Mar 14, 2025
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:
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:
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:
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.
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