Section 127 plans may be the answer for employers looking to add employee benefits.
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When it comes to perks at work, free stuff is always a bonus. But as great as free coffee and donuts are, workers are increasingly looking for ways to eliminate or pay off student debt, which now averages $39,075 per borrower. A tax benefit is found in the tax code. Under Section 127, employers can provide tax-free assistance to employees continuing their education while working or (more recently) to repay student loans.
While Section 127 was created by Congress in 1978 as a temporary tax break (it was made permanent in 2012), with the cost of college skyrocketing (costs have more than doubled in the 21st century), many employers are taking a fresh look at Section 127. The IRS recently updated its guidance—see what you need to know.
What is Article 127?
Section 127 of the tax code allows employers to provide up to $5,250 annually in tax-free educational assistance to employees for tuition, fees, books and equipment.
This amount is an exception and not a discount. This means that the amount is deducted by your employer and not included in your taxable income.
To qualify, an educational assistance plan must be a written benefit plan (you can see a sample of what it looks like here). While this sounds super formal, it’s no different than the health care, retirement benefits, or commuting plan your company probably already has.
How much educational assistance is available?
The amount of assistance available is up to $5,250 per employee, per year.
If that sounds low, you’re right—the limit hasn’t changed in more than 40 years. Although the cost of college has risen faster than the rate of inflation, the annual benefit has never changed. If adjusted for inflation, the benefit would now be worth $27,737.89 per year. While that kind of boost doesn’t happen, the benefit will be adjusted for inflation from 2027.
And, the benefits are “use it or lose it.” Any unused amounts cannot be carried over to the next year.
What is included in “educational assistance”?
Educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The term includes benefits that cover both undergraduate and graduate courses — and they don’t have to be work-related (one exception applies, so keep reading).
In 2020, Congress added the option for employers to also provide this assistance to help workers pay off their student loans (in 2025, the student loan extension became permanent). Payments can be made either to a third party, such as an education provider or loan servicer, or directly to the borrower. Importantly, it doesn’t matter when the special education loan was taken out as long as they are still in repayment (shout out to Gen X).
Educational assistance allowances do not include payments for meals, accommodation or transportation, or tools or supplies (other than textbooks) that you may keep after the course is completed (for example, educational assistance does not include payments for a computer or laptop that you keep). There’s a quick exception to the previous statement about classes not required to be work-related: Payments for classes involving sports, games or hobbies don’t qualify unless they have a reasonable connection to your employer’s business or are required as part of a course of study.
Must employers offer a section 127 plan?
No, employers do not have to offer a section 127 plan to employees.
If they do, however, the plan must be available to all employees (a plan cannot discriminate in favor of officers, shareholders, the self-employed, or highly compensated employees).
And just because the statute allows your employer to pay for certain benefits doesn’t mean they have to. Your employer can limit the types of assistance provided to employees. For example, he may not have chosen to add student loan repayment coverage.
Can part-time workers qualify for the program?
Absolutely. The program must meet non-discrimination requirements. The IRS generally considers the exclusion of part-time, seasonal, or temporary employees unreasonable if these classifications are based on hours or time of service (for example, employees who work less than 20 hours per week or have less than 6 months of service are excluded).
Can I use this money for other tax relief?
No, there is no double dipping. Any expenses paid with section 127 funds cannot be used as the basis for any other deduction or credit, including the lifelong learning credit.
And just because the statute allows your employer to pay for certain benefits doesn’t mean they have to. Your employer can limit the types of assistance provided to employees. For example, he may not have chosen to add student loan repayment coverage.
Can the program benefit my family?
No. A section 127 plan is for the sole benefit of employees. A plan that provides benefits to an employee’s spouse or dependents is not a section 127 education assistance plan unless those spouses or dependents are themselves employees. (Sorry, you also can’t use the money to repay parent PLUS loans, as the money must be borrowed for your own education.)
What if I make a high salary?
There are no specific income limits for receiving educational assistance benefits.
What if I own the company?
While shareholders and owners of a company may participate in the scheme, no more than 5% of the amounts paid or incurred by the employer during the year may be allocated to persons who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5% of the employer’s share capital or profits.
The math looks like this: [total amount of educational assistance provided to employees other than the owner/employee] x .05263158 = [amount of educational assistance that the owner/employee can receive (rounded down to two decimal places but not greater than $5,250)].
In practical terms, this means that if an owner is the only employee, they cannot receive educational assistance.
If I own the company, does it need to be incorporated?
No, your business does not need to be incorporated to qualify under section 127. Unincorporated businesses — including sole proprietorships, partnerships, and LLCs — are eligible, provided they have a formal, separate written plan and otherwise meet the criteria.
I understand that the plan must be written. Can I just rely on the employee handbook?
No. While employee handbooks are generally encouraged for all kinds of reasons, they are usually insufficient for tax purposes. Your section 127 plan must have a separate written plan document that states very specific information. Use your employee handbook to let your staff know there is a plan and how to access it.
As an employer, can I offer my employees cash?
Not as part of a section 127 plan. You cannot offer employees a choice between tax-free educational assistance and other taxable compensation, such as cash or wages. This also means that program benefits cannot be included as an option in a cafeteria benefits plan.
As an employer, do I have to pre-fund the plan like I do for other benefits?
No. The plan does not need to be pre-funded. You may pay or reimburse required expenses as incurred by an employee.
When you say “tax free”, does that include FICA?
Yes. Exemption from income (and therefore income tax) also means there are no associated payroll taxes. At the combined Social Security and Medicare tax rate of 7.65%, businesses and workers save $76.50 in FICA taxes for every $1,000 in educational assistance.
So is this really tax free?
Not completely. It is tax free for federal purposes. In some states, such as Pennsylvania, there is no comparable state exclusion and the aid is taxed on the first dollar.
What if my employer gives me more than $5,250 in educational assistance?
Your employer’s plan may choose to give you more, but anything over $5,250 will be considered taxable income to you.
Where can I find guidance?
You can find the latest guidelines at IR-2026-55.
Can I rely on IRS guidance?
Kind. The guidance found on the IRS website—including frequently asked questions and newsletters—is not intended to be binding legal authority. Because this guidance is not published in the Internal Revenue Bulletin (IRB), it cannot be relied upon as precedent or used to support a legal argument in court. Only guidelines published in the IRB have privileged value.
That said, the IRS notes that taxpayers who reasonably and in good faith rely on these FAQs generally will not be subject to penalties that provide a reasonable standard of relief, including negligence or other accuracy-related penalties, to the extent the reliance results in an underpayment of tax.
