What employers need to know about updated EAP rules

The IRS released updated FAQs on Section 127 educational assistance programs in April 2026, replacing guidance issued in 2024. The updates reflect changes from the One Big Beautiful Bill Act (OBBBA) and introduce new requirements that employers who sponsor these programs will need to act on. Here’s a summary of what changed and what you should do next.

What is a Section 127 educational assistance program?

Section 127 of the Internal Revenue Code allows employers to contribute up to $5,250 per year toward an employee’s educational expenses — including tuition, fees, books, supplies and qualified student loan payments — on a tax-free basis. As long as the program meets IRS requirements, those benefits aren’t counted as taxable income to the employee, making them a cost-effective way to attract and retain talent.

Changes in the 2026 FAQs

1. Disclosure is now mandatory. The IRS changed the language in the FAQs from permissive to mandatory, meaning that employers that offer an educational assistance program (EAP) are now required to inform employees about the program’s existence, provide a copy of the written plan document and summarize its key terms. This is a potentially new compliance step, particularly for employers who have never formally communicated program details.‍
2. The $5,250 annual cap will be indexed for inflation starting in 2027. The limit for tax-free reimbursements stays at $5,250 through 2026, but beginning in 2027, it will adjust annually based on cost-of-living increases. Employers should ensure their payroll systems can accommodate future changes to the cap.‍
3. Reimbursement timing is more flexible. The 2024 FAQs suggested that educational expenses needed to be incurred and paid within the same calendar year. The updated guidance simplifies this: an expense just needs to have been incurred during the calendar year and after the employee started working (e.g. an employee pays tuition in year one, but the employer reimburses in year two after grades are finalized for the term).‍
4. Student loan repayment is now a permanent benefit. The OBBBA made this benefit permanent, eliminating the prior sunset date of Jan. 1, 2026. Employers may continue making payments on principal and interest over multiple years for loans taken out before the employee joined the company, as long as the debt obligation continues during employment.‍
5. Family members generally do not qualify. Section 127 programs must exclusively benefit employees. A spouse or dependent’s educational expenses are not eligible unless that family member is also employed by the company. Shareholder-employees' spouses and dependents who are employees may participate, but benefits to this group are capped at 5% of total annual program benefits.

Steps to take now

1. Review your Section 127 plan document to confirm it reflects the updated rules.
2. Update employee communications to meet the new mandatory disclosure requirement.
3. Confirm your payroll system can accommodate the inflation-adjusted cap beginning in 2027.
4. Consult with legal counsel if you have questions about eligibility, plan design or reimbursement policies.

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Content sponsored by Sandberg Phoenix law firm. This update is not intended to be exhaustive, nor should any discussion or opinions be construed as legal, tax or financial advice. TrueNorth Companies recommends consulting with legal, tax or benefits professionals before making any decisions related to employee benefit plans.