An employer can pay up to $5,250 a year toward an employee's education without that money showing up as taxable wages. The rule is Section 127 of the Internal Revenue Code, and in April 2026 the IRS reissued its guidance on it (fact sheet FS-2026-10) to reflect the Working Families Tax Cuts Act signed in July 2025. Two changes matter to anyone in a tuition program or running one: paying down student loans is now a permanent part of the benefit, and the $5,250 ceiling will begin rising with inflation in tax years starting after 2026.

What the benefit covers

Under the IRS's 2026 Publication 15-B and the reissued FAQs, a qualifying plan can pay for tuition, fees, books, supplies and equipment. The courses can be undergraduate or graduate, and they do not have to relate to the employee's current job. Courses involving sports, games or hobbies are the exception: they qualify only if they relate to the employer's business or are required for a degree program.

Some education costs never qualify: meals, lodging and transportation, and tools or supplies the employee keeps after the course ends (textbooks are the exception). The employee has to be able to show the money went to qualifying expenses.

Student loans count, inside the same limit

Payments of principal or interest on the employee's own qualified education loans have counted since March 27, 2020, and the 2025 law made that permanent for payments after 2025. The employer can pay the loan servicer directly or reimburse the employee, depending on how the plan is written. The loans do not have to be federal and can predate the job. Loans taken out for a spouse's or a child's education do not qualify unless that person is also an employee.

Loan payments and course costs share one cap: $5,250 a calendar year in total, not $5,250 each. Unused room does not carry forward to the next year. A plan written before the loan option existed may need to be amended before it can make loan payments.

The plan has to be a real plan

The exclusion applies only under a separate written plan that benefits employees. The rules for it are specific:

  • Eligibility rules cannot favor highly compensated employees. For 2026, that means anyone who was a more-than-5-percent owner in the current or prior year, or who earned more than $160,000 in the prior year.
  • No more than 5 percent of the year's benefits may go to owners of more than 5 percent of the business, or to their spouses or dependents.
  • Employees cannot be offered cash or another taxable benefit in place of the education money.
  • Eligible employees must be given reasonable notice that the plan exists.

Employers can still set conditions, such as a waiting period before an employee is eligible or a prorated amount for part-time staff. The IRS publishes a sample plan document, Publication 5993, as a starting point.

Above $5,250

Assistance beyond the limit is generally taxable wages. The exception is education that qualifies as a working condition benefit, meaning the employee could have deducted the cost as a business expense had they paid it personally; that portion can be excluded whatever the amount. The tax-free amount up to $5,250 is left out of Box 1 of the employee's Form W-2.

What changes in 2027

The 2025 law ties the $5,250 figure to cost-of-living increases for tax years beginning after 2026. The limit stays at $5,250 for 2025 and 2026. Learning and development teams that build their tuition budgets around the cap will want the 2027 number before setting next year's per-employee maximum.

Before you enroll

Ask human resources for the written plan itself, not a summary of it. It answers the questions that decide what you actually receive: whether it covers loan payments, whether it reimburses before or after a course, what grade or completion rule applies, and whether there is a repayment clause if you leave. Then check whether your courses or degree fall inside the plan's own limits as well as the IRS's.

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