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IRS FAQs on Educational Assistance Programs Highlight an Opportunity to Provide Student Loan Assistance

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On June 17, 2024, the IRS issued a fact sheet (FS 2024-22) that provides answers to frequently asked questions (“FAQs”) about educational assistance programs under Section 127 of the Internal Revenue Code (“Code”). Employers should consider the following Section 127 compliance assistance offered in the FAQs:

  1. Educational assistance programs must be in writing. Employers must implement educational assistance programs in a separate written document that complies with the requirements of Section 127. The FAQs include a sample program as a useful tool for employers who are considering implementing one.
  1. Educational assistance programs can provide up to $5,250 in tax free benefits per calendar year. Employers can provide employees up to $5,250 in tax free “educational assistance” benefits through an educational assistance program. Employees are required to seek reimbursement for expenses incurred in a calendar year and employers must provide payment for the expenses in same calendar year. Employees cannot carry over any unused portion of the $5,250 from one year to the next and cannot seek reimbursement for expenses incurred prior to the start of their employment.
  1. Permissible educational assistance program benefits. The permissible “educational assistance” benefits payable under a program include: (a) payments for tuition, fees and similar expenses, books, supplies and equipment for undergraduate or graduate-level courses; and (b) principal or interest payments on qualified education loans (defined in Section 221(d)(1) of the Code) (“Student Loans”) that an employee incurred for his or her education. As reported in our SW Benefits Blog, “Three Facts Every Employer Should Know When Considering Student Loan Repayment Benefits in Educational Assistance Programs,” employers can make Student Loan payments under a program between March 27, 2020 and December 31, 2025 (unless extended through future legislation). Employers can choose which of these benefits to offer through their programs. However, they cannot provide employees with more than a total of $5,250 in educational assistance benefits in a calendar year.
  1. Employers should consider amending their educational assistance programs to provide Student Loan benefits. Employers wishing to provide Student Loan payments pursuant to their educational assistance programs should review them and, if necessary, amend them to permit Student Loan payments. It is important to note that Student Loan payments are limited to the employees’ Student Loans. Employers are not permitted to pay for the loans of employees’ spouses or dependents through an educational assistance program. Employers can make Student Loan payments to the employee directly or to a third party, like the employee’s educational institution or loan servicer.
  1. Self-employed individuals, shareholders and owners are eligible to participate in an educational assistance program, subject to certain limitations. Self-employed individuals, shareholders and owners are eligible to participate in an educational assistance program. However, no more than 5% of the amounts paid by the employer pursuant to the program can be provided for individuals who own more than 5% of the stock or capital or profits interest in the employer. Consequently, if the owners of an employer are its only employees, the employer probably is prohibited from implementing an educational assistance program due to this 5% limit. Employers also need to consider the Section 127 prohibition against discrimination in favor of highly compensated employees when designing their educational assistance programs.