The IRS has issued a fact sheet (FS-2024-22) to provide Frequently Asked Questions (“FAQs”) regarding educational assistance programs.
Background. An educational assistance program is a written plan under which an employer provides employees with educational assistance benefit payments that meet the requirements of Section 127 of the Internal Revenue Code (“Code”). Educational assistance benefits provided to an employee are excludable from the employee’s income up to $5,250 per year. The plan cannot discriminate in favor of officers, shareholders, self-employed or highly compensated employees in requirements relating to eligibility for benefits.
FS-2024-22. Among other things, the FAQs explain that:
- Tax-free educational assistance benefits include payments to the employee for tuition, fees and similar expenses, books, supplies and equipment and interest on qualified education loans. The payments may be for either undergraduate- or graduate-level courses, and the payments do not have to be for work-related courses.
- Educational assistance benefits do not include payments for the following items:
(1) meals, lodging or transportation;
(2) tools or supplies (other than textbooks) that are kept after completing the course of instruction; and
(3) courses involving sports, games or hobbies unless they have a reasonable relationship to the business of the employer, or are required as part of a degree program.
- An employer may provide payments of principal or interest on an employee’s qualified education loans directly to a third party such as an educational provider or loan servicer, or make payments directly to the employee.
- An educational assistance program must be provided for the exclusive benefit of employees. A program that offers benefits to the spouse or dependents of an employee is not a qualified educational assistance program.
- Student debt that may be reimbursed under an educational assistance program consists of a variety of expenses if the debt was incurred as a result of expenses that are permissible benefits under section 127 of the Code. The employer may reimburse the employee for these expenses as educational assistance benefits, and the employee could then use those funds to help satisfy his or her debt.
- While shareholders and owners may receive educational assistance benefits, not more than 5% of the amount 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 employee spouses or dependents), each of whom (on any day of the year) owns more than 5% of the stock or of the capital or profits interest in the employer.
The IRS has also provided a sample Educational Assistance Program (Plan) document that may be tailored to the individual employer’s needs.
FS-2024-22 is available at: https://www.irs.gov/newsroom/frequently-asked-questions-about-educational-assistance-programs
The sample Educational Assistance Program (Plan) document is available at: https://www.irs.gov/pub/irs-pdf/p5993.pdf