Section 127 Educational Assistance Program: 2026 Guide for Employers*

Education benefits can help employers develop talent while helping employees manage the cost of education. But when those benefits are structured under IRS Section 127, they could also offer meaningful tax advantages.

An IRS Section 127 educational assistance program allows employers to provide qualifying education benefits to employees on a tax-advantaged basis. For 2026, employers can provide up to $5,250 per employee annually in qualifying assistance that is excluded from the employee’s income for federal income tax purposes. State tax treatment may vary. For taxable years after 2026, the limit will be adjusted annually for inflation. Recent legislative changes have also made student loan assistance a permanent feature of Section 127, giving employers another reason to review how their tuition assistance program is structured.

*This post provides general information about Section 127 educational assistance programs and is not legal or tax advice. Employers should consult qualified tax or legal professionals regarding their specific programs and circumstances.

What does Section 127 cover for an education assistance plan?

Section 127 of the Internal Revenue Code establishes the requirements for employer-sponsored educational assistance programs. Under a qualifying program, an employer could generally provide up to $5,250 (adjusted for inflation after 2026) per employee each calendar year without that amount being included in the employee’s federal taxable wages.

The benefit can cover undergraduate and graduate education, and courses generally do not have to be directly related to an employee’s current job. Qualifying assistance can include tuition, fees, books, supplies, certain equipment, and payments toward the employee’s own qualified education loans.

A Section 127 plan creates flexibility to use education benefits for more than training employees for existing positions. It can also support upskilling, reskilling, career mobility, degree completion, and longer-term workforce development.

How can changes to Section 127 impact employee education and tuition assistance?

Section 127 received two significant updates under the One Big Beautiful Bill Act (OBBBA), also known as the Working Families Tax Cuts Act.

First, employer payments toward an employee’s qualified education loans are now a permanent feature of Section 127. This provision had previously been scheduled to expire after 2025.

Second, the $5,250 annual exclusion will be adjusted for inflation for taxable years beginning after 2026. The limit remains $5,250 for the calendar year 2026.

Together, these changes give employers more certainty when incorporating student loan assistance and other education benefits into long-term workforce strategy.

What does the OBBBA mean for corporate education?

With student loan assistance now a permanent feature of Section 127, employers can incorporate it into long-term program design with more confidence. An employee who is currently pursuing education may value tuition assistance, while another employee may benefit more from help paying qualified education loans from previous education.

Both can now fit within a Section 127 program on an ongoing basis, subject to the combined annual exclusion. This can be an opportunity to make education benefits relevant to employees at different points in their careers while supporting broader workforce goals.

Provide more access to education while stretching benefits further

Section 127 could help employers offset some of the financial barriers employees face when pursuing education. Because qualifying assistance is excluded from employees’ federal taxable income up to the annual limit, more of the employer’s education investment can go directly toward eligible education costs.

Employers* can also generally deduct amounts paid through a qualifying Section 127 program as a business expense. This combination can make education assistance a tax-efficient way to invest in employee development.

Support employee training, learning, and professional development

Section 127 programs could support more than traditional degree programs. Depending on the employer’s policy and the type of education involved, employees may be able to pursue coursework and other learning opportunities that develop new capabilities or prepare them for future roles.

This gives employers an opportunity to connect education benefits with skills gaps, internal mobility, succession planning, and other talent priorities rather than treating tuition assistance as just another perk.

What education expenses can employers cover under Section 127?

Eligible education expenses generally include:

• Tuition and fees
• Books
• Supplies
• Certain equipment
• Qualified education loan principal and interest (for the employee’s own education)

There are limitations, though. Meals, lodging, and transportation are not considered qualifying educational assistance. Neither are tools or supplies, other than textbooks, that employees can keep after completing a course. Courses involving sports, games, or hobbies generally do not qualify unless they have a reasonable relationship to the employer’s business or are required as part of a degree program.

Employers can choose which qualifying expenses their individual programs cover, so the company policy can be narrower than what Section 127 permits.

Who is eligible for Section 127 educational assistance?

Employers have some flexibility in setting eligibility requirements, but a Section 127 program must meet IRS nondiscrimination requirements. A program cannot discriminate in favor of highly compensated employees in determining who is eligible to participate.

Certain self-employed individuals, partners, shareholders, and owners may participate, but additional restrictions apply. For example, no more than 5% of the amounts paid under the program during the year may be provided to individuals who own more than 5% of the business (or to their spouses or dependents).

In setting eligibility rules, employers generally weigh organizational goals alongside Section 127 requirements and provide employees with a clear understanding of who can participate.

What are the tax benefits of Section 127 for employers and employees?

The financial savings associated with Section 127 can work on both sides of the benefit.

For employees, up to $5,250 (adjusted for inflation after 2026) in qualifying educational assistance is excluded from federal taxable income in 2026. The employer generally does not include that amount in the employee’s wages. Amounts above the limit are generally taxable unless they qualify under another exclusion, such as a job-related working condition fringe benefit.

For employers, qualifying educational assistance can generally be deducted as a business expense. Because qualifying assistance within the exclusion is not treated as wages, employers may also reduce certain payroll tax costs that would otherwise apply to equivalent taxable compensation.

What are the basic requirements for a Section 127 program?

Receiving Section 127 tax treatment requires more than paying an employee’s tuition. Employers need to establish a separate written educational assistance plan and administer it according to IRS requirements.

Among other requirements, the plan cannot discriminate in favor of highly compensated employees, cannot provide employees with a choice between educational assistance and other taxable compensation, and must provide eligible employees with reasonable notice of the program. See 26 U.S.C. § 127(b).

Employers should also maintain documentation that verifies expenses qualify under the plan and accurately track assistance provided to each employee. Individual circumstances can vary, so employers should work with qualified tax or legal professionals when establishing or changing a Section 127 program.

How can employers design a Section 127 program that employees actually use?

Tax advantages create value only if employees understand and can access the benefit. Start with a policy that clearly explains eligibility, covered education expenses, funding limits, approval requirements, and how employees request assistance. Then, make the information easy to find throughout the year rather than relying on a one-time benefits announcement.

Employers can also evaluate whether available programs align with employees’ career goals and organizational skill needs. Clear career pathways, manager support, simple administrative processes, and ongoing communication can turn a tax-advantaged benefit into a practical employee development resource.

Turn Section 127 into a strategic workforce benefit

Changes to Section 127 give employers more certainty in using education assistance as part of their long-term talent strategy. With student loan assistance now permanent and inflation adjustments beginning after 2026, this is a good time to evaluate whether your existing program is positioned to make the most of the options.

Workforce Edge helps employers simplify education benefit administration while connecting learning opportunities with broader workforce goals. Find out how Workforce Edge can help you build an education benefits strategy that works for your employees and organization.