IRS Code §127 allows employers to provide certain educational assistance to their employees on a tax-free basis, meaning that amounts paid or incurred by an employer under a qualified educational assistance program are deductible by the employer and are excludable from the employees’ taxable income. Tuition assistance programs cannot be offered through a cafeteria plan.
To qualify under Code §127, an educational assistance program must:
provide benefits exclusively to employees of the employer;
provide only qualified educational assistance benefits;
be a separate written program established by an employer;
does not allow employees a choice between assistance and cash;
does not discriminate in favor of highly compensated employees;
does not provide more than 5% of benefits in a year to more-than-5% owners.
The maximum amount of educational assistance benefits that can be provided to an employee on a tax-free basis each year is $5,250. A qualified educational assistance program can provide assistance to employees for a broad range of educational expenses, including expenses for graduate level courses and for courses that are not job-related. Consequently, employers establishing these programs have a wide range of plan design choices.