How much can an employer contribute to student loan repayment tax-free?

Under IRC Section 127, employers can contribute up to $5,250 per year per employee toward qualified student loan repayment, completely tax-free for both the employer and the employee. This provision was made permanent by the One Big Beautiful Bill Act (OBBBA) of 2025. There is no cap on total contributions — amounts above $5,250 are treated as taxable wages.

What is Student Loan Repayment Assistance (SLRA)?

SLRA is a workplace benefit where employers make direct contributions toward employees' existing student loan balances. Under IRC Section 127, these contributions are tax-free up to $5,250 per employee per year.

How does an employer student loan repayment program work?

An employer student loan repayment program works by having the employer make direct contributions toward employees' existing student loan balances. With BenefitPlus, the employer sets a contribution amount, employees enroll by connecting their loans, and payments are routed directly to loan servicers each pay period.

What is Section 127 of the Internal Revenue Code?

IRC Section 127 allows employers to provide up to $5,250 per year per employee in educational assistance benefits — including student loan repayment — tax-free. Originally enacted in 1978 for tuition assistance, it was expanded in 2020 to include student loan repayment and made permanent in 2025 by the OBBBA.

How long does it take to set up an employer student loan repayment benefit?

With BenefitPlus, most employers launch their student loan repayment benefit within 48 hours. Setup includes generating the required Section 127 plan document, configuring eligibility and contribution rules, and inviting employees to enroll.

Do employees pay taxes on employer student loan repayment contributions?

No — employees pay zero federal income tax and zero FICA tax on employer student loan repayment contributions up to $5,250 per year under IRC Section 127. The full $5,250 goes directly to debt reduction.

What is the difference between an SLRA and a salary raise?

A Student Loan Repayment Assistance (SLRA) benefit delivers more value per dollar than a salary raise because it's tax-free under IRC Section 127. A $5,250 SLRA delivers the full amount to the employee's loan balance, while a $5,250 raise nets only about $3,430 after taxes — approximately 53% less value.

BenefitPlus is a fully managed employer-sponsored student loan repayment assistance (SLRA) platform. It enables companies of any size to offer tax-free student loan contributions under IRC Section 127, with built-in compliance, direct-to-servicer payments, and W-2 reporting support.

Section 127 Plan Document Requirements: What Employers Need to Know

Name: BenefitPlus
Author: BenefitPlus

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Why a Written Plan Is Required

IRC Section 127(b)(1) requires a written plan. Without it, employer contributions to student loan repayment are treated as taxable wages — the full $5,250 becomes subject to federal income tax and FICA for both the employer and employee. This is not optional. It is a statutory prerequisite for the tax exclusion.

The plan does not need to be filed with the IRS, but it must exist in writing before the first contribution is made. Retroactive adoption is not permitted.

What the Plan Document Must Include

The IRS requires the following elements in a Section 127 educational assistance plan:

Name and EIN of the sponsoring employer
Description of eligible educational expenses (must specifically include student loan repayment)
Eligibility criteria for participating employees
Annual dollar limit ($5,250 per employee per year)
Nondiscrimination provisions ensuring the plan does not favor highly compensated employees
Procedure for employee notification about the plan
Plan year start and end dates
Statement that no more than 5% of benefits go to shareholders or owners

For the full statutory and regulatory framework, see our Section 127 Guide.

Common Mistakes

Using a pre-2020 template. Many Section 127 plan templates were drafted before the CARES Act added student loan repayment as a qualified expense. These templates omit loan repayment language entirely, which means contributions are not covered by the plan — and not tax-free.

Failing to update for OBBBA permanence. Plans drafted during the temporary extension period (2020–2025) often include sunset date language. Now that Section 127 student loan repayment is permanent, the plan should reflect this.

Not conducting nondiscrimination testing. The IRS requires annual testing to ensure the plan does not disproportionately favor highly compensated employees. Skipping this step puts the entire tax exclusion at risk.

Making contributions before the plan exists. Contributions made before a written plan is adopted are not eligible for the Section 127 exclusion. The plan must be in writing first.

Nondiscrimination Testing: The Annual Requirement Most Employers Miss

IRC Section 127(b)(2) requires that the educational assistance program not discriminate in favor of highly compensated employees (as defined under IRC Section 414(q) — generally employees earning above $155,000 in 2024, indexed for inflation). Section 127(b)(3) further requires that no more than 5% of the amounts paid under the plan go to shareholders or owners.

Nondiscrimination testing is not a one-time check — it must be performed annually. The test evaluates whether the plan's eligibility criteria, participation rates, and benefit distribution satisfy the statutory requirements. A plan that fails nondiscrimination testing loses its tax-free status, and all contributions become taxable wages.

BenefitPlus runs nondiscrimination testing automatically as part of the platform's compliance features, flagging potential issues before they affect the plan's tax-qualified status.

How BenefitPlus Handles This

BenefitPlus generates a fully compliant Section 127 plan document as part of employer onboarding. The plan covers student loan repayment, tuition reimbursement, and other qualifying educational expenses. It is configured to your specific eligibility criteria, contribution levels, and plan year. For the full implementation process, see our How to Set Up a Student Loan Benefit guide. To model the tax savings, use our Tax Savings Calculator.

Need a Section 127 plan document? BenefitPlus generates one as part of your setup — configured to your organization, fully compliant, same day. Talk to our team.

Frequently Asked Questions

Can I use a free template for my Section 127 plan?

You can, but generic templates frequently omit student loan repayment language, lack proper nondiscrimination provisions, or still reference the old sunset dates. A deficient plan document puts the entire tax exclusion at risk.

How often does the plan document need to be updated?

The plan should be reviewed whenever there is a material change — new contribution amounts, eligibility changes, or legislative updates. The OBBBA permanence change in 2025 is one such trigger.

Does BenefitPlus provide the plan document?

Yes. BenefitPlus generates a compliant Section 127 plan document tailored to your organization as part of implementation.

What happens if our Section 127 plan fails nondiscrimination testing?

If the plan discriminates in favor of highly compensated employees, the tax exclusion is lost for those employees. Their employer contributions become taxable wages subject to income tax and FICA. The plan can typically be corrected going forward, but retroactive failures can create payroll tax liability. BenefitPlus monitors this automatically.

The Section 127 Plan Document: What It Is, What It Requires, and Why You Need One