Tax Code Section 127: Employer-Provided Education Assistance

Internal Revenue Code Section 127 was created by Congress in 1978 as a temporary, expiring tax benefit, intended to allow employers to provide tax-free assistance to their employees who were continuing to pursue their education while working.  It was finally made permanent in 2012.

The annual amount of assistance, $5,250, which has not changed in more than 40 years, was based on the average cost of pursuing a four-year college degree in 1978. Amounts are deductible to the employer, and employees do not have to include the amount in their gross taxable income. In 2020, Congress added the option for employers to also use this provision to provide student loan debt relief for employees. Advocates are now working to make that new provision permanent and to expand the annual amount of allowable assistance.

About

Employers do not have to offer the benefit, but those who do must do so fairly and equally to all employees.  Education expenses do not have to be job-related, and there are no requirements for employees to stay with a certain employer for any length of time.  Employees can use the benefit for expenses related to educational attainment from certificates to advanced degrees.

There are significant efforts underway to expand this long-standing tax benefit to allow employers to offer employees the option of using this annual tax-free assistance for either education expenses or student loan repayment, and additional efforts to increase the amount employers can provide.  Such expansions of Section 127 would help employees broaden their education, increase their job skills, and repay student loans.

The Section 127 Coalition, which is co-chaired by NAICU and the Society for Human Resource Management (SHRM) and consists of nearly 100 business, education, and labor groups, was formed over two decades ago to advocate for this important employee tax benefit to be made permanent.  Today, the coalition advocates for the benefit to be extended and expanded so more employees can use it and more employers to be able to offer more assistance. 
 

History

Section 127 was originally enacted in 1978 as a temporary provision to see if it would catch on in the business community.  Albeit successful, and supported broadly by the business, education, and labor communities, the annual amount of assistance has never been adjusted.  Groups in support of the benefit fought for over 30 years to keep it from expiring and advocating for its extension, with an eye toward making it a permanent benefit.

In 2012, as part of economic stimulus legislation passed during the Obama Administration, Section 127 was finally made permanent.  The Section 127 Coalition began laying the groundwork for expanding the benefit, but met with resistance in the House and Senate as many members of Congress were focusing on tax reform legislation that would eliminate many individual benefits, like Section 127, for lower tax rates across sectors.  After successfully saving the benefit from elimination in tax reform legislation that was signed into law in the Trump Administration, the 127 Coalition and several members of Congress again started work on expanding the benefit.
 

COVID-19 Stimulus Efforts

Given the extraordinary amount of bipartisan support for expanding the benefit to include student loan repayment, a provision was included in the CARES Act that would allow a one-year option, for 2020, for employers to provide up to $5,250 in tax-free assistance to employees to use for student loan repayment expenses.  The final stimulus bill signed into law at the end of President Trump’s term in office, the CRRSAA, included a five-year extension of the student loan expansion.  Unless further extended, the expansion is set to expire on December 31, 2025.
 

Outlook

Now that Section 127 has been expanded to include student loan repayment, the Coalition will turn to advocating for an increase in the annual tax-free benefit amount.  Legislation has been introduced in the last two sessions of Congress to more than double the amount from $5,250 to $11,500 and $12,000.  The success of this additional expansion depends on the support these bill receive and whether or not Congress takes up a large scale tax relief package.

WHAT YOU CAN DO

  • THANK your Representative and Senators for the five-year expansion and extension of Section 127 allowing employers to provide tax-free assistance to employees for either tuition or student loan expenses.
  • Ask your Representative and Senators to increase the annual amount of tax-free assistance that has not been adjusted in over 40 years.

Resources

  • The Section 127 Coalition website

NAICU Contact

Karin Johns: Karin@NAICU.edu
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