Bijal Shah |
The federal policy governing how employers provide education benefits for their employees just got a noteworthy boost.
Under the “One Big Beautiful Bill Act,” the $5,250 cap on tax-free education benefits — as set forth in Section 127 of the Internal Revenue Code — will increase based on inflation starting in 2027.
This means employers will be able to reimburse or pay for their employees’ education programs and student loan reimbursements with less tax liability for the learner. That could have meaningful implications for how organizations upskill their workforce and plan for the future — if HR leaders plan accordingly.
What is Section 127?
In the simplest terms, Section 127 of the Internal Revenue Code allows employees to receive up to $5,250 annually in tax-free educational assistance from their employers. This important piece of the tax code dates back to the 1970s, and is widely regarded as a win-win for career advancement and workforce development: Employees get support for their education, and employers can deduct the investment in their employees’ educations.
Employers may offer an educational assistance program under Section 127 not only to pay for an employee’s tuition but also for books and supplies. In 2020, during the Covid-19 pandemic, the CARES Act permitted employers to use a Section-127 educational assistance program to either pay on behalf of or reimburse an employee’s qualified student loans on a tax-free basis up to $5,250, for the period of March 27, 2020 to December 31, 2020. The CARES Act then extended that through December 31, 2025. Anything over $5,250 is considered taxable income for the employee, though some employers have chosen to cover those additional taxes through a tax “gross up” process at the end of the benefit year.The One Big Beautiful Bill Act makes this Covid-19 era benefit permanent — and raises the $5,250 spending cap each year based on inflation, for which the consumer price index will serve as a proxy for determining adjustments.
The bottom-line impact of raising the $5,250 tax-free cap
More strategic use of L&D budgets: Employers will be able to fund programs above the previous $5,250 cap (such as degree pathways or advanced credentials) without incurring tax gross-up costs. This will make upskilling and reskilling efforts more cost-feasible overall.
Reallocated savings from tax overages: Companies that already incur gross-ups for their employees will see tax savings as those costs reduce. Employers can redirect those dollars to expand access to benefits programs, reach new populations, or enhance program offerings.
Broader benefit access: Programs that once exceeded the tax-free threshold can now be offered more equitably, especially to frontline and hourly employees who have historically been excluded because of tax burdens. These workers often sit at the base of an organization’s talent structure, where upward mobility is constrained by both skill gaps and structural barriers. By expanding tax-efficient access to education, employers can reduce that friction and also unlock untapped potential within their existing workforce, creating new pathways to fill persistent talent gaps from within.
What HR and L&D leaders should do now
To maximize this policy change, forward-thinking HR and L&D teams should act quickly and strategically to prepare. Here’s how:
1. Audit your education benefits.
Review which existing programs exceed the old $5,250 limit. Who was using them — and who wasn’t? Use this moment to identify where expanded access to education benefits could unlock greater opportunities for a larger segment of your employee population.
2. Broaden participation.
Now that more investment can be made tax-free, consider opening up programs above $5,250 or credential-rich programs to broader employee segments, particularly those historically underserved by tuition benefits.
3. Prioritize stackable, career-aligned programs.
Focus on short-form credentials, certificates, and degree pathways that lead directly to in-demand roles. Stackability — the ability for a credential to build toward more advanced education or career opportunities — is key to driving both engagement and advancement. Programs that target middle-skill jobs—those requiring more than a high school diploma but less than a four-year degree—offer critical onramps into career pathways. These roles, such as pharmacy techs, logistics coordinators, and cybersecurity-support specialists, serve as gateways for mobility and retention.
4. Revisit ROI metrics.
Move beyond participation rates and start measuring outcomes — such as retention, internal promotions, and lateral moves. Tie education investments directly to business and talent goals. Work with your education benefits provider and learning partners to define the right metrics, surface the right data, and build a clearer picture of how learning is driving impact across your organization.
5. Clearly connect education benefits and business growth.
Help managers, leaders, and finance partners understand how this policy shift supports broader talent and business goals. When stakeholders see that education benefits can realistically affect one's mobility and an organization's workforce resilience, they’re more likely to champion it as a strategic investment that delivers long-term value.
A policy change with strategic stakes
Not every policy change matters to your workforce. This one does.
As these changes and the introduction of Workforce Pell begin to take effect, HR and L&D leaders have an opportunity and a responsibility to act. By proactively auditing existing programs, expanding access, and aligning investments with career and business outcomes, employers can transform education benefits from a transactional perk into a strategic workforce lever.
As these policies are implemented, Guild will share insights with you on a regular basis to ensure we continue to strategically deliver value for you and your employees in this dynamic environment.
