
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document affected by Public Law 107-16 Section 411(a),]
[CITE: 26USC127]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
         PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
 
Sec. 127. Educational assistance programs


(a) Exclusion from gross income

                           (1) In general

        Gross income of an employee does not include amounts paid or 
    expenses incurred by the employer for educational assistance to the 
    employee if the assistance is furnished pursuant to a program which 
    is described in subsection (b).

                    (2) $5,250 maximum exclusion

        If, but for this paragraph, this section would exclude from 
    gross income more than $5,250 of educational assistance furnished to 
    an individual during a calendar year, this section shall apply only 
    to the first $5,250 of such assistance so furnished.

(b) Educational assistance program

                           (1) In general

        For purposes of this section an educational assistance program 
    is a separate written plan of an employer for the exclusive benefit 
    of his employees to provide such employees with educational 
    assistance. The program must meet the requirements of paragraphs (2) 
    through (6) of this subsection.

                           (2) Eligibility

        The program shall benefit employees who qualify under a 
    classification set up by the employer and found by the Secretary not 
    to be discriminatory in favor of employees who are highly 
    compensated employees (within the meaning of section 414(q)) or 
    their dependents. For purposes of this paragraph, there shall be 
    excluded from consideration employees not included in the program 
    who are included in a unit of employees covered by an agreement 
    which the Secretary of Labor finds to be a collective bargaining 
    agreement between employee representatives and one or more 
    employers, if there is evidence that educational assistance benefits 
    were the subject of good faith bargaining between such employee 
    representatives and such employer or employers.

                (3) Principal shareholders or owners

        Not more than 5 percent of the amounts paid or incurred by the 
    employer for educational assistance during the year may be provided 
    for the class of individuals who are shareholders or owners (or 
    their spouses or dependents), each of whom (on any day of the year) 
    owns more than 5 percent of the stock or of the capital or profits 
    interest in the employer.

                (4) Other benefits as an alternative

        A program must not provide eligible employees with a choice 
    between educational assistance and other remuneration includible in 
    gross income. For purposes of this section, the business practices 
    of the employer (as well as the written program) will be taken into 
    account.

                       (5) No funding required

        A program referred to in paragraph (1) is not required to be 
    funded.

                    (6) Notification of employees

        Reasonable notification of the availability and terms of the 
    program must be provided to eligible employees.

(c) Definitions; special rules

    For purposes of this section--

                     (1) Educational assistance

        The term ``educational assistance'' means--
            (A) the payment, by an employer, of expenses incurred by or 
        on behalf of an employee for education of the employee 
        (including, but not limited to, tuition, fees, and similar 
        payments, books, supplies, and equipment), and
            (B) the provision, by an employer, of courses of instruction 
        for such employee (including books, supplies, and equipment),

    but does not include payment for, or the provision of, tools or 
    supplies which may be retained by the employee after completion of a 
    course of instruction, or meals, lodging, or transportation. The 
    term ``educational assistance'' also does not include any payment 
    for, or the provision of any benefits with respect to, any course or 
    other education involving sports, games, or hobbies, and such term 
    also does not include any payment for, or the provision of any 
    benefits with respect to, any graduate level course of a kind 
    normally taken by an individual pursuing a program leading to a law, 
    business, medical, or other advanced academic or professional 
    degree.

                            (2) Employee

        The term ``employee'' includes, for any year, an individual who 
    is an employee within the meaning of section 401(c)(1) (relating to 
    self-employed individuals).

                            (3) Employer

        An individual who owns the entire interest in an unincorporated 
    trade or business shall be treated as his own employer. A 
    partnership shall be treated as the employer of each partner who is 
    an employee within the meaning of paragraph (2).

                        (4) Attribution rules

        (A) Ownership of stock

            Ownership of stock in a corporation shall be determined in 
        accordance with the rules provided under subsections (d) and (e) 
        of section 1563 (without regard to section 1563(e)(3)(C)).

        (B) Interest in unincorporated trade or business

            The interest of an employee in a trade or business which is 
        not incorporated shall be determined in accordance with 
        regulations prescribed by the Secretary, which shall be based on 
        principles similar to the principles which apply in the case of 
        subparagraph (A).

                  (5) Certain tests not applicable

        An educational assistance program shall not be held or 
    considered to fail to meet any requirements of subsection (b) merely 
    because--
            (A) of utilization rates for the different types of 
        educational assistance made available under the program; or
            (B) successful completion, or attaining a particular course 
        grade, is required for or considered in determining 
        reimbursement under the program.

                   (6) Relationship to current law

        This section shall not be construed to affect the deduction or 
    inclusion in income of amounts (not within the exclusion under this 
    section) which are paid or incurred, or received as reimbursement, 
    for educational expenses under section 117, 162 or 212.

     (7) Disallowance of excluded amounts as credit or deduction

        No deduction or credit shall be allowed to the employee under 
    any other section of this chapter for any amount excluded from 
    income by reason of this section.

(d) Termination

    This section shall not apply to expenses paid with respect to 
courses beginning after December 31, 2001.

(e) Cross reference

            For reporting and recordkeeping requirements, see section 
        6039D.

(Added Pub. L. 95-600, title I, Sec. 164(a), Nov. 6, 1978, 92 Stat. 
2811; amended Pub. L. 98-611, Sec. 1(a)-(c), (d)(3)(B), (e), Oct. 31, 
1984, 98 Stat. 3176-3178; Pub. L. 99-514, title XI, Secs. 1114(b)(4), 
1151(c)(4), (g)(3), 1162(a), Oct. 22, 1986, 100 Stat. 2450, 2503, 2507, 
2510; Pub. L. 100-647, title I, Sec. 1011B(a)(31)(B), title IV, 
Sec. 4001(a), (b)(1), Nov. 10, 1988, 102 Stat. 3488, 3643; Pub. L. 101-
140, title II, Sec. 203(a)(1), (2), Nov. 8, 1989, 103 Stat. 830; Pub. L. 
101-239, title VII, Secs. 7101(a)(1), 7814(a), Dec. 19, 1989, 103 Stat. 
2304, 2413; Pub. L. 101-508, title XI, Sec. 11403(a), (b), Nov. 5, 1990, 
104 Stat. 1388-473; Pub. L. 102-227, title I, Sec. 103(a)(1), Dec. 11, 
1991, 105 Stat. 1687; Pub. L. 103-66, title XIII, Sec. 13101(a)(1), Aug. 
10, 1993, 107 Stat. 420; Pub. L. 104-188, title I, Sec. 1202(a), (b), 
Aug. 20, 1996, 110 Stat. 1772, 1773; Pub. L. 105-34, title II, 
Sec. 221(a), Aug. 5, 1997, 111 Stat. 818; Pub. L. 106-170, title V, 
Sec. 506(a), Dec. 17, 1999, 113 Stat. 1922.)


                            Prior Provisions

    A prior section 127 was renumbered section 139 of this title.


                               Amendments

    1999--Subsec. (d). Pub. L. 106-170 substituted ``December 31, 2001'' 
for ``May 31, 2000''.
    1997--Subsec. (d). Pub. L. 105-34 amended heading and text of 
subsec. (d) generally. Prior to amendment, text read as follows: ``This 
section shall not apply to taxable years beginning after May 31, 1997. 
In the case of any taxable year beginning in 1997, only expenses paid 
with respect to courses beginning before July 1, 1997, shall be taken 
into account in determining the amount excluded under this section.''
    1996--Subsec. (c)(1). Pub. L. 104-188, Sec. 1202(b), in closing 
provisions, inserted before period at end ``, and such term also does 
not include any payment for, or the provision of any benefits with 
respect to, any graduate level course of a kind normally taken by an 
individual pursuing a program leading to a law, business, medical, or 
other advanced academic or professional degree''.
    Subsec. (d). Pub. L. 104-188, Sec. 1202(a), substituted ``May 31, 
1997. In the case of any taxable year beginning in 1997, only expenses 
paid with respect to courses beginning before July 1, 1997, shall be 
taken into account in determining the amount excluded under this 
section.'' for ``December 31, 1994.''
    1993--Subsec. (d). Pub. L. 103-66 substituted ``December 31, 1994'' 
for ``June 30, 1992''.
    1991--Subsec. (d). Pub. L. 102-227 substituted ``June 30, 1992'' for 
``December 31, 1991''.
    1990--Subsec. (c)(1). Pub. L. 101-508, Sec. 11403(b), struck out at 
end ``The term `educational assistance' also does not include any 
payment for, or the provision of any benefits with respect to, any 
graduate level course of a kind normally taken by an individual pursuing 
a program leading to a law, business, medical, or other advanced 
academic or professional degree.''
    Subsec. (d). Pub. L. 101-508, Sec. 11403(a), substituted ``December 
31, 1991'' for ``September 30, 1990''.
    1989--Subsec. (b)(1). Pub. L. 101-140, Sec. 203(a)(1), amended par. 
(1) to read as if amendments by Pub. L. 99-514, Sec. 1151(c)(4)(A), had 
not been enacted, see 1986 Amendment note below.
    Subsec. (b)(2). Pub. L. 101-140, Sec. 203(a)(2), amended par. (2) to 
read as if amendments by Pub. L. 100-647, Sec. 1011B(a)(31)(B), had not 
been enacted, see 1988 Amendment note below.
    Pub. L. 101-140, Sec. 203(a)(1), amended par. (2) to read as if 
amendments by Pub. L. 99-514, Sec. 1151(g)(3), had not been enacted, see 
1986 Amendment note below.
    Subsec. (b)(6). Pub. L. 101-140, Sec. 203(a)(1), amended par. (6) to 
read as if amendments by Pub. L. 99-514, Sec. 1151(c)(4)(B), had not 
been enacted, see 1986 Amendment note below.
    Subsec. (c)(8). Pub. L. 101-239, Sec. 7814(a), struck out par. (8) 
which read as follows: ``Coordination with section 117(d).--In the case 
of the education of an individual who is a graduate student at an 
educational organization described in section 170(b)(1)(A)(ii) and who 
is engaged in teaching or research activities for such organization, 
section 117(d)(2) shall be applied as if it did not contain the phrase 
`(below the graduate level)'.''
    Subsec. (d). Pub. L. 101-239, Sec. 7101(a)(1), substituted 
``September 30, 1990'' for ``December 31, 1988''.
    1988--Subsec. (b)(2). Pub. L. 100-647, Sec. 1011B(a)(31)(B), 
substituted ``there shall'' for ``there may'' and ``who are'' for ``who 
may be'' in last sentence.
    Subsec. (c)(1). Pub. L. 100-647, Sec. 4001(b)(1), inserted at end 
``The term `educational assistance' also does not include any payment 
for, or the provision of any benefits with respect to, any graduate 
level course of a kind normally taken by an individual pursuing a 
program leading to a law, business, medical, or other advanced academic 
or professional degree.''
    Subsec. (d). Pub. L. 100-647, Sec. 4001(a), substituted ``1988'' for 
``1987''.
    1986--Subsec. (a)(2). Pub. L. 99-514, Sec. 1162(a)(2), substituted 
``$5,250'' for ``$5,000'' in heading and twice in text.
    Subsec. (b)(1). Pub. L. 99-514, Sec. 1151(c)(4)(A), added par. (1) 
and struck out former par (1) which read as follows: ``For purposes of 
this section an educational assistance program is a separate written 
plan of an employer for the exclusive benefit of his employees to 
provide such employees with educational assistance. The program must 
meet the requirements of paragraphs (2) through (6) of this 
subsection.''
    Subsec. (b)(2). Pub. L. 99-514, Sec. 1151(g)(3), substituted ``For 
purposes of this paragraph, there may be excluded from consideration 
employees who may be excluded from consideration under section 89(h).'' 
for ``For purposes of this paragraph, there shall be excluded from 
consideration employees not included in the program who are included in 
a unit of employees covered by an agreement which the Secretary of Labor 
finds to be a collective bargaining agreement between employee 
representatives and one or more employers, if there is evidence that 
educational assistance benefits were the subject of good faith 
bargaining between such employee representatives and such employer or 
employers.''
    Pub. L. 99-514, Sec. 1114(b)(4), substituted ``highly compensated 
employees (within the meaning of section 414(q))'' for ``officers, 
owners, or highly compensated,''.
    Subsec. (b)(6). Pub. L. 99-514, Sec. 1151(c)(4)(B), struck out par. 
(6) which read as follows: ``Notification of employees.--Reasonable 
notification of the availability and terms of the program must be 
provided to eligible employees.''
    Subsec. (d). Pub. L. 99-514, Sec. 1162(a)(1), substituted ``December 
31, 1987'' for ``December 31, 1985''.
    1984--Subsec. (a). Pub. L. 98-611, Sec. 1(b), amended subsec. 
generally, substituting ``Exclusion from gross income'' for ``General 
rule'' in heading, designating existing provision as par. ``(1) In 
general'' and adding par. (2).
    Subsec. (c)(7). Pub. L. 98-611, Sec. 1(e), substituted ``allowed to 
the employee'' for ``allowed''.
    Subsec. (c)(8). Pub. L. 98-611, Sec. 1(c), added par. (8).
    Subsec. (d). Pub. L. 98-611, Sec. 1(a), substituted ``December 31, 
1985'' for ``December 31, 1983''.
    Subsec. (e). Pub. L. 98-611, Sec. 1(d)(3)(B), added subsec. (e).


                    Effective Date of 1999 Amendment

    Pub. L. 106-170, title V, Sec. 506(b), Dec. 17, 1999, 113 Stat. 
1922, provided that: ``The amendment made by subsection (a) [amending 
this section] shall apply to courses beginning after May 31, 2000.''


                    Effective Date of 1997 Amendment

    Section 221(b) of Pub. L. 105-34 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply to taxable years 
beginning after December 31, 1996.''


                    Effective Date of 1996 Amendment

    Section 1202(c)(1), (2) of Pub. L. 104-188 provided that:
    ``(1) Extension.--The amendment made by subsection (a) [amending 
this section] shall apply to taxable years beginning after December 31, 
1994.
    ``(2) Graduate education.--The amendment made by subsection (b) 
[amending this section] shall apply with respect to expenses relating to 
courses beginning after June 30, 1996.''


                    Effective Date of 1993 Amendment

    Section 13101(c)(1) of Pub. L. 103-66 provided that: ``The 
amendments made by subsection (a) [amending this section and repealing 
provisions set out below] shall apply to taxable years ending after June 
30, 1992.''


                    Effective Date of 1991 Amendment

    Section 103(b) of Pub. L. 102-227 provided that: ``The amendment 
made by this section [amending this section] shall apply to taxable 
years beginning after December 31, 1991.''


                    Effective Date of 1990 Amendment

    Section 11403(d) of Pub. L. 101-508 provided that:
    ``(1) In general.--Except as provided in paragraph (2), the 
amendments made by this section [amending this section and repealing 
provisions set out below] shall apply to taxable years beginning after 
December 31, 1989.
    ``(2) Subsection (b).--The amendment made by subsection (b) 
[amending this section] shall apply to taxable years beginning after 
December 31, 1990.''


                    Effective Date of 1989 Amendments

    Section 7101(c) of Pub. L. 101-239 provided that: ``The amendments 
made by this section [amending this section and section 132 of this 
title] shall apply to taxable years beginning after December 31, 1988.''
    Amendment by section 7814(a) of Pub. L. 101-239 effective, except as 
otherwise provided, as if included in the provision of the Technical and 
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such 
amendment relates, see section 7817 of Pub. L. 101-239, set out as a 
note under section 1 of this title.
    Amendment by Pub. L. 101-140 effective as if included in section 
1151 of Pub. L. 99-514, see section 203(c) of Pub. L. 101-140, set out 
as a note under section 79 of this title.


                    Effective Date of 1988 Amendment

    Amendment by section 1011B(a)(31)(B) of Pub. L. 100-647 effective, 
except as otherwise provided, as if included in the provision of the Tax 
Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see 
section 1019(a) of Pub. L. 100-647, set out as a note under section 1 of 
this title.
    Amendment by section 4001(a), (b)(1) of Pub. L. 100-647 applicable 
to taxable years beginning after Dec. 31, 1987, see section 4001(c) of 
Pub. L. 100-647, set out as a note under section 117 of this title.


                    Effective Date of 1986 Amendment

    Amendment by section 1114(b)(4) of Pub. L. 99-514 applicable to 
years beginning after Dec. 31, 1987, see section 1114(c)(2) of Pub. L. 
99-514, set out as a note under section 414 of this title.
    Amendment by section 1151(c)(4), (g)(3) of Pub. L. 99-514 
applicable, with certain qualifications and exceptions, to years 
beginning after Dec. 31, 1988, see section 1151(k) of Pub. L. 99-514, as 
amended, set out as a note under section 79 of this title.
    Amendment by section 1162(a) of Pub. L. 99-514 applicable to taxable 
years beginning after Dec. 31, 1985, see section 1162(c) of Pub. L. 99-
514, set out as a note under section 120 of this title.


                    Effective Date of 1984 Amendment

    Section 1(g) of Pub. L. 98-611, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(1) In general.--Except as otherwise provided in this subsection, 
the amendments made by this section [enacting section 6039D of this 
title and amending this section and sections 125, 3231, and 6652 of this 
title] shall apply to taxable years beginning after December 31, 1983.
    ``(2) Subsection (d).--The amendments made by subsection (d) 
[enacting section 6039D and amending this section and sections 125 and 
6652 of this title] shall take effect on January 1, 1985.
    ``(3) Subsection (f).--The amendment made by subsection (f) 
[amending section 3231 of this title] shall apply to remuneration paid 
after December 31, 1984.
    ``(4) No penalties or interest on failure to withhold.--No penalty 
or interest shall be imposed on any failure to withhold under subtitle C 
of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to 
employment taxes) with respect to amounts excluded from gross income 
under section 127 of such Code (as amended by this section and 
determined without regard to subsection (a)(2) thereof) with respect to 
periods during 1984.
    ``(5) Coordination with section 117(d).--In the case of education 
described in section 127(c)(8) of the Internal Revenue Code of 1986, as 
added by this section, section 117(d) of such Code shall be treated as 
in effect on and after January 1, 1984.''


                             Effective Date

    Section 164(d) of Pub. L. 95-600 provided that: ``The amendments 
made by this section [enacting this section and amending sections 3121, 
3306, and 3401 of this title and section 409 of Title 42, The Public 
Health and Welfare] shall apply with respect to taxable years beginning 
after December 31, 1978.''


                               Regulations

    Secretary of the Treasury or his delegate to issue before Feb. 1, 
1988, final regulations to carry out amendments made by section 1114 of 
Pub. L. 99-514, see section 1141 of Pub. L. 99-514, set out as a note 
under section 401 of this title.


            Expedited Procedures for Refunds of Overpayments

    Section 1202(c)(3) of Pub. L. 104-188 provided that: ``The Secretary 
of the Treasury shall establish expedited procedures for the refund of 
any overpayment of taxes imposed by the Internal Revenue Code of 1986 
which is attributable to amounts excluded from gross income during 1995 
or 1996 under section 127 of such Code, including procedures waiving the 
requirement that an employer obtain an employee's signature where the 
employer demonstrates to the satisfaction of the Secretary that any 
refund collected by the employer on behalf of the employee will be paid 
to the employee.''


                 Special Rule for Certain Taxable Years

    Section 103(a)(2) of Pub. L. 102-227 provided that, in the case of 
any taxable year beginning in 1992, only amounts paid before July 1, 
1992, by employer for educational assistance for employee be taken into 
account in determining amount excluded under this section with respect 
to such employee for such taxable year, prior to repeal by Pub. L. 103-
66, title XIII, Sec. 13101(a)(2), Aug. 10, 1993, 107 Stat. 420.
    Section 7101(a)(2) of Pub. L. 101-239 provided that, in the case of 
any taxable year beginning in 1990, only amounts paid before Oct. 1, 
1990, by employer for educational assistance for employee be taken into 
account in determining amount excluded under this section with respect 
to such employee for such taxable year, prior to repeal by Pub. L. 101-
508, title XI, Sec. 11403(c), Nov. 5, 1990, 104 Stat. 1388-473.


 Nonenforcement of Amendment Made by Section 1151 of Pub. L. 99-514 for 
                            Fiscal Year 1990

    No monies appropriated by Pub. L. 101-136 to be used to implement or 
enforce section 1151 of Pub. L. 99-514 or the amendments made by such 
section, see section 528 of Pub. L. 101-136, set out as a note under 
section 89 of this title.


           Plan Amendments Not Required Until January 1, 1989

    For provisions directing that if any amendments made by subtitle A 
or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or title XVIII 
[Secs. 1800-1899A] of Pub. L. 99-514 require an amendment to any plan, 
such plan amendment shall not be required to be made before the first 
plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. 
L. 99-514, as amended, set out as a note under section 401 of this 
title.

                  Section Referred to in Other Sections

    This section is referred to in sections 51A, 125, 132, 137, 221, 
414, 1397, 3121, 3231, 3306, 3401, 6039D of this title; title 42 section 
409.
