J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

2.11 Educational Benefits for Employees’ Children

Private foundations.

The IRS has published guidelines for determining whether educational grants made by a private foundation established by an employer to children of employees constitute scholarships. An objective, nondiscriminatory program must be adopted. If the guidelines are satisfied, employees are not taxed on the benefits provided to their children. Advance approval of the grant program must be obtained from the IRS.

IRS guidelines require that:

• Grant recipients must be selected by a scholarship committee that is independent of the employer and the foundation. Former employees of the employer or the foundation are not considered independent.
• Eligibility for the grants may be restricted to children of employees who have been employed for a minimum of up to three years, but eligibility may not be related to the employee’s position, services, or duties.
• Once awarded, a grant may not be terminated if the parent leaves his job with the employer, regardless of the reason for the termination of employment. If a one-year grant is awarded or a multi-year grant is awarded subject to renewal, a child who reapplies for a later grant may not be considered ineligible because his parent no longer works for the employer.
• Grant decisions must be based solely upon objective standards unrelated to the employer’s business and the parent’s employment such as prior academic performance, aptitude tests, recommendations from instructors, financial ...