Navigating the complexities of educational assistance programs can be challenging for employers and employees alike. Recent legislation changes have expanded how employers can provide direct and indirect education assistance. Still, the new tax incentives offered by the Secure 2.0 Act and Section 127 can be confusing. While they sound alike, they take different approaches to the same problem.
In this article, we’ll provide a detailed FAQ based on section 127 of the Internal Revenue Code to help you understand how these benefits can be leveraged, whether you’re an employer, employee, or self-employed individual.
What Is an Educational Assistance Program?
An educational assistance program is a plan established by an employer to provide educational benefits to its employees. To qualify under U.S. Code § 127 – Educational Assistance Programs , the plan must be in writing and meet specific requirements. These programs are designed to support employees in furthering their education, covering expenses such as tuition, qualified education loans (as defined in section 221(d)(1) of the Code ), fees, books, and supplies.
Most importantly, these programs have the benefit that they are tax-free, up to $5,250 per calendar year. This means the benefits provided under this threshold are not included in the employee’s gross income nor reported as wages on their Form W-2.
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Can Educational Assistance Cover Loan Payments?
Yes, under certain conditions. Payments on principal or interest of qualified education loans are considered educational assistance benefits if made after March 27, 2020, and before January 1, 2026. These payments must be for the employee’s education and not intended for a family member’s education. The total combined limit for these payments and other educational assistance is still $5,250 annually.
This section of the Code is most commonly referred to as the “CARES” provisions of Section 127, as these amendments were part of the broader Coronavirus Aid, Relief, and Economic Security (CARES) Act package. The CARES Act provision was set to expire at the end of December 2020, but Congress passed the Consolidated Appropriations Act before that happened, extending the tax break through the end of 2025.
The IRS discusses what qualifies as an eligible loan in more detail here.
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Are There Restrictions on the Types of Courses Covered?
Per the Code, educational assistance benefits can not cover payments for the following items:
• Meals, lodging, or transportation.
• Tools or supplies (other than textbooks) that you can keep after completing the course of instruction (for example, educational assistance does not include payments for a computer or laptop that you keep).
• Courses involving sports, games, or hobbies unless they:
◦ Have a reasonable relationship with the business of the employer
◦ Are required as part of a degree program
An employer can further define what their program will or will not pay for as long as it meets the other requirements of the provision.
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Who Can Benefit From These Programs?
Educational assistance programs are intended for the exclusive benefit of employees. They cannot discriminate in favor of highly compensated employees or disproportionately benefit shareholders or owners. However, self-employed individuals and owners who meet specific criteria can also receive benefits, though not more than 5% of the total benefits provided can go to owners or their families.
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What Happens if Benefits Exceed $5,250?
Suppose educational assistance benefits exceed $5,250 in a given tax year. In that case, the employer must include the excess amount in the employee’s gross income, subject to relevant business and income tax.
Both employers and employees should keep track of these benefits to ensure they are reported correctly. This is especially important for employees who change organizations within a given tax year, as the total assistance they receive can be at most $5,250, regardless of the employer paying it. Additionally, any “unused” amounts of the $5,250 annual limit cannot be carried over by the employer/employee to subsequent years or retroactively applied to previous years of employment.
Can Educational Assistance Be Used for Non-Employees?
Generally, educational assistance benefits are exclusively for employees. Benefits extended to spouses or dependents do not qualify under section 127 and must be included in the employee’s gross income unless they also qualify as employees.
How Do Employers Benefit From Offering These Programs?
Employers can deduct the costs of educational assistance up to the $5,250 limit per employee per year as a business expense. This helps employers support their employees’ pursuit of higher education and skill development while also benefiting from tax incentives. Education assistance initiatives can enhance the workforce’s expertise and knowledge, boost employee morale and productivity, and decrease staff turnover.
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What Should Employers Include in an Educational Assistance Plan?
An effective educational assistance plan should clearly outline the eligibility criteria, types of benefits provided, conditions for receiving benefits, and procedures for claiming benefits. Employers may customize their plans to include provisions for part-time employees and/or prorate benefits based on employment tenure, or even grades received at course completion.
Here is an example plan document that outlines an Educational Assistance Program. Though it will have to be adapted to your organization’s unique needs and policies, this template can help you meet the written plan requirement.
The Takeaway
Educational assistance programs offer valuable benefits that significantly reduce the financial burden of furthering education. Both employers and employees stand to gain from well-structured programs that align with IRS guidelines. As these programs are subject to specific IRS rules and potential legislative changes, staying informed through reliable sources like IRS publications and updates is crucial for maximizing the benefits while remaining compliant.
For more detailed information or specific scenarios, visit the IRS website . You may also want to consult with a tax professional, who can provide guidance tailored to individual circumstances.
SoFi at Work can also help. We’re experts in the employee education assistance space. With SoFi at work, you can access platforms and information that will help build the benefits needed to create a successful and loyal workforce.
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