The IRS has released an updated sample Educational Assistance Program plan document. While employers are not required to use the IRS template, maintaining a separate written plan is mandatory. The sample provides helpful guidance on the language and structure the IRS considers compliant. The updated version also incorporates several changes and clarifications that employers should review and consider adopting.
Applies To:
All employers offering Educational Assistance Programs, regardless of size or ERISA status.
Go Deeper:
Under Internal Revenue Code (IRC) Section 127, employers may provide up to $5,250 per calendar year in educational assistance benefits on a tax-favored basis. After remaining unchanged for many years, this maximum will be indexed for inflation beginning in 2027.
To qualify for tax-favored treatment, the program must be established for the exclusive benefit of employees and must not discriminate in favor of highly compensated employees.
Qualifying expenses generally include tuition, fees, books, and certain supplies and equipment directly related to coursework. However, items that employees are allowed to keep after course completion (e.g., a laptop) do not qualify. Eligible expenses may include undergraduate or graduate coursework, as well as certain non-degree programs and professional certifications, provided they constitute education for the employee.
These programs must be maintained under a separate written plan document and cannot simply be described in an employee handbook. Importantly:
- Section 127 programs are not subject to ERISA and should not be included in ERISA plan documents.
- Educational assistance benefits are not eligible under Section 125 and should not be included in a Cafeteria Plan document.
In addition to formatting and structural updates, the IRS’s revised sample plan document includes several notable changes from the June 2024 version:
- Evergreen indexing language: Reflects the new requirement to index the $5,250 annual limit for inflation beginning in 2027, eliminating the need for annual amendments.
- Student loan repayment clarification: Updated to reflect the permanent inclusion of qualified education loan repayments under current law.
- Expanded definition of Eligible Educational Institution: Now includes certain internship and residency programs aligned with recent IRS guidance.
- Revised reimbursement language: Clarifies that eligible expenses must not be incurred prior to employment.
Collectively, these updates modernize the sample document and align it with current Section 127 requirements.
Penalties for Non-Compliance:
Failure to maintain a compliant Educational Assistance Program document may result in:
- Loss of tax-favored status: Without a valid Section 127 plan, all reimbursements must be treated as taxable income to employees.
- IRS penalties and enforcement actions: Including penalties related to inaccurate Form W-2 reporting and failure to properly withhold or pay applicable taxes (FICA, FUTA, and income taxes).
- Increased audit risk: Non-compliance may trigger IRS scrutiny for both employers and employees.
Practical Impact for Employers:
Employers sponsoring a Section 127 program should take the following steps annually, prior to the start of each calendar year:
- Review program goals and ensure nondiscriminatory operation.
- Confirm the maximum benefit aligns with the indexed annual limit (beginning in 2027).
- Evaluate and implement any required updates due to changes in law or guidance.
- Review plan documents for outdated or noncompliant language.
- Update and distribute employee communications, including handbook summaries, to reflect any changes.