If you're a business owner helping an adult child pay for college, you may be wondering whether there is a tax-efficient way to provide that support.
While many families focus on education savings accounts, scholarships, and student loans, there is another option that is often overlooked: a Section 127 Educational Assistance Plan.
When properly structured, a Section 127 Educational Assistance Plan may allow a business to provide up to $5,250 per year in tax-free educational assistance to eligible employees. For some business owners, that employee may include an adult child who works in the family business.
Here's what you need to know.
WHAT IS A SECTION 127 EDUCATIONAL ASSISTANCE PLAN?
Section 127 of the Internal Revenue Code allows employers to establish educational assistance programs for employees.
Under current federal law, employers may provide up to $5,250 per employee, per year in qualified educational assistance that is generally excluded from the employee's taxable income while remaining deductible to the business as an ordinary business expense.
One of the most attractive features of Section 127 is that the educational assistance does not have to be directly related to the employee's current job duties. In many cases, employees may use the benefit for a wide range of educational programs, degrees, and coursework.
WHAT EXPENSES CAN BE COVERED?
Depending on the circumstances, eligible educational assistance may include:
- Tuition
- Required enrollment fees
- Books
- Supplies
- Required equipment
- Certain qualified student loan principal and interest payments, subject to applicable federal requirements
However, the benefit generally cannot be used for:
- Meals
- Lodging
- Transportation
- Other personal living expenses
In addition, equipment and supplies that are not required course materials may not qualify in certain situations.
CAN AN ADULT CHILD PARTICIPATE?
Potentially, yes. In some situations, an adult child who works in a family-owned business may be eligible to participate in a Section 127 Educational Assistance Plan. However, eligibility depends on several factors, including:
- The structure of the business
- Ownership interests
- Family relationships
- Employee status
- Compliance with IRS requirements
Certain ownership and dependent-related rules may limit or prevent eligibility in some circumstances. Because these rules can be complex, business owners should consult with their CPA, tax advisor, and legal counsel before implementing a plan.
A WRITTEN PLAN IS REQUIRED
A common misconception is that a business owner can simply reimburse educational expenses and receive favorable tax treatment.
In reality, Section 127 benefits generally must be provided through a properly established written educational assistance program. Among other requirements:
- The plan must be maintained in writing.
- Employees must receive reasonable notice of the program's availability.
- The plan generally cannot discriminate in favor of owners, shareholders, or highly compensated employees.
- Employees generally cannot choose between educational assistance and cash compensation.
- Certain ownership and related-party rules may affect eligibility.
Failing to comply with these requirements can jeopardize the tax benefits associated with the program.
BENEFITS BEYOND FAMILY MEMBERS
Even if you are not helping an adult child with college expenses, a Section 127 Educational Assistance Plan may still be a valuable employee benefit. Many businesses use educational assistance programs to:
- Attract talented employees
- Improve employee retention
- Support professional development
- Invest in workforce growth and training
As education costs continue to rise, educational assistance programs can help businesses remain competitive while supporting employee success.
KEEP AN EYE ON FUTURE CHANGES
Tax laws evolve over time.
As of 2026, employers may generally provide up to $5,250 per employee annually under a Section 127 Educational Assistance Plan. Future legislation or inflation adjustments may change this amount, so business owners should verify current limits and requirements before implementing or maintaining a plan.
Regular reviews with your tax and legal advisors can help ensure your educational assistance program remains compliant with current law.
HOW THIS FITS INTO YOUR BIGGER PICTURE
For many business owners, helping children and grandchildren succeed is about more than paying for education. It's part of a larger vision for family, legacy, and long-term wealth stewardship.
A Section 127 Educational Assistance Plan may be one tool that supports those goals while also benefiting your business and employees.
At Sky Unlimited Law, we help business owners integrate business planning, estate planning, and wealth transfer strategies into a comprehensive plan for the future. As your Personal Family Lawyer®, we can help you identify opportunities, coordinate with your CPA and tax advisors, and ensure your planning decisions align with your long-term family and business goals.
Book a complimentary 15-minute call with a member of our team to explore how education planning, business ownership, and legacy planning can work together to support your family's long-term goals.
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