The IRS has just issued a new Fact Sheet, FS-2026-10, April 2026, on the tax treatment of educational assistance plans in the wake of the new One Big Beautiful Bill Act (OBBBA). Employers may be encouraged to add an EAP to their fringe benefit package as a way to attract and retain high-quality employees.
Basic rules: An EAP is a written plan providing educational benefits to participants on a tax-favored basis. Typicaly, the plan pays the educational institution directly or reimburses employees for their out-of-pocket costs. This may cover items such as books, equipment, fees and supplies for study relating to your business activity or coursework required as part of a degree program. The program may pay for both undergraduate and graduate studies.
Conversely, the tax exemption generally isn’t available for meals, lodging or transportation; tools or supplies (other than textbooks) that you can keep after completing the course (e.g., a laptop); or courses involving sports, games or hobbies.
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In addition, beginning March 27, 2020, tax-free educational assistance benefits may also include principal or interest payments on certain qualified education loans. This gives employees even more flexibility.
Key point: Assuming certain requirements are met, up to $5,250 of these annual benefits are tax-free to the employees and tax-deductible by the employers. Thus, it is a “win-win situation.” The main requirements are:
- The plan can’t discriminate in favor of highly-compensated employees.
- The plan can’t provide more than 5% of its benefits during the year to shareholders or owners who 5%-or-more owners of the employer.
- The plan can’t permit employees to choose to receive cash or other benefits that must be included in taxable income.
- The employer must provide reasonable notice of the program to employees who are eligible to participate.
Previously, the maximum tax exclusion of $5,250 per employee wasn’t indexed for inflation, unlike many other comparable tax breaks for fringe benefit plans. Update: Under the OBBBA, the $5,250 annual cap will finally be indexed, beginning in the 2027 tax year (to be announced by the IRS at the end of 2026). In addition, the new law extends tax-favored treatment for student loan repayments and authorizes several other related borrowing changes. Finally, the OBBBA makes the tax law provision on EAPs a permanent part of the tax code.
Final grade: Stick to the plan to ensure all the tax benefits. Make sure all the i’s are dotted and the t’s are crossed.
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