In June 2024, the IRS issued answers to frequently asked questions about educational assistance plans (EAP) under Section 127 of the Internal Revenue Code. Employers that provide educational assistance benefits to help employees pay for tuition, fees, books, supplies, and equipment may exclude the payments, up to $5,250 per year, from employees’ gross income if the benefit complies with Section 127. The IRS’s FAQs describe and clarify the benefit. Here are the highlights from the IRS’s FAQs:
The EAP must be a separate written plan. An employer cannot pay for an employee’s educational expenses under the premise that it has established an EAP unless there is a written plan describing and setting the terms of the EAP. To accompany the FAQs, the IRS created a sample plan for employers, which employers may customize.
Eligible Educational Expenses. EAPs are used to pay for educational expenses such as tuition, fees and similar expenses, books, supplies, and equipment. The benefit does not include payments for meals, lodging, transportation, tools or supplies that the employee can keep after completing the educational course, and does not include any courses involving sports, games, or hobbies unless they are related to the employer’s business or are required as part of a degree program. Out of the eligible expenses, employers may choose which eligible EAP benefits to offer as part of its plan and specify the benefits in the written EAP plan.
The EAP May Pay For Employee Loans Through 2025. Eligible expenses also include principal or interest payments on qualified educational loans if the loans have been incurred by the employee for their own education. The benefit cannot be used to pay for loans for an employee’s spouse or dependent’s education. Paying for educational loans is a limited EAP benefit that only lasts through December 31, 2025 unless there is future legislation extending it.
The Educational Courses Do Not Need to Be Work-Related. A Section 127 EAP benefit does not have to be limited to work-related courses. It can apply towards courses that are unrelated to the job. The benefit applies to either undergraduate or graduate-level courses.
Annual Limit. Under Section 127, an employer may exclude up to $5,250 of EAP payments per calendar year. Any educational assistance payment above $5,250 in a calendar year is taxable. For any payments made as a reimbursement, the employer must reimburse the expenses in the same calendar year that the employee paid for the expense. Unused portions of the $5,250 cannot be carried over to the following calendar year.
A Section 127 EAP is one way to provide employees with a tax-free benefit to help them pay for educational expenses. Another way to provide a similar benefit is to pay for or reimburse employees for educational expenses as a working condition fringe benefit. A working condition fringe benefit has no annual limit on the amount but the educational expenses must be job-related and meet the IRS’s business expenses requirements.
The IRS’s FAQs about Section 127 educational assistance plans is available at: https://www.irs.gov/newsroom/frequently-asked-questions-about-educational-assistance-programs. For more information and guidance about your agency’s educational assistance or reimbursement plan, please contact LCW.