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The IRS recently updated the Section 127 educational assistance program fact sheet (FS-2026-10), revising its frequently asked questions (FAQs) to reflect statutory amendments adopted under last year’s One Big Beautiful Bill Act (OBBBA). Generally, taxpayers may exclude certain educational assistance benefits from their gross income if they are provided under an educational assistance program.
The OBBBA changes included cost‑of‑living adjustments to the annual exclusion amount beginning after 2026 and the permanent inclusion under Section 127 programs of payments by an employer, whether paid to the employee or to a lender, of principal and interest on any qualified education loan incurred by an employee for education. The new fact sheet supersedes prior FAQs issued in 2024. FS-2026-10 also modifies the sample plan provided in the 2024 FAQs.
Educational assistance benefits may include payments for tuition, fees and similar expenses, books, and supplies and equipment, but do not include tools and supplies that may be retained by the employee, meals, lodging and transportation expenses, and do not include any course or other education involving sports, games or hobbies.
The FAQs address the following aspects of educational assistance programs:
- General features of an educational assistance program
- Qualified education loans
- Student debt reimbursements
- Eligibility for self-employed individuals, shareholders and owners
- Other exclusions for educational assistance
Employees may exclude up to $5,250 per year of qualified educational assistance from gross income (adjusted for increases in the cost-of-living for taxable years beginning after 2026), and employers do not report those amounts as taxable wages. However, these education expenses may not be used as the basis for any other deduction or credit, including the Lifetime Learning Credit.
The FAQs also restate that employers must maintain a written plan and comply with nondiscrimination rules to preserve tax‑favored treatment. Employers may use the sample plan provided in the fact sheet and may tailor the plan to include, for example, conditions for eligibility, when an employee’s participation in the plan begins and prorated benefits for part-time employees.
Educational assistance programs may not discriminate in favor of officers, shareholders, self-employed or highly compensated employees in requirements related to eligibility for the benefits. Amounts paid under an educational assistance program are generally deductible by the employer as a business expense under Section 162.
While the guidance is issued in FAQ format and is not precedential, the IRS notes that taxpayers may generally rely on it in good faith for penalties that provide a reasonable cause standard for relief.
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