IRS issues FAQs on educational assistance programs, including qualified education loans
Posted by DaveMoll on Jun. 20, 2024 / Subscribe 0
The IRS has issued frequently asked questions (FAQ) related to educational assistance programs under I.R.C. § 127. The FAQs are being issued to provide general information to taxpayers and tax professionals.
Written plan for employees’ benefit. An educational assistance program is a separate written plan of the employer, for exclusive benefit of its employees, to provide the employees with educational assistance. These tax-free benefits include payments for tuition, fees, books, supplies and equipment and similar expenses. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses.
If student debt was incurred as a result of expenses that are permissible benefits under I.R.C. § 127, an employer may reimburse the employee for these expenses as educational assistance benefits, and the employee could then use those funds to help satisfy his or her debt.
Non-permissible items. Educational assistance benefits do not include payments for the following items:
· meals, lodging or transportation,
· tools or supplies (other than textbooks) that you can keep after completing the course of instruction (for example, educational assistance does not include payments for a computer or laptop that you keep), and
· courses involving sports, games or hobbies unless they have a reasonable relationship to the business of your employer or are required as part of a degree program.
Qualified education loans. Tax-free educational assistance benefits also include principal or interest payments on qualified education loans (as defined in I.R.C. §221(d)(1). A qualified education is a loan for education at an eligible educational institution. Eligible educational institutions include any college, university, vocational school or other postsecondary educational institution.
I.R.C. § 127 requires that such loans be incurred by the employee for the education of the employee and not for the education of a family member such as a spouse or dependent. These payments must be made by the employer after March 27, 2020, and before January 1, 2026 (unless extended by future legislation). The payments of any qualified education loan can be made directly to a third party such as an educational provider or loan servicer or directly to the employee, and it does not matter when the qualified education loan was incurred.
Exclusion from gross income. Under I.R.C. § 127, the total amount that an employee can exclude from gross income for payments of principal or interest on qualified education loans and other educational assistance combined is $5,250 per calendar year. For example, if an employer pays $2,000 of principal or interest on any qualified education loan incurred by the employee for the education of the employee, only $3,250 is available for other educational assistance.
SOURCE: IR-2024-167, June 17, 2024.
Welfarenews; IRSnews
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