How Section 127 Makes It Tax-Free
Under IRC Section 127, employers can contribute up to $5,250 per employee per year toward student loan repayment. These contributions are excluded from the employee's federal gross income and exempt from FICA (Social Security + Medicare) for both the employer and the employee. The One Big Beautiful Bill Act of 2025 made this provision permanent, and starting with taxable years beginning after December 31, 2026, the $5,250 cap will be indexed for inflation.
Who saves and how much
Both the employer and the employee benefit from the Section 127 tax exclusion. The employer saves 7.65% in FICA taxes (6.2% Social Security + 1.45% Medicare) on every dollar contributed up to the Social Security wage base. The employee saves their marginal federal income tax rate plus 7.65% FICA — meaning a mid-career professional in the 22% bracket saves nearly 30 cents on every dollar of benefit received.
State note
California does not currently conform to the federal Section 127 exclusion for state income tax purposes. Employees in California may owe state income tax on the benefit amount. Several other states have partial or full conformity. Consult a tax advisor for state-specific implications.