April 8, 1985
You ask whether the amounts paid or expenses incurred by your company for educational assistance to an employee must be reported to Massachusetts as income to the employee. You indicate that the assistance is provided pursuant to an educational assistance program as defined in Section 127(b) of the Internal Revenue Code ("Code").
Code Section 127(a) provides that an employee's gross income does not include amounts paid or expenses incurred by an employer for educational assistance to an employee pursuant to an educational assistance program as defined in Code Section 127(b). I.R.C. § 127 (1982) (amended 1984). Code Section 127(d) provides that Section 127 does not apply to taxable years beginning after December 31, 1983. I.R.C. § 127 (1982) (amended 1984). An October 1984 amendment to Section 127 of the Code modified and extended for a two-year period the exclusion from federal gross income for assistance provided pursuant to educational assistance programs. Act of Oct. 31, 1984, Pub. L. No. 98-611, 98 Stat. 3176 (amending I.R.C. § 127).
Massachusetts gross income is federal gross income as defined under the Internal Revenue Code as amended on February 1, 1983 and in effect for the taxable year, with certain modifications not here relevant. G.L. c. 62, §§ 1, 2. Under the Internal Revenue Code as amended on February 1, 1983, and in effect for the taxable year, that is, before the 1984 amendment, Code Section 127 provided that the exclusion from gross income would not apply to taxable years beginning after December 31, 1983. Therefore amounts paid or expenses incurred by an employer for educational assistance to an employee, furnished pursuant to a program described in Section 127 of the Code, are includable in the employee's Massachusetts gross income for taxable years beginning after December 31, 1983.
Massachusetts law provides that "[e]very employer making payments to employees...of wages subject to tax under chapter sixty-two shall deduct and withhold a tax upon such wages…." The term "wages" is defined as "wages as defined in section thirty-four hundred and one (a) of the ...Code…." G.L. c. 62B, § 1.
Section 3401(a) of the Code excludes from the definition of "wages" any payment made or benefit furnished, to or for the benefit of an employee if at the time of such payment or such furnishing it is reasonable to believe that the employee will be able to exclude such payment or benefit from income under Section 127. I.R.C. § 3401(a)(18). At the time in 1984 that Section 127 payments were made or benefits furnished to employees, it was reasonable to believe that the amounts would not be included in the employee's federal gross income. Therefore they were not wages as defined in Section 3401(a).
For Massachusetts withholding purposes, then, amounts paid or expenses incurred by an employer for educational assistance to an employee in 1984 and later are not wages for purposes of Massachusetts withholding. Thus they are not subject to Massachusetts withholding.
Educational assistance furnished by the employer to or for the benefit of the employee must be reported on the employee's Form W-2 Wage and Tax Statement. The amount of assistance received should be reported under "State wages, tips, etc." in box 18 of Form W-2. Note that the amount of wages reported for employees receiving educational assistance will differ for state and federal purposes.
An employer who provided educational assistance to any employee in 1984 and failed to report such income on the employee's Form W-2 must issue a correct or supplemental 1984 Form W-2 Wage and Tax Statement for employees receiving educational assistance.
Very truly yours,
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue