Taxability of forgiveness of education benefit repayment obligation

[msindc1]

Colleagues:

Joe's employer (a corporation) provided him with tuition reimbursements.  (I assume that the employer has an Education Assistance Plan, but it isn't clear.)  He is leaving the company, triggering a repayment obligation.  The employer has offered to forgive the repayment obligation as part of the negotiation of certain workplace disputes.  Employee is worried that the forgiven debt will be taxable income.  It seems that it would be under 61(a)(12) and 108(f) says student loan forgiveness is not taxable, but that section doesn't help him because the payment wasn't issued by a qualified entity.

Does anyone know how this should be treated?

Thanks.

Micah

[sjrcpa]

It's taxable income.

Tis better to pay tax on $10,000, for example, than to spend $10,000 of your after tax dollars.

[qbteachmt]

I'm a bit confused. You stated:

"says student loan forgiveness is not taxable"

and

"tuition reimbursements"

Which are not synonyms.

This: "I assume that the employer has an Education Assistance Plan, but it isn't clear." is per the IRS "Educational assistance means amounts you pay or incur for your employees' education expenses. These expenses generally include the cost of books, equipment, fees, supplies, and tuition." See Pub 15-B. The tuition provision is not a Loan Repayment plan; that repayment provision is part of the CARES Act.

And yes, it matters if this is done under the terms of a plan: "If you don't have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits."

And this part is confusing: "He is leaving the company, triggering a repayment obligation"

Tuition reimbursement isn't a loan and would not be repaid.

So, is this Tuition and expenses; is this Reimbursement for tuition and expenses; is this a Loan from the Employer? What gives them a right of repayment? How were the payments reported in the year(s) made? What are the terms of their assistance plan or is there no plan?

[msindc1]

Thanks for your response.

I know that the language I used was somewhat confused, but that's partly because I was referring to different things!  You know, mixing my apples and oranges!

"Student loan forgiveness is not taxable" is correct because a student loan forgiveness program is not taxable.  But here is isn't such a program because it is a private employer.

Shifting them to tuition reimbursement plans, I assume that this employer has an EAP, though I am not 100% sure.  An EAP can include a repayment clause (e.g., "you must repay the tuition payment if you quit within a year").  In this case, the employee is leaving early, triggering the repayment obligation.

Does that clarify?

Thanks!

M.

[joshuabarksatlcs]

NO research, totally off-the-cuff bantering after my daily regimen (Bourbon).  But... OMG I'm wearing a tank top.  Where's the cuff???

You're an evil corporation.  You hired me and provided me with EAP benefits.  Tax free, generally.  But if I were to leave, I'd have to pay you back me the benefits that you paid when you were smitten with me.

Code 108 (d):

(d)Meaning of terms; special rules relating to certain provisions

(1)Indebtedness of taxpayer 

For purposes of this section, the term “indebtedness of the taxpayer” means any indebtedness—

(A) for which the taxpayer is liable, or

(B) subject to which the taxpayer holds property.

When I'm about to leave, you can bet I'd borrow @IRonMaN's ACME magnifying glass to read the contract to find out when I would become liable. 

If the contract said something like "you leave, you die, but if I let you live, the moment you think about leaving, you shall owe me the benefits that I have paid for you.".  Then, clearly I am liable.

But if the contract said along the line of: "If you leave (under xyz conditions), this evil corporation reserves the right to ask for a refund for the benefits", I would argue there was no liability to be forgiven.  During the exit negotiation, I would make sure the agreement was for the corporation to kindly NOT exercise the said right.

I would advise my client NOT to assume.  Get the facts.  Read the contract or plan document.  

(e.g., "you must repay the tuition payment if you quit within a year").  Language like this would arguably create the liability. 

If no liability was created, I would also make sure 1099-C would NOT be issued.

Splitting hairs?  Sometimes, it's my job to split hairs.  Just my 1.8 cents.  (Used to be 2 cents, before the Nasdaq fiasco earlier this week.)   Again, NO research.  On the QT, and very very off the cuff.

[sjrcpa]

@joshuabarksatlcs What brand of bourbon do you drink? 🥃

I think I could use it.

[abctax55]

@sjrcpa - weather gettin' to you?  Or just the beginning throes of filing season?

A friend ended up with "leftover" inventory (long story) of bourbon from a defunct import business. She shared several bottles with me.  I could send some to you & @joshuabarksatlcs (I don't drink bourbon...tequila's MY choice) but I don't think it's very high quality.

[sjrcpa]

Both. I liked @joshuabarksatlcs ' mood. 😃

I've got bourbon but figured his must be special.

I'm mainly a tequila or vodka girl, though.

[abctax55]

(again... twins 🙂

I will drink bourbon in a mint julep (I am from the South..) or a manhattan.

[joshuabarksatlcs]

@sjrcpa 

My last bottle was Weller 12 year.  Working on a Kavalan.  Lately, I've found the Kavalan line quite splendid.  I asked Santa for a case (would have settled for a bottle) of Kentucky Owl Straight but the chump later told me he opened it on the way and got pulled over for SUI ( sleighing und....).  So, if you didn't even get coal last Christmas, it was likely my fault. 

@abctax55 

Being in the West Coast, I gave up ordering manhattan a number of years ago.  Actually I once had to respond to a blank stare and tell the young-ish server (in Vegas) "it's just like the New York City borough, but in lower case", except that from her other blank stare, I figured she had never been to NYC.  I later thought perhaps I should have just said, like a man in a hat with a tan.  She'd probably remember that easier.  I do love a rich, mean manhattan.

[joshuabarksatlcs]

A few weeks ago, @BobKamman was accused of proselytizing, and I co-proselytizing, or vice versa.

Will the conversations in this thread make me guilty of bourselytizing???