Title 26 — Internal Revenue CodeRelease 119-73
§127 Educational assistance programs
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter B— - Computation of Taxable Income › Part PART III— - ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME › § 127
Summary
Employer-paid education help can be tax-free for an employee if it comes from a qualifying employer program. The tax-free amount is limited to the first $5,250 of assistance an employee gets in a calendar year. Starting with tax years after 2026, those $5,250 limits will be raised for inflation using a cost-of-living formula and rounded to the nearest $50. To qualify, the employer must have a written plan just for employees that meets several rules. The plan must not favor highly paid workers, and the IRS must agree the employee groups are not discriminatory. No more than 5% of the money a company spends on the program can go to owners (or their spouses/dependents) who each own more than 5% of the business. The plan cannot let an employee pick education instead of regular pay. The plan does not have to be funded, and employees must be told about it. “Educational assistance” covers payments for tuition, fees, books, supplies, equipment, employer-paid student loan principal or interest, and employer-provided courses. Self-employed people and partners are treated as employees or their own employers under special rules. Using different types of benefits more than others, or requiring course completion or grades for reimbursement, does not automatically break the rules. For reporting and recordkeeping, see section 6039D.
Full Legal Text
Title 26, §127
Internal Revenue Code — Source: USLM XML via OLRC
(a)(1)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)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)(1)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)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)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)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)A program referred to in paragraph (1) is not required to be funded.
(6)Reasonable notification of the availability and terms of the program must be provided to eligible employees.
(c)For purposes of this section—
(1)The term “educational assistance” means—
(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)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)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)(A)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)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)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)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)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)(1)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)If any increase under paragraph (1) is not a multiple of $50, such increase shall be rounded to the nearest multiple of $50.
(e)For reporting and recordkeeping requirements, see section 6039D.
Legislative History
Notes & Related Subsidiaries
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 Pub. L. 119–21, title VII, § 70412(c),
July 4, 2025, 139 Stat. 218, provided that: “The amendment made by this section [amending this section] shall apply to payments made after
December 31, 2025.”
Effective Date
of 2020 Amendment Pub. L. 116–260, div. EE, title I, § 120(b), Dec. 27, 2020, 134 Stat. 3051, provided that: “The amendment made by this section [amending this section] shall apply to payments made after December 31, 2020.” Pub. L. 116–136, div. A, title II, § 2206(c), Mar. 27, 2020, 134 Stat. 347, provided that: “The
Amendments
made by this section [amending this section and section 221 of this title] shall apply to payments made after the date of the enactment of this Act [Mar. 27, 2020].”
Effective Date
of 2001 Amendment Pub. L. 107–16, title IV, § 411(d), June 7, 2001, 115 Stat. 63, provided that: “The
Amendments
made by this section [amending this section and former section 51A of this title] shall apply with respect to expenses relating to courses beginning after December 31, 2001.”
Effective Date
of 1999 Amendment Pub. L. 106–170, title V, § 506(b), Dec. 17, 1999, 113 Stat. 1922, provided that: “The amendment made by subsection (a) [amending this section] shall apply to courses beginning after May 31, 2000.”
Effective Date
of 1997 Amendment Pub. L. 105–34, title II, § 221(b), Aug. 5, 1997, 111 Stat. 818, provided that: “The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1996.”
Effective Date
of 1996 Amendment Pub. L. 104–188, title I, § 1202(c)(1), (2), Aug. 20, 1996, 110 Stat. 1773, provided that: “(1) Extension.—The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after
December 31, 1994. “(2) Graduate education.—The amendment made by subsection (b) [amending this section] shall apply with respect to expenses relating to courses beginning after
June 30, 1996.”
Effective Date
of 1993 Amendment Pub. L. 103–66, title XIII, § 13101(c)(1), Aug. 10, 1993, 107 Stat. 420, provided that: “The
Amendments
made by subsection (a) [amending this section and repealing provisions set out below] shall apply to taxable years ending after June 30, 1992.”
Effective Date
of 1991 Amendment Pub. L. 102–227, title I, § 103(b), Dec. 11, 1991, 105 Stat. 1687, provided that: “The amendment made by this section [amending this section] shall apply to taxable years beginning after December 31, 1991.”
Effective Date
of 1990 Amendment Pub. L. 101–508, title XI, § 11403(d), Nov. 5, 1990, 104 Stat. 1388–473, provided that: “(1) In general.—Except as provided in paragraph (2), the
Amendments
made by this section [amending this section and repealing provisions set out below] shall apply to taxable years beginning after
December 31, 1989. “(2) Subsection (b).—The amendment made by subsection (b) [amending this section] shall apply to taxable years beginning after
December 31, 1990.”
Effective Date
of 1989 Amendment Pub. L. 101–239, title VII, § 7101(c), Dec. 19, 1989, 103 Stat. 2305, provided that: “The
Amendments
made by this section [amending this section and section 132 of this title] shall apply to taxable years beginning after December 31, 1988.” Amendment by section 7814(a) of Pub. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 of Pub. L. 101–239, set out as a note under section 1 of this title. Amendment by Pub. L. 101–140 effective as if included in section 1151 of Pub. L. 99–514, see section 203(c) of Pub. L. 101–140, set out as a note under section 79 of this title.
Effective Date
of 1988 AmendmentAmendment by section 1011B(a)(31)(B) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. Amendment by section 4001(a), (b)(1) of Pub. L. 100–647 applicable to taxable years beginning after Dec. 31, 1987, see section 4001(c) of Pub. L. 100–647, set out as a note under section 117 of this title.
Effective Date
of 1986 AmendmentAmendment by section 1114(b)(4) of Pub. L. 99–514 applicable to years beginning after Dec. 31, 1987, see section 1114(c)(2) of Pub. L. 99–514, set out as a note under section 414 of this title. Amendment by section 1151(c)(4), (g)(3) of Pub. L. 99–514 applicable, with certain qualifications and exceptions, to years beginning after Dec. 31, 1988, see section 1151(k) of Pub. L. 99–514, as amended, set out as a note under section 79 of this title. Pub. L. 99–514, title XI, § 1162(c), Oct. 22, 1986, 100 Stat. 2510, provided that: “(1) Subsection (a).—The
Amendments
made by subsection (a) [amending this section] shall apply to taxable years beginning after
December 31, 1985. “(2) Subsection (b).—The amendment made by subsection (b) [amending section 120 of this title] shall apply to years ending after
December 31, 1985. “(3) Cafeteria plan with group legal benefits.—If, within 60 days after the date of the enactment of this Act [Oct. 22, 1986], an employee elects under a cafeteria plan under section 125 of the Internal Revenue Code of 1986 coverage for group legal benefits to which [former] section 120 of such Code applies, such election may, at the election of the taxpayer, apply to all legal services provided during 1986. The preceding sentence shall not apply to any plan which on
August 16, 1986, offered such group legal benefits under such plan.”
Effective Date
of 1984 Amendment Pub. L. 98–611, § 1(g), Oct. 31, 1984, 98 Stat. 3178, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “(1) In general.—Except as otherwise provided in this subsection, the
Amendments
made by this section [enacting section 6039D of this title and amending this section and section 125, 3231, and 6652 of this title] shall apply to taxable years beginning after December 31, 1983. “(2) Subsection (d).—The
Amendments
made by subsection (d) [enacting section 6039D and amending this section and section 125 and 6652 of this title] shall take effect on
January 1, 1985. “(3) Subsection (f).—The amendment made by subsection (f) [amending section 3231 of this title] shall apply to remuneration paid after
December 31, 1984. “(4) No penalties or interest on failure to withhold.—No penalty or interest shall be imposed on any failure to withhold under subtitle C of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to employment taxes) with respect to amounts excluded from gross income under section 127 of such Code (as amended by this section and determined without regard to subsection (a)(2) thereof) with respect to periods during 1984. “(5) Coordination with section 117(d).—In the case of education described in section 127(c)(8) of the Internal Revenue Code of 1986, as added by this section, section 117(d) of such Code shall be treated as in effect on and after
January 1, 1984.”
Effective Date
Pub. L. 95–600, title I, § 164(d), Nov. 6, 1978, 92 Stat. 2814, provided that: “The
Amendments
made by this section [enacting this section and amending section 3121, 3306, and 3401 of this title and section 409 of Title 42, The Public Health and Welfare] shall apply with respect to taxable years beginning after December 31, 1978.”
Regulations
Secretary of the Treasury or his delegate to issue before Feb. 1, 1988, final
Regulations
to carry out
Amendments
made by section 1114 of Pub. L. 99–514, see section 1141 of Pub. L. 99–514, set out as a note under section 401 of this title. Expedited Procedures for Refunds of Overpayments Pub. L. 104–188, title I, § 1202(c)(3), Aug. 20, 1996, 110 Stat. 1773, provided that: “The Secretary of the Treasury shall establish expedited procedures for the refund of any overpayment of taxes imposed by the Internal Revenue Code of 1986 which is attributable to amounts excluded from gross income during 1995 or 1996 under section 127 of such Code, including procedures waiving the requirement that an employer obtain an employee’s signature where the employer demonstrates to the satisfaction of the Secretary that any refund collected by the employer on behalf of the employee will be paid to the employee.” Special Rule for Certain Taxable Years Pub. L. 102–227, title I, § 103(a)(2), Dec. 11, 1991, 105 Stat. 1687, provided that, in the case of any taxable year beginning in 1992, only amounts paid before July 1, 1992, by employer for educational assistance for employee be taken into account in determining amount excluded under this section with respect to such employee for such taxable year, prior to repeal by Pub. L. 103–66, title XIII, § 13101(a)(2), Aug. 10, 1993, 107 Stat. 420. Pub. L. 101–239, title VII, § 7101(a)(2), Dec. 19, 1989, 103 Stat. 2304, provided that, in the case of any taxable year beginning in 1990, only amounts paid before Oct. 1, 1990, by employer for educational assistance for employee be taken into account in determining amount excluded under this section with respect to such employee for such taxable year, prior to repeal by Pub. L. 101–508, title XI, § 11403(c), Nov. 5, 1990, 104 Stat. 1388–473. Non
Enforcement
of Amendment Made by section 1151 of Pub. L. 99–514 for Fiscal Year 1990No monies appropriated by Pub. L. 101–136 to be used to implement or enforce section 1151 of Pub. L. 99–514 or the
Amendments
made by such section, see section 528 of Pub. L. 101–136, set out as a note under section 89 of this title. Plan
Amendments
Not Required Until January 1, 1989For provisions directing that if any
Amendments
made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 127
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73