Section 127 of the Internal Revenue Code allows employers to provide eligible employees with educational assistance of up to $5,250 tax-free annually. The amounts paid under Section 127 may be deducted as a business expense.
An educational assistance program is any form of instruction or training that improves or develops the employee's capabilities or skills; the definition does not limit the employee to job-related courses or degree programs. Employers can furnish assistance independently, in conjunction with other firms or through a third party such as an educational institution.
Professional development courses are also covered, but only if they generally relate to improving or maintaining skills for the employee's current job.
What's covered
Covered expenses can include tuition, fees, books, supplies and equipment. Until Dec. 31, 2025, you also may help cover any qualified education loans incurred by your eligible employees by making principal and/or interest payments directly to the lender, a third-party servicer or the employee. Employees must be prepared to substantiate all expenses.
To qualify as a Section 127 educational assistance program, you need a written plan. The IRS provides a sample plan that you can tailor to include:
- Conditions for eligibility
- Definitions for when participation begins
- Prorated benefits for part-time employees
The program cannot discriminate in favor of officers, shareholders, highly compensated employees or self-employed individuals. The educational benefits must be incurred by the employee; the plan's benefits cannot be used for the education of a family member (such as a spouse or dependent).
Educational assistance doesn't include:
- Meals, lodging or transportation
- Payments for a computer or laptop or other equipment that employees keep after the course
- Courses involving sports, games or hobbies unless they have a reasonable relationship to the business or are required as part of a degree program; for example, athletic supplies would qualify if they were bought for a course in health or physical education
The terms of your plan may further limit the types of assistance provided.
The financial terms
Employer-provided tax-free educational programs have some financial restrictions for employees:
- Any assistance provided above the cap of $5,250 is taxable as wages.
- Expenses must be incurred in the same calendar year as the reimbursement.
- Any unused portion of the $5,250 annual limit cannot be carried forward to subsequent years.
- The reimbursed educational expenses cannot be used to claim the Lifetime Learning Credit on the individual's tax return.
For more information, see IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits. Also, Chapter 10 in Publication 970, Tax Benefits for Education, provides details on what qualifies as a student loan. The IRS has also published a helpful FAQ about educational assistance programs.
We can help you to learn more about your options for offering tuition reimbursement to your employees as a benefit. Contact us at Benefits by Design Insurance Services at 760-696-3573 or 415-524-8959 or at
admin@benefitsbydesignca.com.
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