What Is the $5,250 Employee Education Subsidy?

An employer-provided educational assistance program is a benefit that allows a company to pay for an employee’s learning pursuits. This arrangement is governed by Section 127 of the Internal Revenue Code, which establishes the rules for how these programs must operate. When structured correctly, this benefit provides a tax advantage to both the employee and the employer. The assistance can cover a wide range of educational costs, from traditional degree courses to specific skill-based training.

Employer Plan Requirements

For an educational assistance program to be valid under tax law, an employer must first create a formal, separate written plan. This document is not merely a policy in an employee handbook but a distinct text that details the specific terms of the benefit. It must outline who is eligible for assistance, the types of education covered, and the process for requesting and receiving funds.

The program must also adhere to strict nondiscrimination rules. A plan cannot be designed to primarily benefit highly compensated employees, which the IRS defines based on salary and ownership stake. This means the educational assistance must be available to a broad range of employees. Furthermore, no more than 5% of the total benefits paid out by the employer during the year can go to individuals who are shareholders or owners holding more than a 5% stake in the company.

An employer is also obligated to provide reasonable notification to all eligible employees about the program. This involves clearly communicating the availability of the educational assistance and the terms outlined in the written plan. Employees cannot be offered a choice between receiving educational benefits or some other form of taxable payment, such as a cash bonus.

Qualified Educational Expenses

The funds from an educational assistance plan can be used for a specific set of costs related to an employee’s education. These qualified expenses include payments for tuition, mandatory fees, books, supplies, and required equipment. The education does not necessarily have to be related to the employee’s current job role. The assistance can apply to both undergraduate and graduate-level courses.

Payments for meals, lodging, or transportation associated with attending classes are not considered qualified expenses. Similarly, the plan cannot pay for tools or supplies that an employee retains after the course is complete, unless they are part of the direct cost of instruction. Courses taken for sports, games, or hobbies are also ineligible for reimbursement unless they are a required part of a degree program or directly related to the employee’s business skills.

Student Loan Repayments

A feature of these programs is the ability to cover student loan payments. Under a provision extended through the end of 2025, employers can use the plan to make payments toward the principal and interest of an employee’s qualified education loans. This applies to loans the employee incurred for their own education, not for the education of a spouse or dependent.

The payments can be made directly to the loan servicer or as a reimbursement to the employee. There is no restriction on when the loan was originally taken out, allowing the benefit to apply to existing student debt. The amount used for loan repayment is counted toward the annual tax-free limit.

Tax Treatment for Employees

For the employee, the primary advantage of an educational assistance program is the tax-free nature of the benefit. An individual can receive up to $5,250 per calendar year from their employer for qualified expenses without that amount being included in their gross income. This means the employee does not owe federal income tax or payroll taxes on the assistance received up to this limit. The employer should not include these tax-free benefits in the employee’s wages reported in Box 1 of their Form W-2.

Should an employee receive educational assistance exceeding the $5,250 annual limit, the tax treatment changes. Any amount provided by the employer above this threshold is considered taxable wages. This excess amount must be included in the employee’s income and is subject to all applicable income and payroll taxes. The employer is responsible for reporting this overage on their Form W-2.

An employee cannot claim multiple tax benefits for the same educational expense. If an expense, such as tuition, is paid for with tax-free funds from an educational assistance plan, that same expense cannot be used to claim an education tax credit, like the American Opportunity Tax Credit or the Lifetime Learning Credit. This rule prevents what is often called “double-dipping” on tax benefits.