The House of Representatives continues work on a reconciliation bill that would enact significant tax provisions and spending cuts.  The various legislative committees have completed work on the areas of the bill within their jurisdiction, including the Ways and Means Committee, which proposed language that would enact $3.8 trillion in tax cuts over the next ten years.  Over the weekend, the House Budget Committee consolidated the legislation, and the House Bill is now before the Rules Committee, where a managers’ amendment may be considered before it heads to the House floor.  This article is one of a series of articles discussing various proposals in the legislation that touch on tax withholding, reporting, and fringe benefits.

The House Bill would make changes to section 127 to extend the tax-free treatment of employer student loan payments, which is currently set to expire at the end of 2025, and adjust the annual limit on tax-free educational assistance that may be provided under that section.

Section 127 of the Internal Revenue Code allows an employer to provide “educational assistance” through an educational assistance plan on a tax-free basis provided that certain requirements are satisfied.  The plan must be a written program established by an employer to provide educational assistance to its employees or retired employees (which is defined, for this purpose, very broadly).  Educational assistance generally includes tuition, books, and mandatory fees for any course of education other than courses involving sports, games, or hobbies (unless such courses have a reasonable relationship to the business of the employer or are required as part of a degree program).  To qualify under section 127, the plan must meet specific requirements including rules relating to discrimination in favor of certain employees.  Under current law, the maximum amount that can be excluded under section 127 is $5,250 per calendar year.

In 2020, Congress amended section 127, as part of the CARES Act, to include within the definition of educational assistance payments of principal or interest with respect to “qualified education loans.”   The expansion followed the debate over whether to eliminate the exclusion for educational assistance plans altogether in 2017, with the House tax reform bill eliminating section 127 and the Senate version leaving it in place.  Under current law, the exclusion for payments on qualified education loans expires on January 1, 2026.  (The exclusion for current educational assistance payments does not expire under current law.)

Section 110113 of the House Bill would amend section 127 to make permanent the exclusion from income for certain employer-provided payments on qualified education loans.  The House Bill would also adjust the $5,250 limit on educational assistance payments for inflation prospectively, increasing the maximum exclusion over time.   This change would increase the limit for all educational assistance plans, not just those providing educational assistance through student loan payments.