Employers are always seeking smart, cost-effective benefits to attract and retain employees. One such perk, often underappreciated, is the employer-provided education assistance program under §127 of the tax code. These programs let businesses cover employee’s eligible educational expenses tax-free, up to a certain limit ($5,250 in 2025).

With 2025 well underway, there’s no better time to revisit how these benefits work, what expenses qualify, and what steps employers (and their tax advisers) need to take to maximize them.

Key rules employers must follow in 2025

While educational assistance programs have long been a fixture in employer benefit portfolios, their permanence sets 2025 apart. The generally temporary tax exclusion is now solidified in law, providing much-needed continuity.

Here’s what that means in practice:

• Annual cycle: the $5,250 exclusion per employee, per calendar year resets annually.
• Written plan required: Section 127 mandates a separate written plan that clearly outlines eligibility, covered expenses and non-discrimination rules that prevent favoritism toward highly compensated employees.
• Payroll coordination: Employers must ensure reimbursements aren’t mistakenly included in taxable wages on Forms W-2, Wage and Tax Statement.
• Student loan surcharge: Student loan repayment assistance qualifies through Dec. 31, 2025, a benefit that needs monitoring for extension beyond this year.

What expenses qualify under §127

Section 127 provides flexibility, but not without boundaries. Here’s what can be covered:

• Tuition, fees and related charges paid directly to an educational institution
• Books, supplies and equipment required for course enrollment or attendance
• Undergraduate and graduate courses, even if not pursuing a degree
• Student loan principal or interest payments, eligible only if incurred by the employee for their own education and paid after March 27, 2020, and before Jan. 1, 2026

Non-qualifying costs include:

• Meals, lodging, transportation
• Tools or supplies that remain with the employee, like a laptop
• Courses in sports, hobbies or games, unless required for a degree or directly related to the employer’s business

Action steps for employers

Here’s how employers and tax advisers can turn these rules into effective programs:

1. Review and update the written plan

• Ensure the document addresses eligibility, benefit limits and nondiscrimination.
• If desired, include student loan reimbursement, as most plans require an amendment to incorporate this feature.

2. Communicate the benefit

Employers should feature it in onboarding materials and internal benefits communications. They could also highlight it mid-year to capture interest from employees considering classes or loan repayments.

3. Sync with payroll and record-keeping

Tax-exempt assistance must be excluded from wages. Employers should:

• Track reimbursements against the $5,250 per employee, per calendar year limit
• Retain documentation: receipts, loan statements, enrollment confirmations
• Ensure payroll systems correctly process and report these benefits

4. Leverage for attracting talent

Framing the program as a recruitment and retention tool boosts return on investment. Consider tracking usage trends and retention impacts, and tailoring benefits toward credentials that align with business needs.

5. Plan ahead for student loan expiration

The loan assistance provision ends Dec. 31, 2025, unless extended. Employers should:

• Promote it while available
• Prepare communications about future changes
• Decide whether to offer a taxable benefit post-expiration

Other IRS resources

IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, offers critical technical guidance:

• It reinforces the separate written plan requirement and $5,250 annual exclusion.
• It highlights the nondiscrimination rule, ensuring highly compensated employees don’t receive preferential treatment.
• Publication 15-B positions education assistance within the broader framework of fringe benefits, which are taxable unless specifically excluded by law.

Additional IRS updates reinforce the current environment:

• The IRS reminds employers that educational assistance continues to include loan payments through the 2025 sunset window.
• IRS FAQs clarify that §127 benefits are excluded from income, but cannot be used to claim other credits (like the lifetime learning credit).

Wrapping up

Offering employer-sponsored educational assistance isn’t just a tax-savvy move, it’s a strategic investment in talent. With a $5,250 annual employee exclusion, businesses can help employees pursue learning or manage student loans, without triggering taxable income.

For 2025, it’s a golden window. The educational assistance exclusion is now permanent.

Student loan repayments remain eligible for special tax treatment through at least the end of the year.As campaigns begin for the new year, employers should dust off their written plans, remind employees (and themselves) about this valuable benefit and apply the rules strategically. Tax professionals can lead the way by helping clients design, communicate and manage programs that benefit everyone.