Navigating Section 127: The Top 5 Compliance Issues in Educational Benefits

If you need help establishing a Section 127 Plan for your business, please reach out to a Ficus Success Advocate. We can help!

 In the quest to attract and retain top talent, many employers are turning to Section 127 Educational Benefits to provide their employees with opportunities for professional growth and development. While offering these benefits can be a significant advantage, it's important to ensure compliance with the complex regulations surrounding Section 127. In this blog, we'll delve into the top five compliance issues related to Section 127 Educational Benefits and how to address them effectively.

1. Eligibility Requirements: 

One of the primary compliance concerns is ensuring that the program's eligibility requirements align with the guidelines laid out in Section 127 of the Internal Revenue Code. To avoid potential pitfalls, employers must define and communicate clear criteria for who can participate in the program. Eligibility often hinges on factors such as full-time employment, length of service, or specific job classifications. Maintaining accurate records of employee eligibility is vital to compliance.

2. Benefit Limits:

Compliance with Section 127 also involves adhering to the benefit limits set by the IRS. As of the knowledge cutoff date in September 2021, the maximum annual nontaxable benefit an employee can receive is $5,250. Employers must carefully monitor this limit to avoid overpayment and unintended tax implications for employees. Stay updated on any changes to this limit, as it may be subject to annual adjustments.

3. Appropriate Educational Expenses:

It's critical to define which educational expenses qualify for reimbursement under a Section 127 Plan. While tuition, fees, and required books are generally covered, it's essential to clearly specify which other expenses, such as transportation, are eligible. Consistency in the treatment of expenses helps ensure compliance. Be sure to provide employees with guidelines for submitting reimbursable expenses and keep accurate records of such disbursements.

4. Documentation and Reporting:

Proper documentation is crucial for compliance. Employers must maintain records of all educational assistance payments and benefits provided to employees. Additionally, tax reporting is required, as the value of educational assistance benefits provided must be reported to the IRS on Form W-2. Timely and accurate reporting is key to avoiding potential compliance issues.

5. Plan Documentation:

To establish and maintain compliance, a written plan document must outline the terms and provisions of your Section 127 Educational Benefit Program. This plan document should be readily available to employees and clearly outline program specifics, including eligibility requirements, benefit limits, and reimbursement procedures. Regularly updating the plan to align with changing regulations is essential for ongoing compliance.

Section 127 Educational Benefits can be a valuable asset in attracting and retaining employees while fostering their professional development. However, non-compliance can lead to unexpected tax liabilities and complications. To navigate these compliance issues effectively, it's crucial to establish clear eligibility criteria, enforce benefit limits, define eligible expenses, maintain thorough documentation, and have a well-documented plan. Staying informed about any updates to tax regulations and working with experts or legal counsel is also advisable to ensure ongoing compliance and the continued success of your educational benefit program.

For more information on this topic, check out our other blog, Section 127 Plans: Establishing a Written Plan Document. 

If you need help establishing a Section 127 Plan for your business, please reach out to a Ficus Success Advocate. We can help!