Section 127 Nondiscrimination Requirements Tool

What Section 127 Nondiscrimination Actually Requires

Unlike IRC Section 129 (which imposes a mechanical 55% benefit test for dependent care plans), Section 127 does not rely on a single percentage threshold. Section 127(b) instead imposes four distinct requirements that together prevent the program from favoring highly compensated employees.

1. A written plan document. §127(b)(1) requires the educational assistance program to be established under a separate written plan adopted before any benefits are paid.
2. Reasonable notification. §127(b)(4) requires reasonable notice of the program and its terms to eligible employees.
3. Eligibility that does not discriminate in favor of HCEs. §127(b)(2) prohibits eligibility rules favoring HCEs as defined in §414(q). The IRS evaluates this qualitatively. There is no single mechanical percentage test written into Section 127 or the Treasury regulations.
4. No more than 5% of benefits to more-than-5% owners. §127(b)(3) is a hard numeric cap on benefits provided to a class of individuals consisting of more-than-5% owners (or their spouses or dependents).