Prior to the inclusion of Section 127 to the Internal Revenue Code, only specifically “job-related” educational assistance could be excluded from an employee’s gross taxable income. Section 127 allows an employee to exclude from income up to $5,250 per year in assistance for any type of educational course at the undergraduate and graduate level. Employers are not required to provide assistance under Section 127 to their employees. However, if an employer chooses to do so, the benefit must be offered to all employees on a non-discriminatory basis that does not favor the highly compensated.Section 127 was added to the tax code to reduce tax complexity and address two broad policy goals:
Reducing administrative inequalities that arise when determining what constitutes “job-related” education; and
Removing disincentives to upward mobility by promoting job advancement and self-improvement for employees.
The Current Status of Section 127
Section 127 was originally established as a five-year provision to give officials time to study it. When it first expired at the end of 1983, a series of extensions were passed. Section 127 has been extended nine times, most recently in 2001. It was set to expire at the end of 2012, but was made a permanent part of the tax code with the passage of H.R. 8, the American Taxpayer Relief Act of 2012 (Pub.L. 112–240) on January 1, 2013.Coalition efforts are now focusing on expansion of Section 127. This includes expansion of the limit of $5,250 and the inclusion of student loan repayment within the provision.
Why Is Section 127 Important?
Providing tax-free educational assistance is an important tool employers use to attract the best available employees and build a skilled workforce.
According to the National Post-secondary Student Aid Study’s most recent data on characteristics of students in post-secondary education, almost one million employees took advantage of Section 127 benefits in 2007.
Section 127 plays a critical role in maintaining US competitiveness. Almost 20 percent of Section 127 recipients are majoring in science, technology, engineering, and mathematics (STEM) degrees. 36 percent of all Section 127 recipients are pursuing a Master’s Degree; 26 percent are pursuing an Associate’s Degree; and 18 percent are pursuing a Bachelor’s degree.
As the needs of employees continue to change, so does the spirit and efficacy of Section 127. Employees who choose to pursue additional education are finding that the limit of $5,250 is not adequate to keep up with the current cost of higher education. Likewise, individuals entering the labor market are facing startling amounts of student loan debt. These debts many times preclude workers from contributing to personal savings and more importantly, retirement savings plans. Employers providing a student loan repayment benefit not only help to mitigate this challenge, but they are able to recruit and retain top talent.
Information Regarding Section 127:
Section 127 Expansion, Limit Increase, Fact Sheet
Legislation in the 115th Congress:
Legislation, 114th Congress:
Legislation, 112th Congress:
Legislation, 111th Congress: