When it comes to perks at work, free stuff is always a bonus. But as great as complimentary coffee and doughnuts might be, employees are increasingly looking for ways to eliminate or pay down student debt, which now averages $39,075 per borrower. One tax-favored benefit can be found in the tax code. Under section 127, employers can provide tax-free assistance to employees who pursue their education while working or (more recently) for repaying student loans.
While section 127 was created by Congress in 1978 as a temporary tax benefit (it was made permanent in 2012), with college costs skyrocketing (costs have more than doubled in the 21st century), many employers are giving section 127 a fresh look. The IRS recently updated its guidance—here’s what you need to know.
What is section 127?
Section 127 of the tax code allows employers to provide up to $5,250 per year in tax-free educational assistance to employees for tuition, fees, books, and equipment.
This amount is an exclusion, not a deduction. This means the amount is deductible by your employer and is not included in your taxable income.
To qualify, an educational assistance plan must be a written benefits plan (you can see a sample of what that looks like here). While that sounds super formal, it’s no different than the health care, retirement benefits, or commuter plan that your company likely already has in place.
How much educational assistance is available?
The amount of available assistance 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 grown faster than the pace of inflation, the annual benefit has never moved. If it had been adjusted for inflation, the benefit would now be worth $27,737.89 per year. While that kind of boost isn’t happening, the benefit will be indexed to inflation starting in 2027.
And, the benefits are “use it or lose it.” Any unused amounts can’t be carried forward to the next year.
What’s 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-level courses—and they do not need to be job-related (an exception applies, so keep reading).
In 2020, Congress added the option for employers to also provide this assistance to help employees pay off their student loans (in 2025, the student loan expansion was made permanent). Payments can be made either to a third party, such as an educational provider or loan servicer, or directly to the borrower. Importantly, it does not matter when the qualified education loan was taken out so long as they are still in repayment (shout out to Gen X).
Educational assistance benefits do not include payments for meals, lodging, or transportation, or 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). There’s one quick exception to the earlier statement about the courses not being required to be job-related: Payments for courses involving sports, games or hobbies do not qualify unless they have a reasonable relationship to the business of your employer, or are required as part of a degree program.
Do employers have to offer a section 127 plan?
No, employers don’t have to offer a section 127 plan for employees.
If they do, however, the plan must be available for all employees (a program cannot discriminate in favor of officers, shareholders, self-employed or highly compensated employees).
And just because the statute allows your employer to pay for certain benefits doesn’t mean that it has to. Your employer can limit the types of assistance provided to employees. For example, it may not have opted to add coverage for repayment of student loans.
Can part-time employees qualify for the plan?
Absolutely. The program must meet nondiscrimination requirements. The IRS generally considers the exclusion of part-time, seasonal, or temporary employees unreasonable if those classifications are based on hours or length of service (for example, excluding employees who work fewer than 20 hours per week or have less than 6 months of service).
Can I use this money for other tax breaks?
No, there’s no double-dipping. Any expenses that are paid with section 127 funds can’t be used as the basis for any other deduction or credit, including the lifetime learning credit.
And just because the statute allows your employer to pay for certain benefits doesn’t mean that it has to. Your employer can limit the types of assistance provided to employees. For example, it may not have opted to add coverage for repayment of student loans.
Can the plan benefit my family?
No. A section 127 plan is for the exclusive benefit of employees. A program that provides benefits to the spouse or dependents of an employee is not a section 127 educational assistance plan unless those spouses or dependents are themselves employees. (Sorry, you also can’t use the money to repay parental PLUS loans, since 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 plan, not more than 5% of the amounts paid or incurred by the employer during the year can go towards individuals 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 stock or of the capital or profits interest in the employer.
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)].
As a practical matter, this means that if an owner is the only employee, they cannot receive educational assistance.
If I own the company, does it have to be incorporated?
No, your business does not have 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 has to be written. Can I just rely on the employee handbook?
No. While employee handbooks are generally encouraged for all kinds of reasons, they are typically not sufficient for tax purposes. Your section 127 plan must have a separate written plan document that spells out very specific information. Use your employee handbook to let your staff know that a plan exists and how to access it.
As the employer, can I offer my employees cash instead?
Not as part of a section 127 plan. You can’t offer employees a choice between tax-free educational assistance and other taxable compensation, such as cash or wages. That also means the plan benefits can’t be included as an option in a cafeteria benefit program.
As the employer, do I have to prefund the plan, like I do for other benefits?
No. The plan doesn’t have to be prefunded. You can pay or reimburse qualifying expenses as they’re incurred by an employee.
When you say “tax-free,” does that include FICA?
Yes. The exclusion from income (and therefore income tax) also means that there are no related payroll taxes. With the combined Social Security and Medicare tax rate of 7.65%, businesses and employees each save $76.50 in FICA taxes for every $1,000 in educational assistance.
So, this is really tax-free?
Not completely. It’s tax-free for federal purposes. In some states, like Pennsylvania, there is no comparable state exclusion, and assistance is taxable from the first dollar.
What if my employer gives me more than $5,250 in educational assistance?
Your employer’s plan can opt to give you more, but anything over $5,250 would be considered taxable income to you.
Where can I find the guidance?
You can find the most recent guidance in IR-2026-55.
Can I rely on IRS guidance?
Sort of. Guidance found on the IRS website—including FAQs and fact sheets—is not treated as binding legal authority. Because this guidance is not published in the Internal Revenue Bulletin (IRB), it cannot be relied on as precedent or used to support a legal argument in court. Only guidance published in the IRB has precedential 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-cause standard for relief, including negligence or other accuracy-related penalties, to the extent that reliance results in an underpayment of tax.
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