IRS Updates FAQ on Section 127 Educational Assistance Programs

The IRS in late April updated its frequently asked questions addressing educational assistance programs under Section 127 of the Internal Revenue Code. The revised guidance reflected student loan repayments made permanent by the One Big Beautiful Bill Act of 2025; mentioned the planned indexing of educational benefits for inflation; and provided program design clarifications. The new FAQ also included a model plan document for plan sponsors to use as a basis for drafting or revising their own Section 127 plans.

The new version of the FAQ superseded the prior version, which the IRS had published in June 2024.

Section 127 enables employers to provide tax-free assistance to employees who are continuing to pursue their education while working. First enacted in 1978 as a temporary program, it has been reinstated multiple times and allows employers to offer an educational assistance program, which provides employees with up to $5,250 in annual benefits that are generally tax-deductible for the employer.

The benefit can be used to cover tuition, fees and qualified student loan repayment.

According to a 2024 survey by the Society of Human Resource Management, 57% of organizations offer tuition assistance as a benefit to their employees,

Benefits Made Permanent

The OBBBA made permanent Section 127 benefits for payments made after 2025; they otherwise would not have applied to employer payments of principal or interest made on or after January 1, 2026. That most recent expiration date was set by the CARES [Coronavirus Aid, Relief, and Economic Security] Act, passed in 2020 during the COVID-19 pandemic.

The revised FAQ removed all references to the expiration date and clarified that employers may make qualifying payments directly to employees or to a third party, such as an education provider or a loan servicer.

In addition, the new FAQ also made clear that qualified education loans may have been incurred by the employee prior to their employment with the employer providing the benefit and that payments of principal and interest may be made by the employer in a subsequent year.

Annual Exclusion Limit Indexed for Inflation

The updated FAQ provided that while the annual program limit will remain $5,250 for 2025 and 2026, it will be adjusted for increases in the cost of living for tax years beginning after 2026. As per the original FAQ, an employee participating in a Section 127 program could exclude educational assistance benefits from their gross income up to $5,250 per calendar year.

Clarifications on Program Design

The revised FAQ made it mandatory for employers to disclose if the company offers a Section 127 educational assistance program, as well as its terms.

Additionally, the new FAQ clarified that an educational assistance program must be for the “exclusive benefit of employees” and cannot be for spouses or dependents unless they, too, are employees.

Programs must also comply with Section 127 nondiscrimination requirements and may not favor officers, shareholders, self-employed individuals or highly compensated employees, according to information in the new FAQ.