8889 / What types of "educational assistance" may be provided on a tax-preferred basis through an employer-provided educational assistance program?
Editor's Note: Beginning in 2024, employers will have the option of treating employees' qualified student loan payments as elective deferrals for purposes of an employer's matching contribution program under the SECURE Act 2.0. That means employers will also be entitled to make matching contributions to an employer-sponsored retirement plan based on an employee's qualified student loan payments—even if the employee does not directly contribute to the retirement plan. See Q for more details. Note that in a recent private letter ruling, the IRS also blessed an arrangement where employers allow employees to allocate employer matching contributions between defined contribution plans, retiree health reimbursement arrangements (HRAs), health savings account contributions and student loan payments under qualified educational assistance programs.1
"Educational assistance," for purposes of an employer-sponsored educational assistance program (EAP), is generally defined in IRC Section 127 as an employer's payment of expenses incurred by an employee for education. Expenses such as tuition, fees, books, supplies, equipment and employer-provided courses of instruction including books, supplies and equipment are all included within this definition.2
The 2020 CARES Act amended Section 127 so that the definition of educational assistance also includes the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan incurred by the employee for education of the employee.3 The Consolidated Appropriations Act of 2021 extended this student loan repayment benefit through January 1, 2026.
Planning Point: Employers who offer traditional education assistance programs can extend their programs to also cover student loans, but the total assistance must be capped at $5,250 per employee, per year, or the payments become taxable.
Educational assistance does not include payments for tools or supplies that the employee may keep after finishing the course of instruction, as well as meals, lodging and transportation. Payment for any course or education involving sports, games or hobbies is not considered to be "educational assistance."4
The IRS, in interpreting the IRC definition, has defined a graduate level course as "… any course taken by an employee who has a bachelor's degree or is receiving credit toward a more advanced degree, if the particular course can be taken for credit by any individual in a program leading to a law, business, medical, or other advanced academic or professional degree."5
Planning Point: Employers are free to impose restrictionson the types of expenses their EAP will cover.For example, an employer can require that the employee earn a certainminimumgrade or remain employed with the employer for a certainperiod of timefollowing course completion.Employers can also limit reimbursement to certain types of courses (e.g., courses at accredited two-year or four-year colleges). Employers can require employees to obtain the employer's approval as a condition for reimbursement (for example, if they wish to limit reimbursement to courses that are relevant to the business).However, employees must be given reasonable notice about anyrestrictionsand those restrictions cannot discriminate in favor ofhighly-compensatedemployees.
According to IRS guidance, a course will be considered to begin on the first regular day of class for the courses offered during that term. The date upon which a student registers for a course has no effect on the date the course is considered to have started for purposes of the Section 127 exclusion. The IRS recently updated pre-existing FAQs to provide that employers may reimburse educational expenses through an EAP if the employee did not incur the relevant expense prior to employment. Earlier FAQs released in 2024 had provided that the employer must reimburse the employee in the same calendar year in which the expenses were incurred. Student loans are an exception. Student loans can be incurred prior to employment and be properly reimbursed at a later date pursuant to the EAP. (While IRS FAQs are not binding law, taxpayers who rely on them in good faith will be eligible for reasonable cause penalty relief.)
1 Let. Rul. 202434006.
2. IRC § 127(c)(1).
3. IRC § 127(c)(1)(B).
4. IRC § 127(c)(1).
5. Notice 96-68, 1996-2 CB 236.