Senate Committee Extends Education Assistance Tax Benefit

March 19, 2001 ( - Last week the Senate Finance Committee approved the Affordable Education Act of 2001 that would, among other things, make permanent the tax-free treatment of employer-provided educational assistance.

The bill would also extend the treatment to graduate classes.

Under current law, employers may offer an employee tax-free educational assistance of up to $5,250 per year in order to attend undergraduate courses that begin before January 1, 2002.  The current exclusion is due to expire on December 31, 2001 and doesn’t apply to graduate classes.

The bill would also increase the amount that can be contributed to an educational savings account from $500 to $2,000, and would allow such accounts to be used for elementary and secondary school expenses – including private-school tuition.

Current law only allows Education Savings Accounts to be used for higher education expenses.

The bill would also make distributions from pre-paid college savings plans and tuition plans tax-free, compared with current law that taxes the beneficiary on earnings withdrawn. 
New Jersey Senator Robert Torricelli and Arkansas Senator Tim Hutchinson introduced the savings plan amendment last month.  It follows a proposal by President Bush whose education plan supports allowing families up to $5,000 per child for K-12 school expenses.

– Nevin Adams