U.S. employees can continue to receive up to $5,250 in tax-free educational assistance from their employers for calendar years 2025 and 2026, the IRS said in an April 20 update.
Section 127 educational assistance programs allow employers to provide financial assistance to their employees for education programs. The $5,250 in tax-free assistance was scheduled to expire last year, but the One Big Beautiful Bill Act made this provision permanent.
In its latest update, the IRS said that for 2025 and 2026, “an employee’s gross income does not include educational assistance benefits if the benefits are provided under a Section 127 educational assistance program and the amounts do not exceed $5,250.”
Hence, employees do not have to pay any tax on the first $5,250 in education assistance received from employers.
Employers are also required to avoid including such benefits, up to the limit of $5,250, in an employee’s wages, tips, and other compensation in Box 1 of Form W-2.
When an employee receives such assistance and spends it on an education program, the expenses cannot be used as a basis to claim certain deductions or credits when filing taxes, the IRS said in an April 10 statement. This includes the lifetime learning credit, under which taxpayers can claim up to $2,000 per return if enrolled in an eligible educational institution.
Any education benefits received by an employee that do not comply with Section 127 cannot be excluded from gross income and are taxable. This is also applicable if Section 127 educational assistance offered by an employer exceeds the $5,250 limit.
For an education program to qualify under Section 127, the employer must have a written program plan.
“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,” the IRS said.
“Your employer must tell you whether there is a Section 127 educational assistance program where you work and the terms of any such program.”
Qualified educational assistance under Section 127 includes payments for tuition, fees, and other similar expenses, as well as for books, supplies, and equipment. The funds must be spent on undergraduate or graduate-level courses. However, it is not necessary that these courses be work-related.
Money spent on meals, transportation, lodging, tools or supplies that can be kept after course completion, such as a computer, does not qualify. Courses that involve hobbies or games also do not qualify unless they have a reasonable relationship to the business of the employer or are required as part of a degree program.
Making Benefits Permanent
Employer payments toward employees’ education were added under benefits covered by Section 127 when the Coronavirus Aid, Relief and Economic Security Act was signed into law in March 2020, according to an Aug. 12 post by consulting company Mercer. However, this applied only to payments made before Jan. 1, 2021.Congress later temporarily extended the provision, but the extension was scheduled to expire by the end of 2025.
In its recent statement, the IRS said that under the bill, the amount excluded from gross income, which currently is set at $5,250, will be adjusted for increases in the cost of living beginning in taxable years after 2026.
The tax exemption received support from The Section 127 Coalition, which sent a letter to lawmakers last year seeking to make the provision permanent, according to a Feb. 19, 2025, statement from the Association of American Universities (AAU).
The coalition is an alliance of over 60 organizations, and includes the AAU, the American Council on Education, and the National Association of Independent Colleges and Universities.
“The Section 127 Coalition believes that enabling employers to invest in their employees by utilizing this voluntary benefit is essential to encourage workers to continue reskilling and upskilling themselves, especially at a time when the demands and skills in the modern workplace are rapidly evolving,” the letter said.
“By providing tax-free, employer-provided student loan repayment assistance, this not only enhances employee well-being and job satisfaction but also serves as an invaluable recruitment and talent retention tool for employers.”