Understanding Educational Programs: FAQs and Key Insights

Overview of Educational Assistance Programs

Under a section 127 educational assistance program, certain educational assistance benefits can be excluded from your gross income. You do not have to pay tax on the benefits, up to $5,250 per calendar year. Employers should not include these benefits in the wages, tips and other compensation in Box 1 of your Form W-2. However, you cannot use these tax-free education expenses as the basis for other deductions or credits, including the lifetime learning credit. If benefits are received under a non-compliant program or exceed $5,250, they may be excluded under section 117 or deducted under sections 162 or 212 if the requirements are satisfied.

Employers can generally deduct amounts paid under a section 127 educational assistance program as a business expense under section 162.

Frequently Asked Questions on Educational Assistance Program

Q1. What is an educational assistance program?

A1. An educational assistance program is a separate written plan of an employer for the exclusive benefit of its employees to provide educational assistance. To qualify as a section 127 program, the plan must be written and meet specific requirements. Employers can inform you if such a program exists at your workplace. Employers may tailor their plans to include eligibility conditions, participation start dates and prorated benefits for part-time employees. Still, the program cannot favor officers, shareholders, self-employed or highly compensated employees.

Q2. What are educational assistance benefits?

A2. Tax-free educational assistance benefits under a section 127 program include payments for tuition, fees, books, supplies and equipment. These payments can be for undergraduate or graduate-level courses and do not need to be work-related. They also include principal or interest payments on qualified education loans incurred by the employee for their education, provided these payments are made between March 27, 2020 and January 1, 2026 (unless extended by future legislation).

Educational assistance benefits do not cover meals, lodging, transportation, tools, supplies you can keep after completing the course or courses involving sports, games or hobbies unless they relate to your employer’s business or are part of a degree program.

Q3. What is the total amount that an employee can exclude from gross income under section 127 of the Code per year?

A3. Under section 127, the total amount an employee can exclude from gross income for educational assistance benefits, including payments of principal or interest on qualified education loans, is $5,250 per calendar year. Unused amounts cannot be carried forward to subsequent years.

Q4. What is a qualified education loan?

A4. A qualified education loan, as defined in section 221(d)(1), is a loan for education at an eligible educational institution, including colleges, universities, vocational schools or other postsecondary institutions. These loans do not need to be issued or guaranteed under a Federal postsecondary education loan program.

Q5. How can payments of qualified education loans be made?

A5. Between March 27, 2020 and January 1, 2026 (unless extended by future legislation), employers may pay principal or interest on an employee’s qualified education loans directly to a third party or the employee. This benefit is available if the employer’s section 127 program includes this provision.

Q6. Are employer payments of qualified education loans for spouses and dependents excluded from gross income under section 127 of the Code?

A6. No, section 127 requires educational assistance programs to be for the exclusive benefit of employees. Payments for the education of spouses or dependents are not excluded from gross income.

Q7. Can student debt be reimbursed under a section 127 educational assistance program?

A7. Yes, if the debt was incurred for expenses covered under section 127 (e.g., tuition, books, qualified education loans), the employer may reimburse the employee, and these reimbursements can be used to pay the debt.

Q8. Can self-employed individuals, shareholders and owners receive educational assistance under a section 127 educational assistance program?

A8. Yes, but the program must meet specific requirements, including non-discrimination in favor of highly compensated employees. Self-employed individuals and shareholders may receive benefits, but the total for shareholders or owners cannot exceed 5% of the program’s total benefits.

Q9. Are there other exclusions from gross income for educational assistance?

A9. Yes, educational expenses that qualify as working condition fringe benefits or are deductible under the educator expense deduction may be excluded from gross income.

For more detailed information, you can visit the IRS website or refer to IRS publications, such as Publication 970, Tax Benefits for Education.