IRS releases new Section 127 Educational Assistance FAQs Factsheet

Earlier this month, the IRS released an official FAQ page for educational assistance benefits to help provide general guidance to companies and their tax professionals around educational assistance benefits. 

What do the IRS FAQs for educational assistance benefits cover? 

The IRS FAQs include general background information on educational assistance programs and some high-level questions and answers around what an educational assistance benefit is, what’s covered under the benefit, and what some of the specific terms under IRC section 127 mean. 

The FAQs cover some specific definitions and questions related to employer student loan repayment benefits. The FAQs also include a sample 127 plan provided by the IRS.

What are the key takeaways from the IRS FAQs for educational assistance benefits? 

For those familiar with education assistance benefits, most of the content covered in the IRS’ FAQs on educational assistance benefits may not come as a surprise. 

For those who are not familiar with this benefit, the FAQs provide a good starting point for learning about educational assistance benefits. 

A few of the biggest takeaways from the FAQs are:

• Employers can offer up to $5,250 in tax-free educational assistance benefits to their employees, per calendar year. This limit applies to tuition assistance and payments on qualified education loans.
• A qualified education loan is any loan, federal or private, that is taken out for education at an eligible education institution (as determined by the Dept of Education). 
• Employers can make payments on qualified loans directly to an educational provider or lender or as a reimbursement to employees. 
• Employers must follow the rules outlined in IRC section 127 in order to offer this benefit in a tax-compliant way 
• Spouses and dependents are not eligible to receive this benefit 
• Tax-free education expenses cannot be used as the basis for any other deduction or credit, including the lifetime learning credit. 

Why is the IRS releasing FAQs around educational assistance benefits now? 

This latest publication from the IRS could reflect the recent growing popularity of tax-free employer student loan repayments as a benefit. 

While educational assistance benefits that cover tuition assistance and reimbursement programs have been around since 1978, the benefit program only expanded to include student loan repayments a few years ago (in 2020).

As federal student loan payments recently resumed in 2023 and many employees with student loans are now feeling the stress of having to make payments again, it may not be surprising that this benefit is now starting to be more widely adopted. 

Where can companies find more information on educational assistance benefits?

If you have specific questions around how to create and run an educational assistance benefit, including an employer student loan repayment benefit or tuition reimbursement program, check out Highway’s library of resources or our own FAQ page, or download Highway’s free toolkit for companies today.    

You can also schedule a call with our team of experts anytime to walk through your company’s specific situation.