UPCEA Updates

By Chelsea Miller, UpSkill America, and Amy Heitzman, UPCEA

Partnership is a key driver to unlocking opportunity in America, which is why UPCEA and UpSkill America are so excited to come together to help academic institutions understand one particular priority for employers: leveraging tax policies to drive engagement (really!). 

UpSkill America focuses on how employers who want to empower their workforce through education are a key stakeholder for academic institutions. UPCEA focuses on how academic institutions can be innovative partners for employers. Both organizations recognize that diving into the IRS tax code isn’t everyone’s idea of a good time. When we ask higher education audiences, “Do you know about Section 127?” we are normally met with blank stares. Despite this reaction, we know that for leaders in higher education, this is essential knowledge—especially when building strong partnerships with employers. It may feel like just another policy to wrap your head around in a rapidly changing landscape, but understanding this policy is a game-changer.

So, what exactly is Section 127?

In simple terms, Section 127 of the IRS code allows employees to receive up to $5,250 in tax-free educational assistance from their employers. For employers, it is a tax deduction for offering qualified education assistance programs (QEAP). It’s a win-win: employees get support for their education, and employers get a write off for investing in a skilled workforce.

This part of the code requires work from the employer – creation of a written plan determining what is included in their qualified education assistance program – in order for them to take advantage of the tax incentive. The written policy must ensure the program has explicit eligibility requirements that enable many workers to participate, not just highly-compensated employees. The $5,250 does not have to be used exclusively for tuition –  it covers books, fees, and other strictly defined related expenses. During the pandemic, Section 127 was modified to include student loan repayments.

Anything over $5,250 is considered taxable income for the employee, though some employers may choose to cover those additional taxes through a “gross up” process at the end of the benefit year. It’s worth noting that in New Jersey, Pennsylvania, and Puerto Rico[1], tax implications start from the very first dollar for all employees.

This important piece of the tax code dates back to the 1970s and has seen infrequent updates since. It is often the guiding policy for employers looking to create an education benefit for their employees.

Are there other parts of the tax code that impact this space?

Yes, there are two other relevant pieces of the tax code employers can consider when developing their education benefit programs – Section 117 and Section 132(d) – detailed below:

Section 117 – Free or reduced tuition for employees of educational institutions may be excludable to employees. The term “qualified tuition reduction” means a tax-free reduction in tuition provided by an eligible educational institution. In plain terms, academic institutions can give reduced or free tuition to their employees without tax implication to either party.

Section 132(d) – For educational reimbursement to qualify as a working condition fringe benefit, the education must be job-related. It is not required that the employer have a written plan, and they may spend what they need for any level of employee. Said differently, if a program or training can be connected to an employee’s role, it can be covered as a fringe benefit.

What Employers Need from Higher Education

Section 127 and the other tax policies described are key drivers in the modern education benefits landscape so understanding them is critical from an employer’s point of view. Section 127 can be a crucial factor for employers when they’re deciding how to invest in their employees’ growth and success. And while other two policies impact a smaller percentage of employers (including academic institutions as employers), they are essential to sustained workforce development program efficacy.

Some key action steps that academic institutions can take include:

• Assess your catalog against these policies. How many fit employers’ desired price point? Do you have ways to manage enrollment intensity to keep within the parameters?
• Create detailed and timely invoices for employer partnerships. These are essential for an employer’s operations. Understanding how close an employee is to the funding caps and ensuring employers can pay invoices through their existing processes help build trust between the employer and academic institutions. Ensure you understand the employer’s benefit year and how it informs their needs.
• Enhance data systems to develop an ability to track student enrollment for employers. Employers want to understand what they are investing in and how an employee is progressing.

For colleges, universities, and training providers, the $5,250 threshold is vital. It’s often the financial benchmark employers keep in mind when assessing programs to address skills gaps and enhance their workforce. While more research is needed to fully understand employer willingness to exceed this cap, being aware of this amount as an all-in cost ceiling is a strong first step as institutions work to increase collaboration with employers.

For community-based organizations wanting to support learners, academic institutions, and employers, understanding these tax policies is essential to help broker the best experience possible for all stakeholders within the constraints of the tax code. Ensuring questions are asked of all parties and there is shared understanding is essential.

How do these tax codes impact partnerships with employers?

For employers with a QEAP or fringe benefit, it’s important that employers understand what they are paying for each employee and on what time frame. This is why you may have employer partners concerned about getting an invoice that clearly articulates what is being paid for each individual or tracking the amount spent for a particular learner in a twelve month period.

Additionally, these tax codes shift what the employer partner is focusing on as success – they want to ensure that students are progressing and completing as the company invests in their efforts to gain new skills, not solely on enrollment.

 

Real World Example from UPCEA Member Purdue Global:

Maricel Lawrence, Innovation Catalyst at Purdue Global, shared with us in a recent conversation that Purdue Global’s programs are frequently chosen by companies to fulfill their employee education benefits through the IRS Section 127. 

Says Dr. Lawrence, “The direct financial advantage for employees is that this benefit allows them to pursue higher education without the burden of immediate taxation on the employer-provided assistance. This makes education more accessible and affordable. Moreover, companies can foster a more skilled, engaged, and loyal workforce. It’s an investment in employee development that can lead to improved productivity, retention, and a stronger talent pipeline.” 

Dr. Lawrence outlines a few current arrangements the Purdue Global (PG) team uses to leverage Section 127 for companies’ employee tuition assistance:

• Example 1: Purdue Global provides a discounted tuition rate per credit hour to employees of partner companies. The tuition benefit covers the cost of tuition, fees, and books (undergraduate program books included in tuition) up to $5,250.00 per annum (January 1st to December 31st), to support the cost of completion of an employer-approved program at Purdue Global. Any remaining balance once the $5,250.00 is met is the student’s responsibility. The company has a series of requirements to be eligible for this benefit, including being a current employee, meeting their internal policies, and meeting PG’s standards for Satisfactory Academic Progress.

• Example 2: Purdue Global developed a tuition grant extended to a select group of partners designed to cover the difference between eligible alliance organization employee tuition assistance ($5,250/year) and the cost of completion for a Purdue Global degree. Students can take up to two courses per 10-week term unless the program’s policy specifies otherwise.

• Example 3: Purdue Global developed a micro-credential in Manufacturing that is completely flexible. Students who do not have a minimum of an associate degree must take a 2-credit foundation course before joining a 3-course micro-credential. Success in this program is not the completion of the micro-credential; instead, the completion of the individual courses. The total cost of these 4 courses is almost completely covered by the $5,250 employer assistance. Since the difference is not big, some organizations have decided to cover the 4 courses’ tuition 100%.

For more information about Purdue Global’s efforts, please contact Maricel Lawrence at [email protected] 

What changes did the recent congressional budget bill have on these tax policies?

The tax reconciliation package passed in July 2025 made student loan repayments a permanent part of expenses covered under Section 127. Additionally, the $5,250 cap will be raised in accordance with cost of living adjustments (COLA) beginning in 2027. As more information becomes available regarding COLA adjustments and raises to the cap, we will share more. The effective date for these changes is December 31st, 2025. 

Key Takeaways:

• Section 127 provides up to $5,250 in tax-free educational assistance for employees.
• It covers tuition, loan repayments, and education related expenses.
• Section 117 and 132(d) are also key tax policies in this space.
• These policies provide significant incentive for employers to invest in workforce education to address skill gaps in their business.
• The $5,250 threshold is a key consideration for program design.

To Conclude: 

Understanding and leveraging Section 127 can unlock tremendous opportunities for both employees and employers. It’s about building a future where education and career growth go hand in hand why providing maximum incentives to all parties involved.

1. Source: https://www.irs.gov/pub/irs-tege/fringe_benefit_fslg.pdf

 

If you want to learn more about Employer Engagement, join us at Convergence 2025: Credential Innovation in Higher Education. We will be touching on topics like this during the opening keynote featuring UpSkill America, Walmart.org, and the founder of Education Design Lab.