In a recent private letter ruling, PLR 201029003 (released July 23), the Internal Revenue Service approved a university's tuition reduction plan which consisted of an arrangement ("Plan A") pursuant to which spouses, children and other dependents of all university employees were eligible for 100% tuition reduction at the university, if admitted, and an arrangement ("Plan B") that was limited to spouses, children and other dependents of tenured faculty, associate professors, assistant professors, members of the university administrative council, other administrative officers and certain upper-level management employees and other employees who would qualify for a tuition benefit if they attended other colleges and universities equal to 50% of tuition charged at any other higher-educational institution.

Under Section 117(d)(3) of the Internal Revenue Code, a qualified tuition reduction is excludible from the gross income of a highly compensated employee only if the reduction is made available on a nondiscriminatory basis. To be nondiscriminatory, the benefit must be made available on substantially the same terms to each member of a group of employees that has been defined under a reasonable classification which does not discriminate in favor of highly compensated employees. The ratio of non-highly compensated employees to highly compensated employees at the university which obtained the private letter ruling that were eligible to participate in Plan B was below the "unsafe harbor percentage" applied for tax-qualified retirement plan purposes. Nonetheless, the IRS rules that Plan B was not discriminatory because it was part of an overall tuition reduction arrangement pursuant to which Plan A was available to a broad cross section of employees (although providing no benefit for attendance at other colleges and universities) and that the classification applied for eligibility for Plan B appeared to be grounded in bona fide business and educational considerations not related to compensation. There was no identification of these bona fide business and educational considerations.

This private letter ruling appears to differ in analysis and conclusions from PLR 9041085 in which the university in question had three tuition reduction plans. The first two plans were limited to officers, faculty and senior administrative staff and the third plan was available to all employees. Participation of non-highly compensated employees in the first two plans was well below the "unsafe harbor percentage" applied for tax-qualified retirement plan purposes, and the IRS ruled that both plans were discriminatory without consideration or comment on the fact that there was another tuition reduction plan for which all employees were eligible. The classification of employees eligible to participate in the two discriminatory plans (officers, faculty and senior administrative staff) appears to be very similar to the classification of employees (tenured faculty, associate professors, assistant professors, members of the university administrative council, other administrative officers and certain upper-level management employees and other employees) eligible to participate in Plan B in PLR 201029003.