A Section 127 plan is the basis for any student loan repayment benefit (or other educational assistance benefit), but what exactly is it, how does it work, and why is it necessary? We’ll walk you through all that and more in this comprehensive primer.
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A Section 127 plan (“127 plan” or “127c plan” for short) is the official written legal document that outlines the terms of and governs a company’s Educational Assistance program (EAP).
Section 127 plans are oh-so-creatively named after the portion of the Internal Revenue Tax Code that established Educational Assistance as a tax-free employer benefit. That part of the revenue code is, you guessed it, Section 127.
Companies that want to offer a tax-compliant Educational Assistance benefit to employees must have a written Section 127 plan in order to provide tax-free tuition assistance, tuition reimbursement, and/or student loan repayments to their employees.
Creating a written Section 127 Plan can be a straightforward process. Here's how to get started:
While the guidelines around what should be included in a Section 127 plan are sparse, generally, 127 plans will include stipulations on:
As with many other official legal documents, you’ll likely also find important legal terms and conditions related to the benefit plan.
There are a few important rules around a 127 plan:
A “Highly Compensated Employee” (HCE) is an official IRS classification and is defined as an individual who owned 5% or more of the business at any point in a preceding tax year, OR was paid more in gross compensation than the IRS-defined limit by the business for the preceding tax year.
Employees who don’t receive tax-free educational assistance payments are not allowed to receive cash, a stipend, or another voluntary, non-educational benefit instead.
At a bare minimum, an eligible employee is any individual who can legally be considered an employee of the business. However, companies can establish their own criteria to refine who is actually eligible to receive educational assistance payments.
Spouses and dependents of employees are not eligible to participate in Section 127 plans.
Section 127 plans are meant to be shared with employees! Companies should leave enough time between when they announce their new Educational Assistance program and when the benefit goes into effect to give eligible employees a chance to read through the 127 plan, ask questions, and enroll in the benefit.
Qualified education expenses include tuition, other fees, books, supplies and equipment for instruction, student loans, and other similar expenses. They do not include meals, lodging, transportation, supplies or equipment that an employee keeps after a course has ended, or tuition for any courses involving sports, games, or hobbies.
Section 127 plans are not required to be funded and are not subject to ERISA.
(ERISA, or the “Employee Retirement Income Security Act”, is a federal law that establishes minimum standards for voluntary retirement and health plans)
How long it takes to set up a Section 127 plan depends entirely on you. The hardest part about creating a Section 127 plan is figuring out how much to budget and what terms are right for your company’s plan. But once your company has figured out the benefit amount(s) and eligibility criteria, a written 127 plan can be set up quickly. Highway Benefits can help you set one up in less than a day.
Companies that want to set up an Educational Assistance benefit under a Section 127 plan, including student loan repayment benefits, should chat with an expert on the options available to them.