Gallup just released its 2026 State of the Global Workplace report — and the timing couldn’t be more relevant to section 132 leadership development. Global employee engagement fell to 20% in 2025. That’s the lowest level since 2020, the first time Gallup recorded two consecutive years of decline, and a figure representing an estimated $10 trillion in lost productivity worldwide.
In the US, only 31% of workers report feeling engaged — the lowest figure since 2014. One engagement element saw the steepest drop of all: the percentage who believe someone at work encourages their development. That number fell from 36% to 30% in five years.
Read that carefully. At the exact moment engagement is collapsing, the driver most likely to fix it — felt investment in people’s growth — is also declining. That’s not a coincidence. It’s a consequence. And it’s one that most companies are making worse by how they structure, communicate, and account for development spending.
The Generation That Will Tell You Exactly What They Need
What makes this data particularly hard to ignore in 2026 is this: the two largest segments of your workforce have been telling you what they need for years.
Deloitte’s 2025 Global Gen Z and Millennial Survey — 23,000 respondents across 44 countries — found that learning and development ranks in the top three reasons Gen Z chose their current employer. Seven in ten Gen Z workers actively develop skills to advance their careers at least once a week — not waiting for their employer to offer it, but doing it on their own time, with or without company support.
These are not disengaged people. They are ambitious, actively developing, and watching closely to see whether their employer is building them or just using them.
Critically, the gap Deloitte identified is not between what Gen Z and millennials want and what’s realistic. It’s between what they expect from their employers and what they actually experience. That gap is precisely where disengagement lives — and where most companies are bleeding retention without understanding why.
The Real Problem With How Companies Treat Development
Most companies are not failing to invest in development. Instead, they’re failing to treat it as investment.
There’s a meaningful difference. And your workforce — especially anyone under 40 — feels it immediately.
A mandatory compliance module is not development. An annual off-site with no stated business purpose is not strategic upskilling. A generic online subscription that nobody asked for and nobody tracks is not a signal that the organization is deliberately building the people inside it.
Strategic upskilling is different in kind, not just degree. It has a named purpose. It connects to a specific business outcome. The person receiving it understands why this program, why now, and what the company is building them toward. That communication turns a budget line item into a psychological contract.
Self-Determination Theory — the foundational framework in motivational psychology — identifies three core psychological needs driving sustained engagement: autonomy, competence, and relatedness. Employer-sponsored development that is deliberate, documented, and communicated directly addresses all three simultaneously. Development that companies leave invisible, uncommunicated, or framed as compliance addresses none of them.
In other words, the program content matters far less than whether the person receiving it knows the company chose it deliberately — for them, tied to their role, worth investing in.
The Tax Advantage Most Companies Don’t Know They Have
Here’s where the opportunity gets structurally interesting. There’s a mechanism available right now that most companies are completely ignoring — and it solves both the financial and the cultural problem at the same time.
Under IRC Section 132(d), employer-provided professional development qualifies as a working condition fringe benefit — excluded from the employee’s gross income, fully deductible by the employer, with no annual dollar cap.
In practical terms: when a development program qualifies, the employee receives it tax-free. The company deducts the full cost as a business expense. Furthermore, in 2026, the Department of Labor expanded qualifying categories to include AI literacy training — significantly broadening what employers can structure this way.
According to IRS Publication 15-B, working condition fringe benefits include any property or service an employee could deduct as an ordinary and necessary business expense. Properly structured leadership development, executive coaching, and AI skills training all meet this standard.
However, most companies have never heard of this — not because it’s complex, but because of a structural communication failure. The person who understands the tax code sits in accounting. The person deciding what development to buy sits in HR or the C-suite. Neither conversation reaches the other.
What the Numbers Actually Look Like
Consider a $25,000 leadership development engagement. Without Section 132 structuring, the employer deducts the cost as a standard business expense. The employee receives no tax advantage.
With proper Section 132(d) structuring, the employer still deducts the full cost — and the employee receives the benefit tax-free. For AI training specifically, Executive Order 14179 and the Department of Labor’s AI Literacy Framework (TEN 07-25) created an explicit pathway for AI workforce training to qualify as a tax-advantaged benefit. Pending tax credit legislation could add 30% on top.
Consequently, the combined tax efficiency on a properly structured program (see the IRS fringe benefit guide) can approach 40% of total investment. On a $100,000 annual development budget, that’s $40,000 in tax efficiency most companies leave uncaptured.
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Why Communicating the Investment Is the Bigger Win
The tax advantage is real. But what it unlocks beyond the balance sheet is the more important story.
When you structure development under Section 132, document the business purpose, and communicate that investment explicitly — you accomplish something the tax code alone cannot. You change the psychological contract.
The leader isn’t just trained. They’re invested in. They know the dollar amount and the business rationale. They understand the company chose this program deliberately and communicated it with intention. That’s fundamentally different from clicking through a compliance module nobody requested.
Gallup’s State of the Global Workplace 2026 makes the business case directly: employees who strongly agree their employer cares about their development are 3.5x more likely to report feeling engaged and 4x more likely to recommend their employer. This isn’t a soft benefit — it’s the exact engagement gap companies are losing right now, and it’s directly addressable through how you structure and communicate development investment.
Therefore, strategic upskilling doesn’t mean a bigger training budget or a fancier learning management system. It means a named investment, tied to a business purpose, communicated with intention — that the person receiving it experiences as a signal about their future at the organization.
Moreover, McKinsey’s research shows that top-quintile resilient organizations outperformed peers by more than 150 percentage points in shareholder returns in the years following the 2007–11 financial crisis — meaning structured, communicated development doesn’t just save 40% on taxes. It builds the leadership capacity that produces measurably better outcomes and retains the people competitors are about to lose.
The L&D and Finance Conversation That Never Happens
Most development programs fail to create internal advocates not because the content is bad, but because the investment stays invisible. The leader experiences the program as an HR requirement — not as a signal that the organization deliberately chose to build them.
However, when you structure development under Section 132, document the business purpose, and communicate the investment explicitly, you transform a cost the company absorbed into a commitment the company made. That shift is where internal evangelism begins — and where the retention math changes.
As the Week 1 post in this series explored, learning and development spending is most commonly treated as an operating expense — a cost to manage rather than an asset to build. Section 132 is the mechanism that structurally repositions it. The documentation required to qualify for the tax treatment is the same documentation that creates internal brand equity. Both require the same action: naming the investment, connecting it to business purpose, and communicating it to the person receiving it.
The Change Management Connection
This matters now more than it has in decades. The pace of organizational change requires leaders to absorb and execute transformation faster than most organizations have ever built change capability.
AI adoption. Organizational redesign. New leadership at critical levels. The companies that move through these changes effectively are not the ones with better processes — they’re the ones with leaders who trust the organization’s intentions toward them enough to bring people along with them.
And right now, trust is the scarce resource. Engagement is at decade lows. The generation driving the next ten years of organizational growth is watching to see whether employers are investing in them or just extracting from them. Consequently, Section 132 is a mechanism — but the real asset it creates is a leadership team that understands the company is building them, and responds by building the company in return.
What This Means for Real Leaders in Plain English
If you’re a founder or executive investing in leadership development — and you should be — here’s the plain version.
Engagement is collapsing. The data is not ambiguous. Furthermore, the generation making up the majority of your workforce has been explicit about what fixes it: visible, deliberate investment in their growth. Not compliance training. Not a subscription nobody asked for. Strategic upskilling they experience as a commitment, not a checkbox.
There’s also a significant tax advantage sitting unclaimed in your development budget right now — because your accounting team and your HR team have never had the same conversation about it. That’s fixable in a single meeting with the right information on the table.
Ultimately, the companies navigating AI adoption, succession, and organizational change most effectively right now aren’t spending more on development. They’re treating it as strategic capital — structuring it deliberately, communicating it explicitly, and capturing every financial and cultural advantage it was designed to produce.
That’s the shift. And it starts with a different conversation inside your organization.
We’ve put together a complete guide to Section 132 for employers — covering qualification requirements, documentation standards, AI training eligibility, and financial impact analysis. If your company is investing in leadership development, this is the document your accounting team and CHRO should be reading together.
If you’re ready for a conversation about structuring your leadership investment for both tax efficiency and internal impact:
Disclaimer: The information in this newsletter is for educational purposes only and does not constitute legal or tax advice. Section 132 qualification requirements vary by situation. Consult your tax professional or legal counsel before structuring any employee benefit program.
Estimated reading time: 9 minutes
References
- IRS Publication 15-B — Employer’s Tax Guide to Fringe Benefits (2026)
- IRS Fringe Benefit Guide — Working Condition Fringe Benefits
- Gallup — State of the Global Workplace 2026
- Gallup — US Employee Engagement Hits Decade Low (HR Dive)
- Deloitte — 2025 Gen Z and Millennial Survey
- Self-Determination Theory — Ryan & Deci
- DOL Training and Employment Notice 07-25 — AI Literacy Framework
- McKinsey — The Resilience Imperative: Succeeding in Uncertain Times