Same-Sex Partner Benefits Do Not Disqualify Tuition Plan

TAX BRIEF

In letter ruling 200137041, the IRS decided that providing graduate courses and benefits for employees’ same-sex partners did not disqualify a university’s tuition reduction plan. However, it said employees would be taxed on such courses and benefits.

Under IRC section 117(d)(1), gross income excludes any qualified tuition reduction. This is defined as any reduction in tuition an educational organization provides to an employee or his or her spouse and dependent children. Except for certain graduate teaching and research assistants, this exclusion is limited to education below the graduate level. Unless taken for credit for an undergraduate degree, a course that leads to a graduate degree generally is not considered education below the graduate level.

The university plan provides tuition fee waivers or reductions to eligible employees and their dependents enrolled in degree-granting programs. Employees who have completed five or more years of full-time service and are active members of a university-sponsored retirement plan are eligible. Dependents include the employee’s spouse or same-sex domestic partner, children (including those of the same-sex domestic partner) and certain persons for whom the employee provides more than half of the support in the calendar year.

Under the plan, eligible employees can receive fee waivers for a maximum of 12 “person years,” in any combination of years or enrollment/number of dependents, to include both undergraduate and graduate work.

The IRS said while the plan provides benefits not considered qualified tuition reductions under IRC section 117(d)(2), this does not prevent excludable benefits from satisfying that section’s rules. The exclusion is available to any individual fulfilling the requirements, regardless of whether similar benefits are provided to certain other persons.

Because of this, the IRS said providing benefits to parties other than those described in IRC sections 117(d)(2) and 132, such as same-sex domestic partners of employees, or extending nonexcludable benefits, such as graduate-level tuition reductions, simply requires the inclusion of the value of such amounts in the gross incomes of those employees for whose benefit they are paid. It ruled the plan benefits that meet the section 117 rules do in fact qualify for the exclusion.

Observation. While this ruling specifically deals with qualified tuition reduction plans, the conclusions reached may apply to other types of benefit plans. Employers thus may consider extending employee benefits to same-sex domestic partners without fear of disqualifying the entire plan.

—James Ozello, JD, Ozello Tax and Legal Consulting, Ringwood, New Jersey.