26 U.S.C. § 127 — Educational assistance programs

(a) Exclusion from gross income. (1) An employee's gross income does not include amounts an employer pays, or expenses an employer incurs, for educational assistance to the employee, if the assistance is given under a program described in (b). (2) If this section would otherwise exclude more than $5,250 of educational assistance given to one person in a calendar year, only the first $5,250 of that assistance is excluded. (b) Educational assistance program. (1) An "educational assistance program" is a separate, written employer plan, for the exclusive benefit of the employer's employees, providing educational assistance. It must meet the requirements of (2) through (6). (2) Eligibility: the program must benefit employees who qualify under a classification the employer sets up, which the Secretary finds is not discriminatory in favor of highly compensated employees (within the meaning of section 414(q)) or their dependents; employees who are left out of the program because they're covered by a genuine collective bargaining agreement — where education benefits were actually the subject of good-faith bargaining — are not counted against this test. (3) Principal shareholders or owners: no more than 5 percent of what the employer pays or incurs for educational assistance during the year may go to the class of people (or their spouses or dependents) who each own more than 5 percent of the employer's stock, capital, or profits interest on any day of the year. (4) Other benefits as an alternative: the program must not let eligible employees choose between educational assistance and other pay that would be taxable; both the written program and the employer's actual business practices are considered. (5) No funding required: the program does not have to be funded in advance. (6) Notification of employees: eligible employees must be given reasonable notice that the program exists and of its terms. (c) Definitions; special rules. (1) "Educational assistance" means (A) an employer's payment of expenses incurred by or for an employee for the employee's education — including tuition, fees, books, supplies, and equipment; (B) an employer's payment, to the employee or to a lender, of principal or interest on a qualified education loan (as defined in section 221(d)(1)) the employee took out for their own education; and (C) an employer providing courses of instruction for the employee (including books, supplies, and equipment) — but it does not include tools or supplies the employee keeps after finishing a course, or meals, lodging, or transportation. It also does not include any payment for, or benefit related to, any course involving sports, games, or hobbies. (2) "Employee" also includes, for any year, someone who is an employee under section 401(c)(1) (relating to self-employed individuals). (3) "Employer": someone who owns an entire unincorporated trade or business is treated as their own employer; a partnership is treated as the employer of each partner who is an employee under (2). (4) Attribution rules: (A) stock ownership is determined under section 1563(d) and (e) (ignoring section 1563(e)(3)(C)); (B) an employee's interest in an unincorporated trade or business is determined under Treasury regulations based on principles similar to (A). (5) Certain tests not applicable: a program is not treated as failing to meet (b)'s requirements merely because (A) different types of assistance under the program are used at different rates, or (B) reimbursement requires successfully completing a course, or getting a particular grade. (6) Relationship to current law: this section does not affect how deductions or income inclusions work under section 117, 162, or 212 for education expenses that fall outside this section's exclusion. (7) Disallowance of excluded amounts as credit or deduction: an employee may not also claim a deduction or credit under any other section of this chapter for an amount already excluded from income under this section. (d) Inflation adjustment. (1) For tax years beginning after 2026, both $5,250 amounts in (a)(2) are each increased by (A) that dollar amount, multiplied by (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year the tax year begins, using calendar year 2025 in place of calendar year 2016. (2) Any increase under (1) that is not a multiple of $50 is rounded to the nearest multiple of $50. (e) Cross reference. For reporting and recordkeeping requirements, see section 6039D.