§ 127. Educational assistance programs

§ 127. Educational assistance programs

(a) Exclusion from gross income

(1) In general Gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance to the employee if the assistance is furnished pursuant to a program which is described in subsection (b).

(2) $5,250 maximum exclusion If, but for this paragraph, this section would exclude from gross income more than $5,250 of educational assistance furnished to an individual during a calendar year, this section shall apply only to the first $5,250 of such assistance so furnished.

(b) Educational assistance program

(1) In general For purposes of this section an educational assistance program is a separate written plan of an employer for the exclusive benefit of his employees to provide such employees with educational assistance. The program must meet the requirements of paragraphs (2) through (6) of this subsection.

(2) Eligibility The program shall benefit employees who qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of employees who are highly compensated employees (within the meaning of section 414(q)) or their dependents. For purposes of this paragraph, there shall be excluded from consideration employees not included in the program who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that educational assistance benefits were the subject of good faith bargaining between such employee representatives and such employer or employers.

(3) Principal shareholders or owners Not more than 5 percent of the amounts paid or incurred by the employer for educational assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer.

(4) Other benefits as an alternative A program must not provide eligible employees with a choice between educational assistance and other remuneration includible in gross income. For purposes of this section, the business practices of the employer (as well as the written program) will be taken into account.

(5) No funding required A program referred to in paragraph (1) is not required to be funded.

(6) Notification of employees Reasonable notification of the availability and terms of the program must be provided to eligible employees.

(c) Definitions; special rules For purposes of this section—

(1) Educational assistance The term “educational assistance” means—

but does not include payment for, or the provision of, tools or supplies which may be retained by the employee after completion of a course of instruction, or meals, lodging, or transportation. The term “educational assistance” also does not include any payment for, or the provision of any benefits with respect to, any course or other education involving sports, games, or hobbies.

(A) the payment, by an employer, of expenses incurred by or on behalf of an employee for education of the employee (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment),

(B) the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (as defined in section 221(d)(1)) incurred by the employee for education of the employee, and

(C) the provision, by an employer, of courses of instruction for such employee (including books, supplies, and equipment),

(2) Employee The term “employee” includes, for any year, an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals).

(3) Employer An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (2).

(4) Attribution rules

(A) Ownership of stock Ownership of stock in a corporation shall be determined in accordance with the rules provided under subsections (d) and (e) of section 1563 (without regard to section 1563(e)(3)(C)).

(B) Interest in unincorporated trade or business The interest of an employee in a trade or business which is not incorporated shall be determined in accordance with regulations prescribed by the Secretary, which shall be based on principles similar to the principles which apply in the case of subparagraph (A).

(5) Certain tests not applicable An educational assistance program shall not be held or considered to fail to meet any requirements of subsection (b) merely because—

(A) of utilization rates for the different types of educational assistance made available under the program; or

(B) successful completion, or attaining a particular course grade, is required for or considered in determining reimbursement under the program.

(6) Relationship to current law This section shall not be construed to affect the deduction or inclusion in income of amounts (not within the exclusion under this section) which are paid or incurred, or received as reimbursement, for educational expenses under section 117, 162 or 212.

(7) Disallowance of excluded amounts as credit or deduction No deduction or credit shall be allowed to the employee under any other section of this chapter for any amount excluded from income by reason of this section.

(d) Inflation adjustment

(1) In general In the case of any taxable year beginning after 2026, both of the $5,250 amounts in subsection (a)(2) shall each be increased by an amount equal to—

(A) such dollar amount, multiplied by

(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2025” for “calendar year 2016” in subparagraph (A)(ii) thereof.

(2) Rounding If any increase under paragraph (1) is not a multiple of $50, such increase shall be rounded to the nearest multiple of $50.

(e) Cross reference For reporting and recordkeeping requirements, see section 6039D.

(Added Pub. L. 95–600, title I, § 164(a), Nov. 6, 1978, 92 Stat. 2811; amended Pub. L. 98–611, § 1(a)–(c), (d)(3)(B), (e), Oct. 31, 1984, 98 Stat. 3176–3178; Pub. L. 99–514, title XI, §§ 1114(b)(4), 1151(c)(4), (g)(3), 1162(a), Oct. 22, 1986, 100 Stat. 2450, 2503, 2507, 2510; Pub. L. 100–647, title I, § 1011B(a)(31)(B), title IV, § 4001(a), (b)(1), Nov. 10, 1988, 102 Stat. 3488, 3643; Pub. L. 101–140, title II, § 203(a)(1), (2), Nov. 8, 1989, 103 Stat. 830; Pub. L. 101–239, title VII, §§ 7101(a)(1), 7814(a), Dec. 19, 1989, 103 Stat. 2304, 2413; Pub. L. 101–508, title XI, § 11403(a), (b), Nov. 5, 1990, 104 Stat. 1388–473; Pub. L. 102–227, title I, § 103(a)(1), Dec. 11, 1991, 105 Stat. 1687; Pub. L. 103–66, title XIII, § 13101(a)(1), Aug. 10, 1993, 107 Stat. 420; Pub. L. 104–188, title I, § 1202(a), (b), Aug. 20, 1996, 110 Stat. 1772, 1773; Pub. L. 105–34, title II, § 221(a), Aug. 5, 1997, 111 Stat. 818; Pub. L. 106–170, title V, § 506(a), Dec. 17, 1999, 113 Stat. 1922; Pub. L. 107–16, title IV, § 411(a), (b), June 7, 2001, 115 Stat. 63; Pub. L. 116–136, div. A, title II, § 2206(a), Mar. 27, 2020, 134 Stat. 346; Pub. L. 116–260, div. EE, title I, § 120(a), Dec. 27, 2020, 134 Stat. 3051; Pub. L. 119–21, title VII, § 70412(a), (b), July 4, 2025, 139 Stat. 218.)

Editorial Notes

Prior Provisions

A prior section 127 was renumbered section 140 of this title.

Amendments

2025—Subsec. (c)(1)(B). Pub. L. 119–21, § 70412(a), struck out “in the case of payments made before January 1, 2026,” before “the payment by an employer,”.

Subsecs. (d), (e). Pub. L. 119–21, § 70412(b), added subsec. (d) and redesignated former subsec. (d) as (e).

2020—Subsec. (c)(1)(B). Pub. L. 116–260 substituted “January 1, 2026” for “January 1, 2021”.

Pub. L. 116–136 added subpar. (B). Former subpar. (B) redesignated (C).

Subsec. (c)(1)(C). Pub. L. 116–136 redesignated subpar. (B) as (C).

2001—Subsec. (c)(1). Pub. L. 107–16, § 411(b), struck out before period at end “, and such term also does not include any payment for, or the provision of any benefits with respect to, any graduate level course of a kind normally taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree”.

Subsecs. (d), (e). Pub. L. 107–16, § 411(a), redesignated subsec. (e) as (d) and struck out heading and text of former subsec. (d). Text read as follows: “This section shall not apply to expenses paid with respect to courses beginning after December 31, 2001.”

1999—Subsec. (d). Pub. L. 106–170 substituted “December 31, 2001” for “May 31, 2000”.

1997—Subsec. (d). Pub. L. 105–34 amended heading and text of subsec. (d) generally. Prior to amendment, text read as follows: “This section shall not apply to taxable years beginning after May 31, 1997. In the case of any taxable year beginning in 1997, only expenses paid with respect to courses beginning before July 1, 1997, shall be taken into account in determining the amount excluded under this section.”

1996—Subsec. (c)(1). Pub. L. 104–188, § 1202(b), in closing provisions, inserted before period at end “, and such term also does not include any payment for, or the provision of any benefits with respect to, any graduate level course of a kind normally taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree”.

Subsec. (d). Pub. L. 104–188, § 1202(a), substituted “May 31, 1997. In the case of any taxable year beginning in 1997, only expenses paid with respect to courses beginning before July 1, 1997, shall be taken into account in determining the amount excluded under this section.” for “December 31, 1994.”

1993—Subsec. (d). Pub. L. 103–66 substituted “December 31, 1994” for “June 30, 1992”.

1991—Subsec. (d). Pub. L. 102–227 substituted “June 30, 1992” for “December 31, 1991”.

1990—Subsec. (c)(1). Pub. L. 101–508, § 11403(b), struck out at end “The term ‘educational assistance’ also does not include any payment for, or the provision of any benefits with respect to, any graduate level course of a kind normally taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree.”

Subsec. (d). Pub. L. 101–508, § 11403(a), substituted “December 31, 1991” for “September 30, 1990”.

1989—Subsec. (b)(1). Pub. L. 101–140, § 203(a)(1), amended par. (1) to read as if amendments by Pub. L. 99–514, § 1151(c)(4)(A), had not been enacted, see 1986 Amendment note below.

Subsec. (b)(2). Pub. L. 101–140, § 203(a)(2), amended par. (2) to read as if amendments by Pub. L. 100–647, § 1011B(a)(31)(B), had not been enacted, see 1988 Amendment note below.

Pub. L. 101–140, § 203(a)(1), amended par. (2) to read as if amendments by Pub. L. 99–514, § 1151(g)(3), had not been enacted, see 1986 Amendment note below.

Subsec. (b)(6). Pub. L. 101–140, § 203(a)(1), amended par. (6) to read as if amendments by Pub. L. 99–514, § 1151(c)(4)(B), had not been enacted, see 1986 Amendment note below.

Subsec. (c)(8). Pub. L. 101–239, § 7814(a), struck out par. (8) which read as follows: “Coordination with section 117(d).—In the case of the education of an individual who is a graduate student at an educational organization described in section 170(b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, section 117(d)(2) shall be applied as if it did not contain the phrase ‘(below the graduate level)’.”

Subsec. (d). Pub. L. 101–239, § 7101(a)(1), substituted “September 30, 1990” for “December 31, 1988”.

1988—Subsec. (b)(2). Pub. L. 100–647, § 1011B(a)(31)(B), substituted “there shall” for “there may” and “who are” for “who may be” in last sentence.

Subsec. (c)(1). Pub. L. 100–647, § 4001(b)(1), inserted at end “The term ‘educational assistance’ also does not include any payment for, or the provision of any benefits with respect to, any graduate level course of a kind normally taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree.”

Subsec. (d). Pub. L. 100–647, § 4001(a), substituted “1988” for “1987”.

1986—Subsec. (a)(2). Pub. L. 99–514, § 1162(a)(2), substituted “$5,250” for “$5,000” in heading and twice in text.

Subsec. (b)(1). Pub. L. 99–514, § 1151(c)(4)(A), added par. (1) and struck out former par (1) which read as follows: “For purposes of this section an educational assistance program is a separate written plan of an employer for the exclusive benefit of his employees to provide such employees with educational assistance. The program must meet the requirements of paragraphs (2) through (6) of this subsection.”

Subsec. (b)(2). Pub. L. 99–514, § 1151(g)(3), substituted “For purposes of this paragraph, there may be excluded from consideration employees who may be excluded from consideration under section 89(h).” for “For purposes of this paragraph, there shall be excluded from consideration employees not included in the program who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that educational assistance benefits were the subject of good faith bargaining between such employee representatives and such employer or employers.”

Pub. L. 99–514, § 1114(b)(4), substituted “highly compensated employees (within the meaning of section 414(q))” for “officers, owners, or highly compensated,”.

Subsec. (b)(6). Pub. L. 99–514, § 1151(c)(4)(B), struck out par. (6) which read as follows: “Notification of employees.—Reasonable notification of the availability and terms of the program must be provided to eligible employees.”

Subsec. (d). Pub. L. 99–514, § 1162(a)(1), substituted “December 31, 1987” for “December 31, 1985”.

1984—Subsec. (a). Pub. L. 98–611, § 1(b), amended subsec. generally, substituting “Exclusion from gross income” for “General rule” in heading, designating existing provision as par. “(1) In general” and adding par. (2).

Subsec. (c)(7). Pub. L. 98–611, § 1(e), substituted “allowed to the employee” for “allowed”.

Subsec. (c)(8). Pub. L. 98–611, § 1(c), added par. (8).

Subsec. (d). Pub. L. 98–611, § 1(a), substituted “December 31, 1985” for “December 31, 1983”.

Subsec. (e). Pub. L. 98–611, § 1(d)(3)(B), added subsec. (e).

Statutory Notes and Related Subsidiaries

Effective Date of 2025 Amendment