Educational Assistance Plans: A Smart Investment for Your Workforce and Your Bottom Line

Looking for a way to support your team’s professional development and enjoy tax savings? A Section 127 educational assistance plan might be the perfect fit.These employer-sponsored programs allow businesses to offer up to $5,250 per year in tax-free educational benefits to eligible employees. Not only are these funds excluded from federal income and payroll taxes, but they’re also deductible as a business expense—making them a win-win for companies and employee.

What Is a Section 127 Plan?

A Section 127 plan refers to a provision in the IRS tax code that enables businesses to provide educational benefits to employees without those benefits being treated as taxable income (up to the annual limit).

Covered expenses may include:

• Tuition for undergraduate or graduate courses
  
• Books, supplies, and equipment
  
• Even student loan repayment (through 2025)
  

Unlike traditional tuition reimbursement programs, Section 127 plans don’t require the education to be job-related, though you may choose to set that as a condition.

Setting Up an Educational Assistance Program

To qualify for tax advantages, your plan must meet a few basic requirements:

• It must be a formal written plan made exclusively for employees.
  
• The plan can’t discriminate in favor of highly compensated staff.
  
• It must exclude any choice between educational benefits and other compensation.
  
• You’ll need to notify employees about the program and how it works.
  
• No more than 5% of total benefits can go to owners (or their family members) who own more than 5% of the company.
  

Importantly, you don’t have to pre-fund the plan. Payments or reimbursements can be made as employees incur expenses.

Can Business Owners Help Their Children Through the Plan?

If your child works for your business, you may still be able to include them in the plan—but only if they meet specific criteria:

✔️ They are age 21 or older
✔️ They are a bona fide employee
✔️ They are not your dependent
✔️ They do not own more than 5% of the business (directly or indirectly)

Indirect ownership includes options, partnerships, and parental ownership attribution, depending on your business structure.

Student Loan Repayment Option

Thanks to recent updates, Section 127 plans can be used to pay off student loans—both principal and interest—through December 31, 2025. These payments count toward the $5,250 annual cap, but can be a highly valuable benefit, especially for younger employees.

The Business Benefits

Offering educational support isn’t just a feel-good perk—it’s a strategic advantage. These programs can help you:

• Improve employee satisfaction and engagement
  
• Boost retention rates
  
• Attract new talent, especially younger workers

• Reduce taxable income for your business
  

Want to Explore a Plan for Your Business?

Educational assistance programs are a powerful way to invest in your people while strengthening your business. If you’re ready to design a Section 127 plan or need help understanding the compliance requirements, contact our team today to get started.