When companies compete for the best employees, the quality of their benefits packages is a key differentiator. Prospective employees look for a comprehensive package to improve their financial well-being and help prepare for the future. An IRS Section 127 Educational Assistance Program works toward both of these goals, with long-term rewards for the employee and the employer.

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. 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 Educational Assistance Program pays tuition and fees for college courses at the undergraduate and graduate levels. With certain exceptions, employers cannot include reimbursement for the cost of anything that an employee keeps after the course is completed, such as books and equipment.

An employer may make advance payments to employees. It’s more common for a company to reimburse employees upon successful completion of a course, but a small percentage of employers choose to issue advances and then settle up after completion of the course(s) when all terms of the program have been satisfied.

An employer may require that an employee repay any reimbursements received within a defined period of time before he or she voluntarily resigns from the employer. The most common period for a 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 may be required to be relevant to the employee’s current job or, more generally, to a field that holds value to the company in any future position the employee may attain. The employer can set other requirements, such as a rule that the program will only reimburse employees for courses completed with a certain grade or higher.

Organizations Offering Educational Programs

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

There is no minimum number of employees for an employer to set up an IRS 127 program. Even a company with only one employee can offer a program that enhances its benefits package. Full-time employees are always eligible to participate in programs after being employed for a defined period of time, and part-time and seasonal employees may also be deemed eligible 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 educational assistance programs.

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 participate in them. According to the IFEBT, an amazing 43% of working people are unaware that their employer offers this benefit. If you consider their power to advance their educations and careers, IRS 127 programs are grossly underutilized by employees.

Ways That IRS 127 Programs Help College Students

  1. Employees: Section 127 programs are most often used by employees for graduate school and/or night classes after work hours. However, they also help many college students who are studying for a bachelor’s degree. Students with jobs should check with their employer regarding their eligibility for an IRS 127 program. If their employer doesn’t offer one, students should consider seeking another employer who offers this benefit. Since the pandemic, there has arisen a strong trend in the retail, restaurant, and hotel industries to offer increasingly generous benefits packages, including educational assistance programs, to entice the additional workers that they need. Below are a few of the large employers who hire many students and offer IRS 127 programs:

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

b. Target employees who want to pursue degrees in a range of fields can receive tuition support of up to $5,250 annually for a bachelor’s degrees and up to $10,000 for a master’s degrees annually.

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 college courses in a wide range of majors.

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

g. Taco Bell employees may pursue bachelor’s and master’s degrees and receive tuition reimbursement of up to $5,250 a year.

  1. Small Business Owners, including PPC’s, and LLP’s, have an opportunity to use an IRS 127 program to help pay college tuition for their adult children and grandchildren with pre-tax dollars.

In using an IRS 127, business owners can take advantage of the program’s ability to transfer family income to a child’s or grandchild’s lower tax bracket through their wages. They are also paying up to $5,250 per year of tax exempt tuition for family members.

Since the tuition refund program must be available on the same terms to all employees, it may not make sense to offer it in a small business that has nonfamily employees.

The program must meet IRS Section 127 requirements. The adult children participating 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 providing over half of their own support).

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

The grandchildren participating must be:

a. Financially independent for tax purposes (not claimed as a dependent on their parent’s tax return and providing December 20, 2021 over half of their own support).

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