The IRS has released an updated sample Educational Assistance Program plan document. While employers are not required to use the IRS template, a separate written plan is mandatory, and the sample offers helpful insight into the language and structure the IRS views as compliant. The new version also incorporates several updates and clarifications that many employers should consider adopting.
Applies To: All employers who offer Educational Assistance Programs to their employees, regardless of employer size and ERISA status.
Go Deeper:
Under Internal Revenue Code (IRC) Section 127, employers are allowed to provide up to $5,250 per calendar year in certain educational assistance benefits on a tax-favored basis. However, after going unchanged for many years, new rules allow this maximum to be indexed for inflation beginning in 2027. To qualify for tax-favored treatment, the plan must be created for the exclusive benefit of employees and cannot unduly favor highly compensated employees.
Qualifying expenses can generally include tuition, fees, books, along with certain supplies and equipment directly related to classes or other courses of instruction as long as the employee is not allowed to keep them once the class has concluded (e.g., a laptop that they can keep when the class is done will not qualify). These expenses can result from undergraduate or graduate courses as well as certain qualifying non-degree programs and professional certifications, so long as they reasonably constitute education of the employee.
Among other requirements, such programs require a separate written plan document and cannot merely be described in an employee handbook, for example. Importantly, this plan document requirement should not be confused with other types of plan documents already familiar to employers. These programs are not subject to ERISA and therefore should not be included in the employer’s ERISA Plan Documents. Likewise, these expenses are also not qualifying expenses under Section 125 and therefore should not be referenced within, nor run through, the employer’s Section 125 ‘Cafeteria’ Plan Document.
In addition to minor formatting and structural changes, the IRS’s new sample plan document also contains several important revisions from their June 2024 version, including the following:
- Evergreen indexing language has been added. In response to a change in the law, the sample now includes indexing language so that the $5,250 per calendar year maximum is automatically adjusted from year to year, thus making annual amendments unnecessary.
- Updated language for Qualified Education Loans. The previous version of the sample plan document contained language indicating that the temporary, pandemic-related option to reimburse student loans was no longer permitted after 2025. This new version now reflects its permanent inclusion provided under the One Big Beautiful Bill Act.
- The definition of “Eligible Educational Institution” has been expanded for certain internships and residency programs. To better align with recent guidance/FAQs, the new version now explicitly allows qualifying expenses related to “an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.”
- Certain reimbursement language has been removed/reworded. Specifically, to better align with current guidance, the new plan document language clarifies that the qualifying expenses must not have been incurred prior to the individual’s employment.
Together, these updates modernize the sample plan document and align it with current Section 127 requirements.
Penalties for Non-Compliance:
Failure to have a separate and compliant Educational Assistance Program Document can result in many adverse consequences, including the following:
- Loss of Tax-Favored Status. As is the case under Section 125, having no Section 127 plan document technically means there is no Section 127 plan. This means any reimbursements of even otherwise qualifying educational assistance expenses must be reported as taxable income to the employee.
- Penalties and Enforcement Actions. The IRS can impose penalties for noncompliant programs as well as for filing inaccurate Forms W-2. Penalties and interest can also result for both the employer and the employee if taxable wages were underreported, or if FICA, FUTA, and federal and state income taxes are not properly withheld or paid on a timely basis.
- Increased Scrutiny. Non-compliance in this area could easily invite audits or investigations to both the employer and employee.
Practical Impact to Employers:
Employers who choose to sponsor a Section 127 Educational Assistance Program are urged to take the following steps on an annual basis, before the start of each new calendar year:
- Review program goals and make sure the program continues to be utilized in a nondiscriminatory manner.
- Confirm the program’s maximum benefit does not exceed the indexed maximum permitted for the calendar year in question (only applicable to 2027 calendar years and beyond).
- Confirm any other changes that may be necessary. This includes those resulting from changes in the law or guidance that may affect plan design or eligibility for the new calendar year.
- Review the plan document(s) to make sure they do not contain any outdated language or impermissible features. For example, programs after 2025 must not include language permitting reimbursement toward student loan repayments.
- Update and distribute all communications about the program to reflect any changes. This includes in summaries found in Employee Handbook (if applicable)
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