WASHINGTON — The Internal Revenue Service today issued frequently asked questions (FAQs) in FS-2024-22 related to educational assistance programs.
Taxpayers may exclude certain educational assistance benefits from their gross income if they are provided under an educational assistance program. Educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies and equipment. They also include principal or interest payments on qualified education loans made by the employer after March 27, 2020, and before Jan. 1, 2026 (unless extended by future legislation).
Taxpayers do not have to pay tax on the amount of benefits up to $5,250 per calendar year and their employer should not include the benefits in their wages, tips and other compensation shown in box 1 of their Form W-2.
What is an educational assistance program?
An educational assistance program is a separate written plan of an employer for the exclusive benefit of its employees to provide employees with educational assistance.
To qualify as a section 127 educational assistance program, the plan must be written, and it must meet certain other requirements. Your employer can tell you whether there is a section 127 educational assistance program where you work. A sample plan for employers is available. An employer may tailor its plan to include, for example, conditions for eligibility, when an employee’s participation in the plan begins and prorated benefits for part-time employees. However, a program cannot discriminate in favor of officers, shareholders, self-employed or highly compensated employees in requirements relating to eligibility for benefits.
What are educational assistance benefits?
Tax-free educational assistance benefits under a section 127 educational assistance program include payments for tuition, fees and similar expenses, books, supplies and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses.
Tax-free educational assistance benefits also include principal or interest payments on qualified education loans (as defined in section 221(d)(1) of the Code). Section 127 requires that such loans be incurred by the employee for the education of the employee and not for the education of a family member such as a spouse or dependent. These payments must be made by the employer after March 27, 2020, and before January 1, 2026 (unless extended by future legislation). The payments of any qualified education loan can be made directly to a third party such as an educational provider or loan servicer or directly to the employee, and it does not matter when the qualified education loan was incurred.
What is a qualified education loan?
A qualified education loan (as defined in section 221(d)(1)) is a loan for education at an eligible educational institution. Eligible educational institutions include any college, university, vocational school or other postsecondary educational institution as defined in sections 221(d)(2) and 25A(f)(2). The Department of Education determines whether an organization is an eligible education institution. A loan does not have to be issued or guaranteed under a Federal postsecondary education loan program to be a qualified education loan.
Can self-employed individuals, shareholders and owners receive educational assistance under a section 127 educational assistance program?
While there are no specific income limits for receiving educational assistance benefits, an educational assistance program must satisfy certain requirements under section 127 of the Code and Treasury Regulation § 1.127-2, including not being discriminatory in favor of employees who are highly compensated employees.
An individual who is self-employed within the meaning of section 401(c)(1) may receive educational assistance. While shareholders and owners may receive educational assistance, not more than 5 percent of the amounts paid or incurred by the employer for educational assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer.