What Employers Need to Know About IRS Education Benefit Updates

IRS Clarifies Education Assistance Programs After OBBBA

On April 21, 2026, the IRS released updated guidance related to educational assistance programs under IRC section 127, incorporating changes from the One Big Beautiful Bill Act. The new guidance provides business leaders with the opportunity to support employee growth while managing costs in a tax efficient way.

Following is an overview of the updates which provide important clarifications to the programs.

Key takeaways

• Employers can offer up to $5,250 per employee per year in tax-free educational assistance through 2026
• Programs must follow strict written plan and nondiscrimination requirements
• Student loan repayment remains an eligible tax-free benefit when included in the plan
• Benefits apply only to employees, not spouses or dependents unless they are also employees
• Careful plan design is essential to maximize tax advantages and avoid compliance risks

What qualifies as an educational assistance program

An IRC Section 127 educational assistance program must be a separate written plan designed exclusively for employees. This is not optional. Without a formal plan, the tax benefits do not apply.

Employers have flexibility in how they structure the program. You can define eligibility criteria, waiting periods, and benefits for part-time employees. However, one rule is non-negotiable. The program cannot favor owners, executives, or highly compensated employees.

This requirement often becomes a sticking point for smaller organizations and closely held businesses, so it is worth reviewing carefully.

What expenses are covered

The IRS allows a broad range of educational expenses to be covered tax-free, including:

• Tuition and fees
• Books, supplies, and equipment
• Undergraduate and graduate coursework
• Student loan repayment, including both principal and interest

One important detail is that the coursework does not have to be job-related. This gives employers flexibility to support employees pursuing degrees or certifications outside their current role.

However, there are clear exclusions. Benefits do not cover meals, lodging, or transportation. They also do not cover items like computers or tools that employees keep after completing a course, unless a narrow exception applies.

Student loan repayment remains a key opportunity

Earlier descriptions of the student loan repayment provisions often characterized it as a temporary benefit scheduled to expire January 1, 2026. The revised guidance clarifies that student loan repayment is now a permanent feature of the benefit. Its continued inclusion is one of the most impactful aspects of the current guidance. Employers may either make payments directly to a loan servicer or reimburse employees, if the plan permits.

This benefit may apply even to loans incurred before employment, creating an opportunity for employers to deliver immediate value to new hires.

For employers, this creates a compelling value proposition. Helping employees reduce education debt can support retention and employee engagement.

Understanding the $5,250 annual limit

The annual exclusion is now permanent. The $5,250 annual exclusion amount remains in place through 2026. Future year exclusion amounts will be adjusted based on cost-of-living rates beginning January 1, 2027.

This exclusion amount applies to the combined total of all educational assistance, including student loan payments.

Example for 2026: If an employer provides $2,000 in student loan repayment, only $3,250 remains available for other educational expenses that year.

Unused amounts do not carry forward, so program utilization strategies matter. Employers should consider communication and timing to ensure employees take full advantage of the benefit.

Coordination with other tax benefits

Employers and employees should understand that the same expenses cannot be used for multiple tax benefits. If educational assistance is excluded from income under Section 127, those expenses cannot also be used for credits like the Lifetime Learning Credit.

There may be other tax-efficient approaches available, such as treatment under the working condition fringe benefit rules, but those options depend on whether the education is job-related and whether the applicable requirements are met.

Next steps for employers

Educational assistance programs are both valuable and complex.

For employers, now is the time to:

• Review existing plan documents for compliance
• Evaluate whether student loan repayment is included
• Ensure nondiscrimination requirements are being met
• Align the program with broader talent and retention strategies

When structured correctly, these programs can deliver measurable value through employee satisfaction, skill development, and tax efficiency. Business leaders who take a proactive approach will be better positioned to maximize both the financial and human impact of their programs.

Questions about leveraging the educational assistance program tax benefit for your business? Contact your Keiter Opportunity Advisor | Email | 804.747.0000.

Additional Resources:

• Updates to frequently asked questions about educational assistance programs | gov
• [Sample] Educational Assistance Program Plan | IRS.gov