Providing Section 127 Educational Assistance (Tuition and Student Loan Repayment)

Purpose

Before the September 18, 2026 release, employers who helped employees pay for school had to track the $5,250 tax-free limit for each employee themselves. Since that release, UZIO tracks and applies it for you. Two dedicated earnings and a contribution field handle Section 127 educational assistance: tuition, fees, books and supplies, and student loan repayment. UZIO applies the annual limit, taxes anything above it, and applies each state's rules automatically.

Section 127 of the Internal Revenue Code lets an employer provide up to $5,250 of educational assistance per employee per year free of federal tax. It is employer-paid only. There is no employee contribution side, and it is not part of a Section 125 cafeteria plan.

Who can do this: Any user whose role includes the Payroll permission. This is usually the Employer Administrator, but other roles can be granted the same access.

When to use this

Pick the setup that matches how the money reaches the school or lender:

The tax treatment is the same either way. The only difference is whether cash is added to the employee's paycheck. You can use both methods, and both types, for the same employee.

When not to use it: for education that does not qualify under Section 127. Pay it with a regular taxable earning instead. It is taxed in full from the first dollar and does not count toward the employee's $5,250.

How the $5,250 works

• One limit, shared. The $5,250 covers both types combined. It is not $5,250 for tuition plus another $5,250 for loan repayment.
• Both delivery methods count. Reimbursements through payroll and payments you make directly all count against the same limit.
• Split fairly on the same pay run. When tuition and loan repayment appear on the same pay run, UZIO spreads the remaining exclusion across them proportionally, rather than giving it to whichever is processed first.
• Above the limit is taxable everywhere. Anything over $5,250 in the year is taxable for federal income tax, Social Security, Medicare, and the applicable state taxes.
• Nothing to configure. You do not set up the cap or track a running total.

How states treat it

Most states follow the federal treatment, but not all. A few treat tuition and loan repayment differently from each other. That is why UZIO keeps the two types separate. UZIO applies the right treatment for each employee based on their work state. Some examples:

• Pennsylvania taxes the full amount for state income tax and state unemployment, even within the federal exclusion.
• New Jersey includes it in state income tax wages but excludes it from state unemployment wages up to the exclusion.
• A number of states tax loan repayment for state income tax while still excluding tuition and fees.

Option 1: Reimburse the employee through payroll

The employee pays the school or loan servicer, and you pay them back on their paycheck. The employee receives the full amount. Only the portion above the annual exclusion adds to their taxable wages.

Step 1: Add the earning

1. Open Company Earnings and click Add Earning.
2. In Earning Type, choose one of:
• Section 127 Tuition Reimbursement, for tuition, fees, books and supplies.
• Section 127 Loan Repayment, for student loan repayment.
3. Enter the W-2 Label. This is the label that appears in W-2 Box 14a with the amount.
4. Click Save.
5. Assign the earning to each employee who receives the benefit, from the Earnings tab of their payroll record. See Setting Up Employee Payroll.

The tax treatment is fixed by the Section 127 rules. You do not configure taxability on these earnings. If you offer both benefits, add both earnings.

[Screenshot: Add Earning form with Earning Type "Section 127 Tuition Reimbursement" selected and the W-2 Label field; use demo data]

Step 2: Enter the amount on the pay run

1. Go to Payroll Dashboard > Start Payroll.
2. In the payroll grid, find the column for your Section 127 earning.
3. Enter the amount for each employee you are reimbursing.
4. Continue to review and approve the payroll as usual.

Example: you reimburse $6,000 of tuition in a state that follows the federal treatment. The employee receives the full $6,000 in their paycheck. Their taxable wages increase by $750, the amount above $5,250.

Option 2: Pay the school or lender directly

You pay the institution or loan servicer yourself, outside payroll. You then record the payment in UZIO as an employer contribution so it is taxed correctly. No cash is added to the employee's paycheck. UZIO does not pay the school or lender for you.

Step 1: Add the contribution

1. Go to Payroll Setup > Company Contributions and click Add Contribution.
2. Name it, for example Tuition Paid to School.
3. Set Link to Deduction to No. Educational assistance is employer-paid only.
4. Set the method to Fixed $ or % of Gross Pay.
5. In Educational Assistance Type (IRC Section 127), directly below Annual Limit, choose Tuition & Fees or Loan Repayment.
6. Check the W-2 settings. Choosing a type sets the W-2 Box to Box 14a and locks it. The Box 14a label stays yours to edit.
7. Click Save.

Set up one contribution per type if you provide both. You can have only one active contribution for each type.

[Screenshot: Add Contribution form with Educational Assistance Type (IRC Section 127) set to Tuition & Fees, below Annual Limit, and W-2 Box locked to Box 14a; use demo data]

What the field does, and when you see it

Step 2: Assign it and record each payment

1. Assign the contribution to each employee who receives the benefit, from the Contributions tab of their payroll record.
2. If you do not pay the same amount every pay period, assign it at 0.00.
3. When you run a payroll that should carry a payment, override the contribution amount for that employee with the amount you paid.

Example: you pay $6,000 of tuition directly to a university. Nothing is added to the employee's pay. Their taxable wages increase by $750, so the only effect on their net pay is the tax on that $750.

Worked examples

Each example shows one pay period: the employee's regular pay plus the assistance.

If you already offered tuition assistance in 2026

With the September 18, 2026 release, the Tuition Assistance and Non Tax Tuition Assistance earnings were replaced by the Section 127 earnings. They can no longer be added.

What UZIO set up for you: if you used either earning during 2026, your account already has a Section 127 Tuition Reimbursement earning, carrying across the W-2 and Box 14a settings you had. There is nothing to reconfigure.

What you still need to do:

• Enter amounts on each pay run. Employee amounts were not carried across. The previous earnings no longer appear in your Company Earnings list or on employees' active earnings, so assign the new earning to the employees who need it and enter amounts as usual.
• Add Section 127 Loan Repayment yourself if you offer that benefit. It is new, so it was not created automatically.

Your 2026 amounts still count. Assistance you already paid this year through either previous earning counts toward each employee's $5,250. UZIO carries those amounts across so the exclusion is applied on the full year.

Your records do not change. Pay stubs, reports, W-2s and earning history keep the previous earnings as their own lines. Pay runs already processed are not recalculated.

Expected outcome

• Reimbursed through payroll: the amount appears on the employee's pay stub under the Section 127 earning name, like any other earning.
• Paid directly: nothing is added to the employee's pay. The visible effects are the employer contribution and tax on any amount above the exclusion.
• At year end: assistance within the exclusion is not reported as wages. Amounts above it are included in taxable wages in the normal W-2 boxes. Where you set a Box 14a label on the earning or contribution, the amount also appears in Box 14a under that label. See Year-End W-2s and Tax Documents.

Common problems

Why can't I see the Educational Assistance Type field on my contribution?

The field appears only on a new contribution that is not linked to a deduction and uses Fixed $ or % of Gross Pay. It is hidden for Formula and % of Net Pay, and for any contribution linked to a deduction. On a contribution that was saved without a type, the field does not appear at all. Add a new contribution instead.

Why won't my contribution save with an educational assistance type?

You already have an active contribution for that type. Use the existing one and assign it to more employees, or remove the old one first.

One of the settings above conflicts with the type. Set Link to Deduction to No, use Fixed $ or % of Gross Pay, and answer No to the 2% S-Corp shareholder question.

Can a contribution be both educational assistance and a 2% shareholder benefit?

No. The two are mutually exclusive. Choosing a type turns off the 2% S-Corp shareholder question, and answering Yes to that question clears the type. Set up a separate contribution for each. See Health Premiums and HSA Contributions for 2% S-Corp Shareholders.

Why is an employee's reimbursement taxable when they have received less than $5,250 this year on the new earning?

Assistance paid earlier in 2026 through the previous Tuition Assistance or Non Tax Tuition Assistance earnings counts toward the same $5,250. Direct payments recorded as a contribution count too. UZIO works from the employee's full-year total.

We don't offer educational assistance. Do we need to do anything?

No. If you do not set up either earning or a contribution with an educational assistance type, nothing changes for you or your employees.

Can employees contribute toward this themselves?

No. Section 127 educational assistance is employer-paid only.

Will our earlier 2026 pay runs be recalculated?

No. Pay runs already processed stay exactly as they are.

Can we still see the previous tuition earnings on past pay stubs and reports?

Yes. They remain as their own lines on pay stubs, reports, W-2s and earning history.

Still stuck?

If a Section 127 amount was taxed in a way you did not expect, or you need to know how a specific state is treating it today, please reach out to us at support@uzio.com or call +1-571-601-1752. Include the employee ID, the employee's work state, the pay date, the earning or contribution name, the amount paid, and the taxable wages you expected. Do not send Social Security numbers.

Whether a course or loan qualifies under Section 127 is a tax question for your accountant, not something UZIO Support can decide.

Related articles

• Setting Up Company Level Earnings
• Setting Up Company Level Contributions
• Payroll Grid Tools: Earnings Data Import for bulk amounts
• Health Premiums and HSA Contributions for 2% S-Corp Shareholders
• Year-End W-2s and Tax Documents