Tax Benefits and Compliance
Understanding IRS Section 127 rules and compliance requirements for educational assistance programs to maximize tax benefits while staying compliant.
IRS Section 127: Educational Assistance Programs
Section 127 of the Internal Revenue Code allows employers to provide up to $5,250 per employee annually in tax-free educational assistance benefits.
Maximum Annual Tax-Free Benefit
This limit applies per employee per calendar year and includes all qualified educational expenses.
Eligible Educational Expenses
Understanding which expenses qualify for tax-free treatment under Section 127.
- Tuition and fees
- Required textbooks and supplies
- Equipment required for courses
- Online course materials
- Laboratory fees
- Technology fees
- Graduation fees
- Room and board
- Transportation costs
- Personal expenses
- Optional materials
- Insurance
- Student activity fees
- Parking fees
Compliance Requirements
Key compliance responsibilities for employers to maintain Section 127 qualification.
- Program must be in writing
- Available to employees on non-discriminatory basis
- Cannot favor highly compensated employees
- Must specify eligible educational expenses
- Reasonable notification of program existence
- Clear explanation of benefits available
- Information about application process
- Details about any restrictions or requirements
- Employee applications and approvals
- Educational institution documentation
- Proof of course completion
- Payment records and receipts
- Track total benefits per employee
- Ensure $5,250 annual limit compliance
- Maintain records for audit purposes
- Report excess benefits as taxable income
Potential Tax Savings
Example savings for both employers and employees with a $5,250 annual benefit.
Federal income tax savings (25% bracket)
FICA tax savings (7.65%)
Total annual savings
Corporate tax deduction (21% rate)
FICA tax savings (7.65%)
Total annual savings