The IRS recently revised its FAQs (IRS FS-2026-10) addressing educational assistance programs under Internal Revenue Code Section 127. This updated guidance replaces the FAQs issued in June 2024 (IRS FS-2024-22) and reflects changes made to Section 127 programs by the One Big Beautiful Bill Act. Employers with educational assistance programs should take note of these updates.
What Are Educational Assistance Programs?
Educational assistance programs are employer-sponsored programs that help employees pay for student loan debt or costs associated with pursuing additional education. Section 127 of the Internal Revenue Code allows employers to exclude from employees’ gross income employer-paid or employer-reimbursed educational assistance provided through a qualified program.
What Changes Were Made to the Section 127 FAQs?
- Annual Exclusion Limit Will Be Indexed
- What Changed: The 2024 FAQs referenced a fixed annual exclusion limit of $5,250 per employee for educational assistance. The 2026 FAQs provide that, beginning in 2027, the exclusion limit will be indexed for inflation.
- Employer Takeaway: Employers should consider updating their programs and administrative systems to account for annual increases beginning in 2027.
- Student Loan Repayment Benefit Made Permanent
- What Changed: The 2024 FAQs provided that employer payments of principal or interest on qualified education loans had to be made before Jan. 1, 2026. The 2026 FAQs remove this expiration date, allowing these payments to continue indefinitely.
- Employer Takeaway: Employers may now treat student loan repayment programs as long-term benefits and should consider updating their programs accordingly.
- More Flexible Reimbursement Timing
- What Changed: For educational expenses other than student loan repayments, the 2024 FAQs required employees to incur the expense in the same calendar year the employer provided reimbursement. The 2026 FAQs eliminate this requirement and instead provide that the expenses cannot have been incurred before employment began.
- Employer Takeaway: Employers should review their programs to determine whether revisions are needed to reflect the more flexible reimbursement timing rules.
- Clarified Notice Requirements
- What Changed: The 2024 FAQs stated that employers could inform employees about the existence of an educational assistance program. The 2026 FAQs clarify that employers must inform employees about the program and its terms.
- Employer Takeaway: Employers should review their communications and enrollment materials to ensure all eligible employees receive adequate notice of the program and its terms.
- No Coverage for Non-Employee Spouses or Dependents
- What Changed: The 2026 FAQs emphasize that a program that provides benefits to the non-employee spouse or dependents of an employee will not qualify as a Section 127 educational assistance program.
- Employer Takeaway: Employers should confirm that benefits are limited to eligible employees to avoid jeopardizing the program’s Section 127 status.
- Expanded Eligibility
- What Changed: The 2026 FAQs expand guidance regarding who may participate in qualified educational assistance programs. Eligible participants now include officers, shareholders, owners, self-employed individuals and highly compensated employees. However, the program must continue to satisfy applicable nondiscrimination rules, including the requirement that benefits provided to shareholders and owners must not exceed 5% of the aggregate benefits provided under the program during the year.
- Employer Takeaway: Employers should ensure their programs include safeguards to satisfy applicable nondiscrimination requirements and benefit limitations.
- Sample Plan Document
- What Changed: The 2026 FAQs include an updated sample Educational Assistance Program plan document.
- Employer Takeaway: Because Section 127 programs must be maintained pursuant to a written plan, employers should confirm they have compliant plan documentation in place.
What’s Next?
While IRS FAQs are considered informal guidance, employers generally may rely on them if doing so in good faith. Employers should review the revised FAQs and determine whether updates to their educational assistance programs, communications or administrative procedures are necessary or appropriate.
Warner Norcross + Judd Has You Covered
If you have questions about how the updated FAQs affect your educational assistance program or need assistance with implementation, please contact Stephanie Grant, Cade Bunton or a member of Warner’s Employee Benefits Practice Group.
