Category Personnel/Employment
Title Providing Tax-Free Tuition Discounts for School Employees - QTRs
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Preview This article discusses providing tax-free tuition discounts for school employes, also known as Qualified Tuition Reduction (QTRs)
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Providing Tax-Free Tuition Discounts for School Employees

Under Code § 117(d), educational institutions may provide reductions in tuition or discounts for their employees. The process, known as a Qualified Tuition Reduction (QTR) plan, requires schools to follow three simple steps: (1) The board needs to divide employee job classifications into one or more groups and assign a specific discount to the group(s). (2) The decision to institute a QTR plan must be by official board action and the details of the decision regarding the group(s) and their discounts must be recorded in the meeting minutes. (3) Each employee filling a job classification within a specified group must be offered the same discount. Failure of a school board to set up a QTR plan as outlined above will likely subject its employees to a tax liability for any tuition discounts.

Specific Considerations

  • A QTR may be offered to the following: (a) individuals currently employed by the school, (b) an individual who has ceased working at the school because of retirement or disability, (c) a widow or widower of an individual who passed away while employed at the school, or (d) a spouse or dependent child of any of the individuals named above.  
  • Schools can create several employee groups. Many schools simply place administrators and teachers in one group and support staff in another.  
  • Several factors can influence the amount of the discount that your school may offer to the various groups of employees. The primary factor is the school budget. What can your school actually afford to give in discounts? The amount should be realistic so that the discount doesn't have to be changed much from year to year. The discount you give for a total of seven staff children this year may mushroom to fifteen staff children a year later. Strive for a discount figure that your school will be able to hold steady for several years.  
  • When trying to figure how staff discounts fit into a budget, be sure to remember that student discounts offset salaries to some extent. If you are finding it difficult to substantially raise staff salaries and the school has extra seats available in the various grades, it is "easier" to partly remunerate your staff through the generous use of student discounts if a high percentage of the staff have school-age children.  
  • Most people have heard of the adage "Equal pay for equal work," or its corollary "Equal benefits for equal work." However, a QTR is an exception to the rule. If a school employee is single without children or has grown children out of school, or if the school does not have a grade or specialized program needed for the school-age child, no other benefit needs to be offered in lieu of the unused tuition discount. This exception makes a QTR unlike most other types of earned benefits.  
  • Part-time employees in each group are usually given a discount proportional to the amount of time per week they work in the school.  
  • Such things as a nationwide teacher and administrator shortage, the educational debt load of newer teachers recently out of college, and teacher wages that are about 60 percent of the local public school's wages give cause for many ACSI member schools to argue in favor of giving the administrators and teachers a higher tuition discount than support staff.  
  • The amount of the tuition discount given to the employees is not added to any IRS W-2 form or 1099 form.  
  • After a discount is given, an employee may still owe the school some tuition for his or her child or children. It is illegal for the school to reduce the employee's wages by the amount of the tuition that is owed to the school. For instance, if the employee owes the school $1,000 in tuition after the discount has been taken, the school cannot just lower the person's salary by the remaining $1,000 owed. To do so avoids the payment of government taxes owed on that $1,000 of salary. Of course an employee may request that any tuition owed be deducted from the net pay after taxes have been paid.  
  • Another part of the IRS Code provides for employee educational assistance as a tax-free benefit of up to $5,250 per year. This benefit allows the employer to pay some or all of the employee's postsecondary expenses. Any QTR discount being given to an employee's dependent does not count toward the $5,250 tax-free limit for the employee's own postsecondary expenses when taking classes that further his or her vocational preparation.  
  • Under IRS rules, a highly compensated employee does not qualify for a tax-free tuition discount. In 2002, a highly compensated employee was defined as "a person earning $90,000 or more annually." This person may be offered a tuition discount by virtue of being an individual within one of the QTR groups identified by the board. However, the amount of the discount must be added to the person's W-2 form at the end of each calendar year. In this case the tuition discount is a taxable fringe benefit. It's still a good deal, but not quite as good as that received by most other school employees.   

    If the highly compensated employee is in a designated group of school employees in which the other employees earn less than $90,000 a year, and everyone in group is being offered the same discount, the benefit for the highly compensated employee is considered nondiscriminatory and does not need to be reported on his/her W-2 form as additional compensation. 

    Under the IRS rules, the amount of money that defines a person as a highly compensated employee changes with inflation. Check with the IRS or your tax preparer for current information.  

New IRS Ruling regarding QTR Plans

Recently, IRS Private Letter Ruling 200149030 was issued regarding the applicability of school tuition discounts for church staff. The IRS clearly indicated that church staff who do not have a function or role in their own Christian school do not qualify for a tax-free tuition discount under the IRS Code. If a discount is given to these individuals, the amount of the discount must be reported as income as noted above. Under IRS rules a QTR plan is specifically a benefit for the employees of an educational institution, not a church or religious organization. If your school has been giving church employees a QTR discount, the practice should end before a new school year begins.  

The recent IRS ruling did not answer the question about giving tax-free discounts to church staff who teach Bible or other classes in the school, or who have other direct roles such as administration. This remains a gray area. Until there is a further IRS ruling or clarification, most Christian schools will probably continue to give discounts to church employees who have a significant or identifiable role in the school and to not report the amount of the discount on W-2 forms, unless they are "highly compensated employees." If the IRS announces any further changes regarding QTR plans, ACSI will immediately report the changes in this newsletter.    

Sample School Board Resolution for an Employee Qualified Tuition Remission Plan  

WHEREAS Internal Revenue Code Section 117(d) provides that a qualified tuition reduction provided to an employee of an educational institution is excluded from the employee's gross income for federal income tax and employment tax purposes, and  

WHEREAS __________ Christian School is an educational institution as defined in the IRS Code Section 170(b)(1)(A)(ii), and  

WHEREAS __________ Christian School desires to adopt a qualified tuition remission plan under the IRS Code Section 117(d) for the benefit of its employees,  

NOW, THEREFORE, __________ Christian School adopts the following Qualified Tuition Remission Plan:  

(1) Tuition for dependent children of employees enrolled in the school will be reduced in an amount equal to:  

(a) _____ percent of all tuition for exempt administrative and teaching employees.  

(b) _____ percent of all tuition for exempt and nonexempt support employees.  

(2) Tuition reduction is only available for education provided by the school to children of current employees.  

(3) A proportional tuition reduction is available to part-time employees based upon a percentage that is commensurate with the discount offered to other employees of their same QTR group.  

The Qualified Tuition Remission Plan will be effective on (date)_____. At such time, the value of the tuition reduction will not be included in an employee's salary for either federal income tax or federal employment tax purposes.  

[(1) As per information available in the feature article, a school's QTR plan may have more groups and variables than that shown in the sample resolution above. (2) QTR plans are typically adopted by school boards in the spring for the following school year so that teacher and administrator candidates will have a clear picture of what benefits are available if they accept employment at the school. Editor]    

Notice: This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It has been provided to member schools with the understanding that ACSI is not engaged in rendering legal, accounting, tax, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Laws vary by jurisdiction, and the specific application of laws to particular facts requires the advice of an attorney.  

Association of Christian Schools International
731 Chapel Hills Drive
Colorado Springs, CO 80920
Phone: 719.528.6906
ACSI.org  

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