Recently, the IRS released updated guidance for Internal Revenue Code (IRC) Section 127 regarding educational assistance programs. Although much of the guidance reiterates existing requirements, the updates provide useful clarifications and reminders for employers. Here’s what employers should know.
What is an educational assistance program?
A Section 127 educational assistance program is a benefit plan established by an employer to help employees pay for education-related expenses. Employees can receive up to $5,250 per calendar year in educational assistance without paying federal income tax on those benefits. Beginning after 2026, this limit will be adjusted annually for inflation. To qualify for this tax benefit, employers need to establish a written plan that complies with IRC requirements and communicate the plan’s eligibility to their employees.
What expenses are covered?
Employers can provide tax-free assistance for the following expenses:
- Tuition payments
- Fees
- Books, supplies, and equipment
- Qualified student loan payments
To receive reimbursement, an employee’s expense must not have been incurred prior to employment. However, employers can make tax-free payments toward an employee’s qualified student loan principal or interest regardless of when the loan was incurred. Loan payments can be made directly to the third-party loan service or reimbursed to the employee.
What expenses are not covered?
Employers cannot provide tax-free assistance for:
- Meals, lodging, or transportation
- Tools or supplies that are kept after completing the course (for example, a computer or laptop)
- Courses involving sports, games, or hobbies unless they are required for a degree program or reasonably related to the employer’s business
Who can participate?
Educational assistance programs are intended exclusively for employees. Generally, spouses and dependents cannot receive benefits unless they are also employees of the company. Employees who are officers, shareholders, self-employed, or highly compensated may also receive benefits, but employers may not discriminate in favor of these employees. Employers can also create their own additional eligibility requirements such as waiting periods or participation rules for part-time employees.
As student debt remains a significant concern for many employees, educational assistance programs can provide a valuable recruitment and retention tool for employers. Contact us today if you are interested in implementing these benefits in your business or would like to confirm your plan’s compliance.
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