Educational Assistance for Employees: Why Not Provide a Nontaxable Benefit?

IRS issued a reminder that employers who offer educational assistance programs can also use them to help pay for their employees’ student loan obligations through Dec. 31, 2025. These programs rely on I.R.C. Section 127 which permits up to $5,250 of qualifying educational assistance to be provided to an employee each year on a nontaxable basis. The option to use educational assistance programs to pay for workers’ student loans has been available for payments made after March 27, 2020, but is set to expire Dec. 31, 2025. Review employer educational assistance policies with employers to see if the benefit makes sense.

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Related Content

• SECURE 2.0 Act Impact on Retirement Plan Compliance and Administration
  See how you can improve employee 401(k) (or other qualified CODA) benefits by having the plan match qualifying employee student loan payments. For plan years beginning in or after 2024, the SECURE 2.0 Act allows 401(k) or other qualified CODA employer plans to provide an employer match based on a participant's repayment of their qualified student loans. The match may not apply to loan payment amounts that, aggregated with the individual's elective deferrals, exceed the Section 402(g) limit. See new I.R.S. Notice 2024-63 for additional guidance.

• Fringe Benefit Rules (IRC § 132)
  Remember that certain job-related education that an employer provides to an employee may qualify as a nontaxable working condition fringe benefit under I.R.C. Section 132, and so falls outside the Section 127 $5,250 annual limit. The job-related education must satisfy the following conditions so that the expense would otherwise be deductible under  Treas. Reg. § 1.162-5: (1)  it maintains or improves skills needed for the employee's job, or (2) it is required by the employer or by law for the employee to keep their present salary, status, or job, and serves a bona fide business purpose of the employer.

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