IRS Issues FAQs on Educational Assistance Programs and Provides Sample Plan Document

The IRS has issued FAQs addressing educational assistance programs and has provided a sample document that employers can use as a template for designing their own programs. As background, taxpayers may exclude from their gross income up to $5,250 per calendar year of certain employer-provided educational assistance benefits, such as payments for tuition, fees, and similar expenses, if they are provided under a qualified educational assistance program (see our Question of the Week). Employers are not required to report these benefits on Form W-2, and amounts paid under these programs generally are deductible by the employer as business expenses. Key points in the FAQs include:

• Separate Written Plan. To be qualified under Code § 127, an educational assistance program must be formalized in a separate written plan document. The FAQs include a link to Publication 5993, a sample educational assistance plan that employers may use to establish their own program. Employers can modify the sample plan and include additional provisions, provided that applicable requirements under the Code and underlying regulations are met.
• Benefits. Examples of tax-free educational assistance benefits include payments for tuition, fees, books, supplies, and equipment for both undergraduate and graduate courses. These payments need not be work-related. Educational assistance benefits do not include payments for meals, lodging, or transportation; tools or supplies that students can keep after course completion (other than textbooks); and courses involving sports, games, or hobbies, unless there is a reasonable relationship to the employer’s business, or they are required as part of a degree program.
• Qualified Educational Loans. Educational assistance benefits also include principal or interest payments by employers after March 27, 2020, and before January 1, 2026, on qualified educational loans incurred by employees for their own education (see our Question of the Week). These loan payments can be made directly to a third party (e.g., an educational provider or loan servicer) or to the employee. Generally, an employer must amend the terms of an existing plan to include this benefit, unless the plan is written to provide generally for all benefits available under Code § 127.
• Annual Limit. The annual limit for expenses paid and incurred during a calendar year is $5,250. Except for qualified education loans, expenses must be incurred and reimbursed within the same year that they are paid, and the $5,250 limit cannot be carried forward to subsequent years.
• Exclusive Benefit. Educational assistance programs must exclusively benefit employees; benefits for an employee’s spouse or dependents generally do not qualify. Spouses and dependents of employees or owners who are also employees may receive benefits under the program but are subject to rules that prohibit discrimination in favor of these employees with respect to benefit eligibility, and that limit the benefits they may receive to 5% of the benefits under the program.
• Reimbursements. In the case of educational assistance benefits that are reimbursements of permissible employee expenses, employees must be prepared to substantiate the expenses to their employer.
• Nondiscrimination. While there are no specific income limits for receiving educational assistance benefits, an educational assistance program must not discriminate in favor of employees who are highly compensated. In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during any calendar year may be provided for the class of individuals who are more-than-5% shareholders or owners (or their spouses or dependents). [EBIA Comment: If an educational assistance program is discriminatory, all participants lose favorable tax treatment for their benefits under the program—not just those in whose favor discrimination is prohibited.]
• Working Condition Fringe Benefit. Benefits that qualify as a working condition fringe benefit can be excluded from the employee’s gross income and need not be included in wages, regardless of amount. A working condition fringe benefit is a type of benefit provided by an employer that, if paid by the employee, would qualify as a deductible business expense.

These FAQs are not published in the Internal Revenue Bulletin and are not binding on the IRS for case resolution; however, no underpayment penalty will apply to taxpayers relying upon them in good faith.

EBIA Comment: The FAQs provide a helpful summary of the Code’s rules for educational assistance programs. However, employers should keep in mind that they have flexibility in designing their programs. For example, employers need not offer reimbursements for all expenses that can be reimbursed tax-free under the rules. An employer’s program could limit the courses that are eligible (e.g., to courses at a fully accredited two-year or four-year college) or the expenses that can be reimbursed (e.g., only tuition). Reimbursement could also be conditioned on attaining a specified minimum grade or remaining employed with an employer for a certain amount of time after completing the education. A program could also include per-employee or aggregate reimbursement limits (or both). Some, but not all, of these options are reflected in the IRS’s sample plan. For more information, see EBIA’s Fringe Benefits manual at Sections X.A (“Overview of Qualified Educational Assistance Programs”), X.C (“Types of Educational Assistance That Can Be Offered”), and X.F (“Design Choices Checklist”).

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