As education continues to be a major component of careers and professional development, the government has carved out many ways for employers to help support employees with education assistance programs. Currently, there are three sections of the tax code that are commonly used for educational assistance: Section 132, Section 127 and Section 401(m)(4)—which was added by the SECURE 2.0 Act. To use these benefits successfully, employers and employees need to understand the differences between them.

Section 132 (Fringe Benefits)

Under Section 132, the IRC allows for certain types of work-related education to be covered by employers as a fringe benefit business expense. To qualify as a business expense, the education (and accompanying costs, like travel or food) can only be for maintaining or improving an employee’s performance in their current position.

As a business expense, there is no limit on the amount the company can spend on education under Section 132. Additionally, there is no need for a company to write up any kind of educational assistance policy document or make it available to all employees. It can be used to address specific needs on short notice.

However, education that prepares an individual for a “new trade or business”—even if they don’t plan on using the education for a career change—CANNOT qualify as a fringe benefit. Similarly, education that allows an employee to reach the minimum standards their current job requires is NOT a fringe benefit (e.g., a company cannot hire an unqualified person as an accountant and then pay for them to get an accounting degree). Examples on excludable education expenses under Section 132 restrictions can be found here.

These restrictions mean that it’s very difficult to use Section 132 to fund an undergraduate degree or graduate degree because they almost universally will qualify the employee for a new trade or business. In general, a Section 132 benefit is used by employers that wish to pay for an employee’s continuing education for their role or training to meet a new regulatory requirement for their current position.

Section 127

The educational reimbursement benefit given under Section 127 offers the greatest amount of flexibility for types of covered education. A Section 127 benefit can provide employees with tax-free reimbursement for most types of education, including undergraduate and graduate programs. The only types of education it cannot be used for are classes tied to sports or hobbies (unless directly related to work).

Although Section 127 offers the most flexibility for types of education, it has far more rules and restrictions than Section 132 for how it’s implemented. Classified as an education benefit (and not a business expense), Section 127 cannot be used to cover things like travel, lodging or food costs associated with an education program, and its maximum reimbursement is capped at $5,250 a year. Additionally, Section 127 requires the employer to have a written benefit plan that employees are told about and can access (usually in an employee handbook).  

Employers should note that since Section 127 reimbursement is a benefit, it must pass anti-discrimination testing to ensure it’s not only being used by highly compensated employees. While an employer can put restrictions on the types of education it will approve under the benefit (or require approval before reimbursement), it cannot restrict benefit-eligible employees from using the benefit if they meet the plan criteria.

In 2020, Congress made a rule change that allowed companies to use Section 127 to reimburse employees for qualified student loan payments. The change is currently set to expire at the end of 2025 (but it may be extended).

SECURE 2.0

The education benefit offered through the SECURE 2.0 Act is the most limited and the least direct of the three. It’s a tool to help employees save for retirement while handling their education costs.

Under SECURE 2.0, employers are allowed to treat employees’ qualified student loan payments as retirement plan contributions for the purpose of determining employer contributions to the plan. The purpose of this regulation is to allow employees with limited income to repay their student loans without missing out on the benefit of employer matching in their retirement account. Unlike the other educational assistance programs, the benefit does not incentivize education; instead, it works to ensure that employees are no longer being penalized for prioritizing the repayment of their education.

For employer matching, loan repayments count towards the annual retirement plan contribution limit. If the limit is reached, employee contributions can still be made to the retirement plan up to the limit, but they cannot be matched by the employer. (Loan repayments plans have some flexibility with how they perform nondiscrimination testing.)

This chart indicates approximate rules and regulations around Section 127, Section 132, and SECURE 2.0 education assistance programs discussed above. Employers should discuss programs with their tax or benefit professionals before implementing them at their company. To maintain a tax-favorable status, educational assistance program benefits cannot be offered to employees with an option for them to take cash or some other benefit received in place of the educational assistance (which would make the benefit taxable compensation).