The Internal Revenue Service (IRS) recently issued a template plan document that employers can use to establish a qualified educational assistance program under Section 127 of the Internal Revenue Code (Code). For employers looking for a straightforward plan, the IRS has made it simple. For employers with more tailored objectives, including around course restrictions, grade requirements, clawback provisions, or benefit allocation, a custom plan document may be a better option.
What is a Section 127 Program?
A qualified educational assistance program under Section 127 of the Code allows employers to provide up to $5,250 per employee per year in tax-free benefits for tuition, fees, books, supplies, equipment, and qualified education loan repayments. The $5,250 cap will be indexed for inflation beginning with taxable years after 2026.
When a Custom Plan Makes More Sense
The IRS issued template is intentionally general. For employers that want tighter control over how educational assistance dollars are spent, a custom plan document is likely a better option. The template is general in the following ways:
- Education Definition: The default definition of “Education” covers “any form of instruction or training that improves or develops the capabilities of an individual” and does not restrict benefits to job-related coursework or approved institutions. While the template acknowledges that conditioning benefits on “successful completion of the course or attaining a particular course grade” is permissible, it does not include specific grade thresholds or completion requirements.
- Eligibility Waiting Periods: The template offers only a simple “x months-after-hire” placeholder.
- Administration: Reimbursement procedures and substantiation procedures are mentioned briefly but no specifics are defined.
- Student Loan Repayments: There is no language regarding student loan repayment logistics, such as payment frequency, lender-direct versus employee reimbursement, and allocation of the $5,250 cap between tuition and loan benefits.
- Employment or Clawback Provision: The template omits continued-employment or clawback provisions.
Compliance Reminders
It is important to note that all Section 127 programs must be maintained as a separate written plan for the exclusive benefit of employees. The program must satisfy Section 127(b) nondiscrimination rules, including a 5% cap on benefits provided to more than 5% of owners and their families. Employers must also affirmatively notify employees of the program.
If you have questions about qualified educational assistance programs, please contact a member of the Faegre Drinker benefits and executive compensation team.
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