When companies compete for the best employees, the quality of their benefits packages is a key differentiator. Prospective employees look for a comprehensive package that will improve their financial condition and help them prepare for the future. An IRS Section 127 Educational Assistance Program (EAP) works toward both of these goals, with long-term rewards for employees. Employers improve employee recruitment, loyalty, and retention.

IRS Section 127 enables an employer to exclude from an employee’s reported income up to $5,250 per year in employer-provided educational reimbursements for courses taken. Employers are not required to provide educational assistance under Section 127, but if they do, the assistance must be offered to all employees on a non-discriminatory basis that does not favor highly-compensated personnel.

The COVID-19 Relief Bill that was attached to the Consolidated Appropriations Act of 2021, approved December 21, 2020, extended the tax-free status of employer tuition refund payments under IRS Section 127 through 2025.

Covered Educational Expenses

An employer’s EAP pays tuition and fees for college courses at the undergraduate and graduate levels. With certain exceptions, employers cannot include reimbursement for the cost of any material that an employee retains such as books and equipment.

An employer may make advance payments to an employee prior to the beginning of an approved course. A percentage of employers choose this method and then settle up after completion of the course when all terms of the EAP have been satisfied. However, it’s more common for an employer to reimburse employees upon the completion of a course.

An employer may require that employees repay any reimbursements received within a defined period of time prior to their voluntarily resignation. The most common period for a voluntary separation repayment requirement is one year.

Courses of Study

Employers can pay tuition for courses in any subject area that is not a sport, hobby, or game. Courses do not need to be offered by a college. Post-secondary vocational training programs are also eligible. Employers may require that courses may be relevant to the employee’s current job or, more commonly, to a field that holds value to the employer in a future position the employee may attain. The employer can set other requirements, such as a rule that the EAP will only reimburse employees for courses with a final grade of A or B.

Employers Offering EAP’s

Organizations offering IRS 127 plans may be corporations, LLC’s, partnerships, or sole proprietorships. Owners and stockholders with more than 5% of the company’s stock may not receive EAP benefits.

There is no minimum number of employees for an employer to set up an EAP. Even an employer with only one employee can offer an EAP that enhances its benefits package. Full-time employees are eligible to participate in EAP’s after being employed for a defined period of time. Part-time and seasonal employees may also be deemed eligible for the EAP at the employer’s discretion.

About 92% of employers offer educational benefits of some kind, according to a survey by the International Foundation of Employee Benefit Plans (IFEBT), for a total annual value of $22 billion. Among all employers, 52% offer IRS 127 EAP’s.

Despite the widespread availability of tuition refund programs and the many benefits that accrue to employees who use them, only 2% to 5% of employees nationwide participate in them. According to the IFEBT, an amazing 43% of working people are unaware that their employer even offers this benefit. In considering the ability of a tuition refund plan to advance the education and career of an employee, such programs are greatly underutilized.

How EAP’s Help Students

1. Large Employers (50+ employees): Section 127 programs are most often used by employees for night classes after the workday has ended. However, they also help college students who are studying for a bachelor’s degree and have part- or full-time jobs. These students should check with their employer regarding their eligibility for its EAP. If the employer doesn’t offer one, students should consider seeking another employer who does offer an EAP as part of its benefits package.

Since the pandemic made hiring more difficult, there has arisen a strong trend in the retail, restaurant, and hotel industries to offer increasingly generous benefits packages, including EAP’s, to entice the workers that they need. Below are a few of the large employers in this industry who hire college students and offer EAP’s:

a. McDonald’s provides its restaurant employees with an IRS 127 EAP. They recently lowered their eligibility requirements from 9 months to 90 days of employment and have dropped weekly shift minimums from 20 to 15 hours.

b. Target employees who want to pursue degrees in can receive tuition support of up to $5,250 annually for a bachelor’s or master’s degree.

c. Dunkin’ corporate employees are eligible for tuition reimbursement of up to $5,250 annually after six months of service.

d. Best Buy reimburses employees up to $3,500 a year for undergraduate tuition expenses and up to $5,250 a year for graduate-level coursework.

e. Chipotle’s reimburses up to $5,250 a year for courses in a range of majors.

f. The Gap covers up to 100% of tuition and fees for two classes per term for a total of up to $5,250 annually for employees who seek job-related skills.

g. Taco Bell employees may pursue bachelor’s or master’s degree and receive tuition reimbursement of up to $5,250 a year from the company’s EAP.

2. Small Business Owners: Small businesses may use an EAP to help pay college tuition for their adult children and grandchildren with pre-tax dollars. In establishing an IRS 127 EAP, business owners can take advantage of the program’s ability to transfer family income to the lower tax brackets of a child or grandchild through the wages paid to them. They can accomplish this by paying up to $5,250 per year of tax exempt tuition for family members. However, since the EAP must be available on the same terms to all employees, it may not make sense to offer it in a small business that has non-family employees.

Adult children participating in a small business owner’s EAP must be:

a. 21 years of age,

b. Financially independent for tax purposes (not claimed as a dependent on their parent’s tax return), and

c. Formally, factually, and consistently employed by the employer on a part- or full-time basis and compensated by reasonable wages.

Grandchildren participating in a small business owner’s EAP must be:

a. An age eligible for employment according to state law, and

b. Formally, factually, and consistently employed by the employer on a part- or full-time basis and compensated by reasonable wages.