The IRS has issued updated frequently asked questions (“FAQs”) regarding educational assistance programs under Internal Revenue Code (“Code”) Section 127. The revised FAQs implement certain changes made to Section 127 programs by the One Big Beautiful Bill Act (“OBBA”). The IRS has also provided a sample Educational Assistance Program document that may be tailored to the individual employer’s needs.
Background. Under a Code Section 127 educational assistance program, an employee could exclude up to $5,250 per year in tax-free qualified educational benefits received from an employer. These excludable benefits include payments for tuition, fees and similar expenses, books, supplies and equipment.
Effective March 27, 2020, these benefits included principal and interest payments on qualified educational loans (“Student Loans”). Under the original FAQs, employer payments of principal and interest on Student Loans were described as a temporary benefit with a legislative sunset of January 1, 2026.
Revised FAQs. Highlights from the updated FAQs include the following notable changes for Code Section 127 programs:
- Indexing of Annual Exclusion Limit. Under the original FAQs, the $5,250 annual exclusion limit was a fixed figure with no mechanism for adjustment. The updated FAQs provide that while the annual limit remains $5,250 for 2025 and 2026, it will be adjusted for increases in the cost of living for taxable years beginning after 2026.
- Student Loan Provisions Become Permanent. The updated FAQs removes all references to the expiration date (i.e., January 1, 2026) for Student Loan repayments, providing that tax-free educational assistance benefits now include principal and interest payments on Student Loans indefinitely.
- Mandatory Disclosure Required. The original FAQs provided that an employer “can” choose to tell employees whether there is a Code Section 127 educational program available where they work. The updated FAQs now state that employers “must” notify eligible employees whether there is a Code Section 127 program where they work and disclose the terms of any such program.
- Clarification on Spousal and Dependent Benefits. The updated FAQs clarify that a Code Section 127 program must be for the “exclusive benefit of employees.” A program providing benefits to spouses or dependents is not a qualifying program unless those individuals are themselves employees.
- Clarification on Eligibility of Officers, Shareholders, and Highly Compensated Employees. The updated FAQs confirm that officers, shareholders, self-employed individuals, highly compensated employees and owners are eligible to receive Code Section 127 program benefits from an employer. However, the program must satisfy the non-discrimination requirements of Code Section 127 (and Treas. Reg. § 1.127.2), and these benefits must be capped at 5% of the aggregate benefits provided under the program during the year.
Takeaway. Employers should review their existing Code Section 127 program documents in light of these changes. The updated FAQs are available at: https://www.irs.gov/newsroom/updates-to-frequently-asked-questions-about-educational-assistance-programs.