistance compared to 2 million full-time employees of small
employers who were eligible. 

BLS estimated the number of part-time employees eligible for
educational assistance was almost the same, regardless of employer
size.  About 1.9 million part-time employees of medium and large
employers and 1.9 million part-time employees of small employers were
estimated to be eligible for job-related education.  BLS also
estimated that about 440,000 part-time employees of medium and large
employers were eligible for nonjob-related educational assistance
compared to almost 400,000 part-time employees of small employers who
were eligible.  (Additional BLS information on employee eligibility
is in appendix III.)


--------------------
\13 BLS recognizes that eligibility criteria for educational
assistance, such as seniority, vary by employer, and it therefore
relies on employers determining employee eligibility. 


   CHARACTERISTICS OF EMPLOYEES
   ELIGIBLE FOR AND RECEIVING
   EMPLOYER-PROVIDED EDUCATIONAL
   ASSISTANCE
------------------------------------------------------------ Letter :5

The number and percentage of employees eligible for employer-provided
educational assistance who received it varied slightly for the 3-year
period we reviewed, according to IRS data.  Employer returns filed
with IRS showed that the reported number of employees eligible for
assistance under section 127 ranged from 11,208,411 for 1992 to
9,899,354 for 1994 and that about 900,000 employees received
assistance in each of the 3 years.  The percentage of eligible
employees who received educational assistance varied from 8.25
percent for 1992 to 9.11 percent for 1993 to 8.40 percent for 1994. 
Figure 3 shows the reported number of employees eligible for
educational assistance and receiving it.\14

   Figure 3:  Number of Employees
   Reported to IRS as Eligible for
   and Receiving Section 127
   Assistance, 1992-1994

   (See figure in printed
   edition.)

Note 1:  Differences from one year to the next should be interpreted
with caution.  The percentage of returns reporting the number of
employees eligible for assistance and the number of employees
receiving it varied from year to year.  See app.  II.1 for additional
information. 

Note 2:  Numbers are rounded to the nearest 100,000. 

Source:  GAO analysis of IRS Form 5500 and related Schedule F data. 


--------------------
\14 Note that numbers in Figure 3 are rounded to the nearest 100,000. 


      NEARLY ALL SECTION 127
      RECIPIENTS WORKED FOR LARGE
      EMPLOYERS
---------------------------------------------------------- Letter :5.1

In each of the 3 years we reviewed, over 95 percent of the reported
recipients of section 127 assistance worked for large employers,
according to IRS data.  For 1992, employers reported that 96 percent
of section 127 recipients worked for large employers.  For both 1993
and 1994, employers reported that 99 percent of the recipients worked
for large employers.  Figure 4 shows the distribution of recipients
by employer size. 

   Figure 4:  Number of Reported
   Section 127 Recipients by
   Employer Size, 1992-1994

   (See figure in printed
   edition.)

Note 1:  Small employers:  fewer than 100 employees; medium
employers:  100 - 249 employees; and large employers:  250 or more
employees. 

Note 2:  Differences from one year to the next should be interpreted
with caution.  The percentage of returns reporting the number of
recipients varied from year to year.  See app.  II.1 for additional
information. 

Source:  GAO analysis of IRS Form 5500 and related Schedule F data. 


      UNDERGRADUATE STUDENTS
      RECEIVED MORE THAN HALF OF
      TOTAL SECTION 127 ASSISTANCE
---------------------------------------------------------- Letter :5.2

According to NPSAS data, 74 percent of full-time employees receiving
educational assistance in academic year 1992 to 1993 were
undergraduates.  Our analysis of the NPSAS data showed that about
337,000 of the estimated 456,000 employees who were enrolled in
educational institutions, responded to the NPSAS survey, and
reportedly received section 127 assistance were considered
undergraduate students.\15 These undergraduates received an estimated
$345.9 million in assistance, nearly 60 percent of the estimated
$597.3 million provided to all section 127 recipients.  Table 2 shows
the estimated amount and percentage of section 127 recipients by
student level. 



                                Table 2
                
                 Estimated Percentage and Dollar Amount
                of Section 127 Assistance and Number of
                 Recipients, by Student Level, Academic
                             Year 1992-1993

                         (Dollars in millions)

                                          Amount of       Number of
                                          assistance      recipients
                                        --------------  --------------
--------------------------------------  ------  ------  ------  ------
Undergraduate                           $345.9     58%  336,88     74%
                                                             0
Graduate                                $251.4     42%  119,21     26%
                                                             0
======================================================================
Total                                   $597.3    100%  456,09    100%
                                                             0
----------------------------------------------------------------------
Source:  GAO analysis of NPSAS:93 data. 


--------------------
\15 The NPSAS data covered employees whose employer-provided
educational assistance was for courses only provided by educational
institutions.  IRS data included all education received by employees,
regardless of the source.  This difference may explain the
discrepancy between the two data sources in the number of employees
reported as having received assistance under section 127. 


      MOST RECIPIENTS WORKED FOR
      PRIVATE-SECTOR EMPLOYERS
---------------------------------------------------------- Letter :5.3

Further analysis of the NPSAS data showed that 446,000 (almost 98
percent) of the estimated 456,090 Section 127 recipients identified
their employers.  The employers of an estimated 329,000 undergraduate
employees and 117,000 graduate employees were identified. 

Almost 75 percent of section 127 undergraduate recipients who
identified their employers worked for private-sector employers.  An
estimated 202,000 recipients who were undergraduates worked for
private sector for-profit employers.  Additionally, an estimated
43,000 undergraduate recipients worked for private nonprofit
employers.  Figure 5 shows the estimated number and percentages of
undergraduate recipients by employer type. 

   Figure 5:  Estimated Number and
   Percentage of Section 127
   Undergraduate Recipients by
   Employer Type, Academic Year
   1992-1993

   (See figure in printed
   edition.)

Note:  Employers of 328,920 undergraduates were identified for
academic year 1992-93. 

Source:  GAO analysis of NPSAS:93 data. 

Over 65 percent of graduate-level section 127 recipients worked in
the private sector.  More than 58,000 of an estimated 116,000
graduate students worked for private sector for-profit employers, and
an estimated 18,000 others worked for private nonprofit employers. 
Figure 6 shows the estimated number and percentages of graduate
recipients by employer type. 

   Figure 6:  Estimated Number and
   Percentage of Section 127
   Graduate Recipients by Employer
   Type, Academic Year 1992-1993

   (See figure in printed
   edition.)

Note:  Employers of 116,590 graduates were identified for academic
year 1992-93. 

Source:  GAO analysis of NPSAS:93 data. 


      MOST UNDERGRADUATE
      RECIPIENTS WERE IN CLERICAL
      OR TECHNICAL OCCUPATIONS,
      AND MOST GRADUATES WERE IN
      PROFESSIONAL OR TEACHING
      OCCUPATIONS
---------------------------------------------------------- Letter :5.4

Our analysis of the NPSAS data also showed that most
undergraduates--about 64 percent (125,000)--worked for private,
for-profit employers in clerical or technical occupations, whereas
most graduates--about 89 percent (64,000)--were in professional,
manager/administrative, or teaching occupations.\16 Figure 7 shows
the estimated number of section 127 recipients by identified
occupations and student level. 

   Figure 7:  Estimated Section
   127 Recipients by Identified
   Occupation and Student Level,
   Academic Year 1992-1993

   (See figure in printed
   edition.)

\a The response rate was too low to provide an estimate. 

Note:  Of an estimated 456,090 academic year 1992-93 recipients, the
occupations for 59 percent were identified.  Numbers do not add up to
totals due to rounding. 

Source:  GAO analysis of NPSAS:93 data. 


--------------------
\16 The occupations for 59 percent of the recipients--an estimated
195,960 undergraduates and 72,180 graduates--were identified.  See
appendix II for the specific estimates for the characteristics
reported. 


   TAX PROVISIONS RELATED TO
   EMPLOYER-PROVIDED EDUCATIONAL
   ASSISTANCE
------------------------------------------------------------ Letter :6

Four provisions of the IRC describe the circumstances under which
employers can exclude or deduct the cost of educational assistance
from their employees' gross income.  To the extent the assistance
meets requirements of these provisions, the IRC provisions also allow
qualifying employees to exclude the amount of the assistance from
their federal gross income.  However, the requirements and those who
can benefit from them vary by provision. 


      FOUR TAX PROVISIONS APPLY TO
      EMPLOYER-PROVIDED
      EDUCATIONAL ASSISTANCE
---------------------------------------------------------- Letter :6.1

The following tax provisions apply to employer-provided educational
assistance: 

  -- Section 127:  Educational Assistance Programs,

  -- Section 117:  Qualified Scholarships,

  -- Section 132:  Certain Fringe Benefits, and

  -- Section 62(a)(2)(A):  Reimbursed Expenses of Employees. 

These provisions generally allow employers to deduct the cost of
educational assistance provided to their employers from their taxes
as an allowable deduction for necessary business expenses.  Further,
such assistance if excludable from gross income, is not subject to
social security or other federal employment taxes.  These provisions
also allow employees receiving the assistance to exclude the value of
qualifying assistance from their federal gross income. 


         CERTAIN EMPLOYER-PROVIDED
         EDUCATIONAL ASSISTANCE IS
         EXCLUDABLE
-------------------------------------------------------- Letter :6.1.1

Section 127.  This section allows employers to provide educational
assistance to their employees without having to include the value of
the assistance as part of the employees' gross income.  Educational
assistance under this provision does not have to be job-related;
however, the assistance generally cannot be provided for education
related to a sport, game, or hobby.  Assistance excludable from taxes
covers education expenses incurred by employees (tuition
reimbursement programs) as well as by employers on their behalf or
provided directly by employers to education providers.  In addition,
there must be written plans for the program and employees must be
notified of the program's existence.  The section also has a number
of specific restrictions that must be met for the program to be
considered valid.\17 Under section 127, taxpayers may exclude up to
$5,250 a year of this assistance from their gross income.  Employees
whose assistance exceeds this cap can then use sections 62 or 132,
provided they meet the job-relatedness requirements of those
provisions.  The recent extension of section 127 includes
employer-provided assistance for undergraduate and graduate
education, although it ends coverage of graduate assistance as of
mid-1996. 


--------------------
\17 The program cannot offer employees a choice between educational
assistance and taxable remunerations; it cannot discriminate in favor
of highly compensated employees or their dependents as defined under
section 414(q) of the IRC; and no more than 5 percent of the
assistance may be for shareholders or owners who own more than 5
percent of the company. 


         QUALIFIED SCHOLARSHIPS
         AND TUITION REDUCTIONS
         ARE EXCLUDABLE
-------------------------------------------------------- Letter :6.1.2

Section 117.  This section allows qualifying employees of educational
institutions to exclude the value of "qualified scholarship and
tuition reductions" from their gross income.\18 Qualified scholarship
and tuition reductions include tuition and related expenses, e.g.,
tuition and fees to enroll or attend an educational institution and
fees, books, supplies, and equipment required for courses of
instruction at an educational institution.  Section 117 generally
provides that

  -- the exclusion applies to scholarship and tuition reductions
     provided to employees for any education below the graduate level
     (except in the case of graduate student employees engaged in
     teaching or research activities for the institution);

  -- the exclusion also applies to scholarship and tuition reductions
     given to the employees' spouses or dependents;

  -- the institution may not discriminate in favor of highly
     compensated employees in providing tuition reductions; and

  -- the exclusion does not apply to amounts received as payment for
     teaching, research, or other services by the student required as
     a condition for receiving the reduction. 

The scholarship or tuition reduction can be for job or nonjob-related
education, and there is no limit on the value of assistance that can
be provided. 


--------------------
\18 According to Treasury regulations, the term "educational
institutions" refers to institutions that maintain a faculty,
curriculum, and an enrolled body of students. 


         WORKING-CONDITION FRINGE
         BENEFIT EXCLUSION
-------------------------------------------------------- Letter :6.1.3

Section 132.  This section allows employees to exclude from their
gross income employer-provided educational assistance if it is
classified as a "working condition fringe benefit." According to the
IRC, a working condition fringe benefit is any property or service
provided to an employee to the extent that, if the employee paid for
such property or services, that payment would be deductible under
section 162 or 167.\19

Section 132 generally provides that

  -- the educational assistance is allowable as an exclusion only to
     the extent that the expenses would have been deductible by the
     employee as a business expense under section 162 had the
     employee paid for the education; and

  -- an employer's cash payment to an employee requires the employee
     to (1) use the payment for expenses in connection with a
     prearranged activity or undertaking (for which a deduction is
     allowable under section 162), (2) verify that the payment is
     actually used for such expenses, and (3) return any part not
     used to the employer, otherwise the payment will not qualify as
     a working condition fringe benefit. 

There is no limit on the value of assistance that can be provided,
and the assistance can be for undergraduate or graduate education. 
The essential requirement is that the education be job-related, as
defined by section 162.  Employees would likely use this tax
provision should the educational assistance they receive otherwise
meet this provision's requirements and exceed the section 127 income
exclusion cap of $5,250.