IRS Releases FAQs on Education Assistance Benefits

The IRS has issued a new fact sheet that offers expanded guidance on employer-sponsored educational assistance programs, which can be a powerful recruiting and retention tool for business leaders.

Applies to:

All Employers

Effective:

June 22, 2024

What’s covered in the new IRS fact sheet on educational assistance programs?

The Internal Revenue Service (IRS) recently issued fact sheet FS-2024-22 to answer frequently asked questions related to educational assistance programs, or EAPs, under Section 127 of the Internal Revenue Code (IRC). EAPs are used by employers as recruitment tools since they are tax exempt to employees and tax deductible to employers. The IRS makes clear that the fact sheet is not binding law and will not be relied upon or used by the IRS to resolve a case. However, it remains helpful to employers and employees who are looking for more general information about EAPs.

The fact sheet answers general questions like defining an EAP, defining EAP benefits, and defining qualified education loans. However, the fact sheet also addresses whether student debt can be reimbursed and the impact on the employee’s gross income. If the debt was incurred as a result of expenses that are permissible benefits under Section 127 of the Code (such as tuition, books, equipment, qualified education loans), the employer may reimburse the employee for these expenses as educational assistance benefits, and the employee could then use those funds to help satisfy their debt. To be excluded from the employee’s gross income, the employee must be prepared to substantiate the expenses to the employer.

While the EAP fact sheet is not binding law, it may still be a useful resource for employers who are looking for general information about this topic.

Additional exclusions from gross income for educational assistance include working condition fringe benefits and educator expense deductions. If the benefits qualify as a working condition fringe benefit, regardless of amount, they are excluded from gross income and the employer does not have to include them in wages. A working condition fringe benefit is a benefit which, had the employee paid for it, the employee could deduct it as an employee business expense. In 2023, educators can deduct up to $300 ($600 if married filing jointly and both spouses are eligible educators, but not more than $300 each) of unreimbursed business expenses. The educator expense deduction, claimed on Form 1040 Line 11, is available even if an educator doesn’t itemize their deductions. To do so, the taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide for at least 900 hours per school year in a school that provides elementary or secondary education as determined under state law. Employers are encouraged to review the fact sheet with their tax professional to understand its impact.

Action Items for Employers

1. Review the fact sheet here.
2. Update education assistance program policies and procedures as needed.
3. Review fact sheet with tax professional.
4. Have appropriate personnel trained on the requirements.

Looking for additional information on how IRS regulations intersect with your benefit offerings? Check out our roundup on 2025 HSA and HDHP contribution limits.