Qualified Tuition Reduction


Free or reduced tuition provided by eligible educational institutions to its employees may be excludable from gross income as a qualified tuition reduction. Whether a tuition reduction is a “qualified” tuition reduction and excludable from income depends on whether it is for education below or at the graduate level and whether the tuition reduction represents payment for services.

IRC Section and Treas. Regulation

  • IRC Section 117(d)
  • IRC Section 132(h)

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

  • IRM Section


Generally, amounts paid by an employer to or for the benefit of employees are compensatory in nature, and includible in gross income as wages. However, Section 117(d)(1) of the Internal Revenue Code allows employees of certain educational institutions, including nonprofit universities and colleges, to exclude from gross income qualified undergraduate tuition reduction they, their spouse, or their dependent children receive from the employee’s employer.

Section 117(d)(2) defines a “qualified tuition reduction” as the amount of any reduction in tuition provided to any employee of a Section 170(b)(1)(A)(ii) educational organization for the education (below the graduate level) at such organization (or other organization described in Section 170(b)(1)(A)(ii)) of such employee or any person treated as an employee under the rules of Section 132(h). A qualified tuition reduction means that the educational organization pays some or all the tuition for the employee.  It may be in the form of tuition remission, a tuition waiver, or a tuition grant.

Section 132(h) provides that the following individuals are considered employees for the purposes of qualified tuition reductions:

  • A current employee
  • A former employee who retired or left on disability
  • A widow or widower of an individual who died while an employee
  • A widow or widower of a former employee who retired or left on disability
  • A dependent child or spouse of one of the above

Section 170(b)(1)(A)(ii) describes an educational organization as one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.

The exclusion from income provided by Section 117(d) is generally limited to education “below the graduate level.” Tuition reductions for graduate education are considered qualified and are excludable only if they are provided by an eligible educational institution to a graduate student performing teaching or research activities for the educational institution. The employee must include in income any other tuition reductions received for graduate education. (IRC Section 117(d)(5)(4))

Section 117(d)(3) of the Code provides that the exclusion from income of a qualified tuition reduction will apply to highly compensated employees only if such reduction is available on substantially the same terms to each member of a group of employees that is defined under a reasonable classification set up by the employer that does not discriminate in favor of highly compensated employees (within the meaning of Section 414(q)).

Issue Indicators or Audit Tips

Issue Indicators

  • Employee Benefits Handbooks
  • Employment Contracts
  • Written policies and procedures
  • Reciprocity Agreements
  • Student rosters

Audit Tips

  • When discussing fringe benefits with the taxpayer, examiners should communicate with the appropriate parties. Personnel in the payroll department may not have the same awareness of benefits as those in the human resources department.
  • Identify the employees receiving tuition reduction, remission, voucher, waiver, etc.
    • Determine employees’ job descriptions and amount of the fees waived