IRS and Treasury Release Guidance on Educational Assistance Programs

On June 17, 2024, the IRS and Treasury issued frequently asked questions (FAQs) in FS-2024-22 regarding Educational Assistance Programs. The FAQs provide guidance to taxpayers and clarify the rules surrounding tax-free educational assistance benefits for student loan payments.

Educational Assistance Programs

As background, Educational Assistance Programs under Section 127 of the Internal Revenue Code (the “Code”) allow employers to provide employees with tax-free educational assistance benefits.  Qualified educational assistance benefits include payments for tuition, fees, books, supplies, and equipment. Since March 27, 2020, they also include payments by an employer for an employee’s principal or interest payments on qualified education loans, but this change is temporary and set to expire at the end of 2025 (unless further extended by future legislation). Employees may exclude from their gross income up to $5,250 in qualified educational assistance benefits per year.

To qualify for tax-free treatment under Section 127 of the Code, the Educational Assistance Program must be documented in writing, and the benefits must be qualified educational assistance benefits. The program’s eligibility conditions must not favor officers, shareholders, self-employed, or highly compensated employees. Additionally, employees must not be offered the choice between qualified educational assistance benefits and cash.

Student Loan Payments

Following the enactment of the CARES Act, payments for principal or interest on qualified education loans incurred by an employee may be offered tax-free through Educational Assistance Programs as well for a limited time. Payments can be made directly to a third party or employee, regardless of when the debt was incurred. However, the CARES Act only provides temporary benefits for qualified education loan payments made after March 27, 2020, and before January 1, 2026 (unless further extended by future legislation).

For the purposes of Section 127 of the Code, a “qualified education loan” means any indebtedness incurred by an employee “solely” to pay qualified higher education expenses, such as tuition, fees, room and board, books, supplies, and equipment. If a loan is used for any non-qualified expenses, such as entertainment expenses or medical expenses, the entire loan may be considered “tainted” for purposes of Section 127 of the Code (i.e., no amount of the loan would be eligible for tax-free reimbursement under Section 127 of the Code). Further, qualified higher education expenses do not include payments for the following items:

• Meals, lodging, or transportation;
• Tools or supplies (other than textbooks) that an employee can keep after completing the course of instruction (e.g., educational assistance does not include payments for a computer or laptop that the employee can keep after completion of a course); and
• Courses involving sports, games, or hobbies, unless they have a reasonable relationship to the business of the employee’s employer, or are required as part of a degree program.

In addition, the FAQs also clarify that a qualified education loan must be incurred by an employee for the employee’s own education. An employer’s payment of principal or interest on a loan incurred by an employee for the education of the employee’s spouse or dependent may not be excluded from the employee’s gross income. In addition, a payment by the employer on a loan incurred by the parent of an employee for the employee’s education may not be excluded from the parent’s or the employee’s gross income.

If an employer wants to include qualified education loan payments as a benefit under its Educational Assistance Program, the employer may need to amend the plan’s terms. However, an amendment is not necessary if the plan already includes all benefits available under Section 127 of the Code.

Working Condition Fringe Benefits

If an educational benefit doesn’t qualify for tax-free reimbursement under Section 127 of the Code—or if the amount of the benefit is greater than $5,250 in a given calendar year—the benefit may still qualify for tax-free reimbursement under Section 132 of the Code as a working condition fringe benefit. For an educational benefit to qualify as a working condition fringe benefit, the education must satisfy one of the following requirements:

1. The education must be required by the employer or by the law for the employee to maintain their salary, status, or job, and serve a bona fide business purpose of the employer; or
2. The education must maintain or improve the skills needed in the employee’s present job.

Furthermore, even if the educational benefit satisfies one of the above requirements, it will not qualify for tax-free reimbursement under Section 132 of the Code if the education is required to meet the minimum educational requirements of the employee’s present job, or the education is part of a program of study that will qualify the employee for a new trade or business.

If you have any questions about the current rules regarding Educational Assistance Programs, the FAQs, or creating or amending an Educational Assistance Program, please contact a member of the Miller Johnson Employee Benefits & Executive Compensation practice group.