IRS Updates FAQs on Educational Assistance Programs and Releases New Sample Plan Document

The Internal Revenue Service has released updated frequently asked questions addressing educational assistance programs under Section 127 of the Internal Revenue Code along with a revised sample plan document, Publication 5993 (Rev. 4-2026). The updated guidance reflects amendments to Section 127 made by the One Big Beautiful Bill Act of 2025 and eliminates the confusing language of the original frequently asked questions, published in 2024, concerning expense-and-benefit timing for employers that offer or are considering offering educational assistance or student loan repayment benefits.

Section 127 permits employers to provide certain educational benefits to employees on a tax-free basis (i.e., benefits are excludable from federal income tax, Social Security tax, Medicare tax, and many state income tax wage bases) through a written educational assistance plan. Employees may currently exclude up to $5,250 per year from gross income for qualifying educational assistance, including in-kind benefits, current educational expense assistance, and pre-employment student loan repayment benefits.

The updated guidance reminds employers to review existing (and in-development) Section 127 programs, including plan documents, expand or formalize pre-employment student loan repayment features, and reassess compliance with employee notice and nondiscrimination requirements of Section 127.

KEY UPDATES IN THE REVISED FAQS

The revised frequently asked questions (FAQs) supersede prior guidance issued in 2024 and include notable updates.

Removal of Unsupported “Same-Year” Expense-and-Reimbursement Limitation

The 2024 FAQs provided that educational expenses “must be paid by the employee in the same calendar year for which reimbursement is made by the employer.” Similarly, the 2024 plan template stated that reimbursed expenses must be paid by an employee in the same calendar year in which reimbursement is provided by an employer. That approach created practical concerns for employers administering educational assistance programs, as employers often condition reimbursement on successful course completion or minimum grade attainment.

For example, an employee who incurs educational expenses in one calendar year but is not eligible for reimbursement until the following year under their employer’s policy (i.e., when final grades post) would have run afoul of the 2024 FAQs’ same-year requirement. Likewise, an employer that provides advance assistance in one calendar year for a course scheduled in the following calendar year would also fail the 2024 FAQs’ same-year requirement.

The revised FAQs and sample plan notably remove this same-year language and instead focus on enforcing the annual Section 127 exclusion limit without expressly requiring that the educational expense and employer reimbursement occur in the same calendar year.

Inflation Adjustment to Annual Exclusion Amount

The $5,250 annual exclusion will be indexed for inflation for taxable years beginning after 2026, representing a departure from the longstanding fixed annual limit. The updated FAQs reiterate that unused amounts cannot be carried forward.

Student Loan Repayment Benefits Made Permanent

Pre-employment student loan repayment assistance is now a permanent feature of Section 127, after being temporarily added to Section 127 by the Coronavirus Aid, Relief, and Economic Security Act for benefits provided between March 27, 2020 and December 31, 2025. According to a February 2025 report from the Congressional Research Service, nearly 43 million individuals—one in six adult Americans—have federal student loan debt, with an aggregate value of more than $1.6 trillion.

A thoughtful, well-designed Section 127 program can add to an employer’s overall strategy to recruit and retain employees. The revised FAQs remove references to the expiration date and clarify that employers may make qualifying payments directly to employees, lenders, or educational providers, depending on the terms of the plan.

CLARIFICATIONS ON PROGRAM DESIGN

The revised FAQs include operational reminders of several statutory and regulatory requirements set forth in Section 127 and the regulations promulgated thereunder, including:

• Employers must inform employees about the existence and terms of any educational assistance program.
• Educational assistance programs must be maintained for the exclusive benefit of employees and generally may not be provided to spouses or dependents unless those individuals are also employees.
• Programs must comply with Section 127 nondiscrimination requirements and may not favor officers, shareholders, self-employed individuals, or highly compensated employees.
• Qualifying expenses include tuition, fees, books, supplies, equipment, and eligible student loan repayments but exclude items such as meals, lodging, transportation, and certain tools or equipment that employees may retain after course completion.

UPDATED PLAN TEMPLATE

The Internal Revenue Service (IRS) has issued an updated template for educational assistance program plans via Publication 5993, which employers may reference as a starting point for creating or revising a Section 127 plan. The template reflects recent statutory changes, including those related to pre-employment student loan repayment benefits, and incorporates the statutory and regulatory provisions outlined above. Employers should tailor the document to their specific eligibility rules, benefit design, and operational practices.

For employers that have not recently updated their programs—or that have implemented student loan repayment benefits on an interim basis—the template may highlight gaps in existing plan terms or administrative practices. Therefore, employers should consider using the template document as a practical tool to evaluate whether existing plan documents and administrative practices align with post-OBBBA standards and to identify potential gaps in program design or operation.

CONSIDERATIONS FOR EMPLOYERS

Employers may wish to review their educational assistance programs to ensure alignment with current law. Key action items may include:

• Updating plan documents to reflect permanent allowance for pre-employment student loan repayment benefits
• Revising references to the annual exclusion amount and future inflation adjustments
• Reviewing employee communications and program disclosures
• Confirming compliance with Section 127 nondiscrimination requirements

While the updated IRS plan template provides a useful framework for establishing a compliant Section 127 program, employers should be cautious about relying on the sample document alone. For example, many operational and non-tax legal considerations are not addressed in the plan template.

Employers frequently include additional provisions tailored to their workforce, administrative practices, and risk management objectives:

• Amendment and termination procedures
• Explicit disclaimers that participation does not guarantee continued employment
• Governing law and choice-of-law provisions
• Severability language
• Rules governing commencement and cessation of participation
• Funding provisions
• Administrative authority and discretionary interpretation provisions
• Recordkeeping requirements
• Application and approval procedures

Further, an employer’s official Section 127 plan document is often highly technical and may not address practical employee questions. In practice, employers should consider supplementing their formal Section 127 plan document with additional employee-facing materials and administrative forms, including:

• Educational assistance application forms
• Employee-facing FAQs
• Employment repayment agreement or clawback provisions
• A “reasonable notice” summary of terms for a Section 127 program