Thinking About Offering an Educational Assistance Program?

Here’s What You Need to Know About the Child Care Educational Assistance Program

A child care educational assistance program (EAP) can help you attract and retain top talent at your early childhood education center. It also provides generous tax benefits for you and your employees. If you’re considering an EAP for your child care business, this guide covers everything you need to know.

What Is a Child Care Educational Assistance Program?

A qualified EAP is an employee benefit that helps cover education costs. Under this type of program, your child care business pays for courses, certifications, or degree programs that improve your employees’ skills. In return, both you and your team enjoy significant tax breaks under Internal Revenue Code Section 127.

To qualify for IRS tax benefits, the program must meet specific requirements. We recommend working with tax specialists, HR experts, and attorneys to build a compliant plan. A well-structured EAP protects your business and maximizes savings for everyone involved.

What Does an EAP Cover?

Educational assistance can include tuition, fees, books, supplies, and equipment. However, it does not cover meals, transportation, or lodging. Even if those expenses are tied to a course, the IRS excludes them from qualified benefits.

IRS Requirements for a Qualified EAP

Your educational assistance program must satisfy several IRS criteria. Below are the key requirements for child care employers.

Eligible Educational Expenses

The program can cover any instruction or training that develops an employee’s abilities. This includes professional certifications, CDA credentials, undergraduate degrees, and graduate programs. Your child care center can also include student loan repayment assistance under the program.

Thanks to the One Big Beautiful Bill Act signed in 2025, student loan repayment is now a permanent Section 127 benefit. Previously, this provision was temporary under the CARES Act and set to expire at the end of 2025. Now employers can offer this benefit with long-term confidence.

Written Plan and Nondiscrimination Rules

The EAP must be documented in a comprehensive written plan. You must share this plan with all eligible employees. The plan cannot discriminate or show favor to highly compensated employees. Every qualifying team member should have equal access.

Employees also cannot be given the choice between educational assistance and cash. This is a key compliance point that the IRS reviews carefully. Violating this rule could disqualify the entire program from tax-free treatment.

Ownership Limitations

No more than 5% of total EAP funds may go to individuals who own 5% or more of the business. This includes spouses and dependents of owners. If the owners are the sole employees, they generally cannot receive benefits under this rule.

Consider a child care center where the owner also works as a director. The owner’s benefit is calculated based on total assistance provided to other employees. The IRS provides a specific formula for this calculation. This ensures the program serves the broader workforce first.

Tax Credit and Deduction Restrictions

Employees cannot claim tax credits or deductions for amounts already excluded from their income. This rule prevents double-dipping on the same educational benefit. It applies to both tuition assistance and student loan repayment funds received through the EAP.

Annual Dollar Limit

Employers can provide up to $5,250 per employee per year in tax-free educational assistance. If you pay more than $5,250, the excess is generally taxable. You must report the taxable portion on the employee’s W-2 as wages.

Starting in 2026, this annual limit will be indexed for inflation. The cap will increase over time to keep pace with rising education costs. This is a major improvement after decades at a flat $5,250 ceiling. Some analysts expect the first adjusted amount to apply for the 2027 tax year.

The $5,250 limit covers all forms of assistance combined. That includes tuition payments, book reimbursements, and student loan repayments. Unused portions of the annual limit cannot carry forward to the next year.

Additional IRS requirements may apply to your specific situation. We encourage you to work with a tax professional to ensure full compliance.

Tax Benefits for Child Care Employers

The biggest tax advantage for employers is the deduction. Under Section 127, you can deduct up to $5,250 per employee per year for educational expenses. For a child care center with 20 employees, that could mean up to $105,000 in deductions annually.

This deduction lowers your taxable income dollar for dollar. It rewards you for investing in your workforce while reducing your tax bill. An educational assistance program is one of the most cost-effective benefits a child care owner can offer.

Indirect Cost Savings

Beyond the direct deduction, offering an EAP can reduce other costs. Lower turnover means fewer expenses on recruiting, hiring, and training new staff. A more skilled workforce also leads to better licensing outcomes and stronger parent satisfaction.

Tax Benefits for Child Care Employees

Your employees also gain major tax advantages from a qualified EAP. Educational assistance up to $5,250 per year is excluded from taxable income on Form W-2. Your staff can pursue education without increasing their tax burden.

Working Condition Fringe Benefit Exception

If you provide more than $5,250 in a year, employees may still avoid taxes on the excess. The extra amount may qualify as a working condition fringe benefit. This applies when the education would be deductible as a business expense if the employee paid out of pocket.

For example, a lead teacher earning a director’s credential could potentially exclude additional amounts. The key factor is whether the training relates directly to the employee’s current job duties. Consult a tax professional to determine eligibility.

Student Loan Repayment Benefits

Your employees can also use EAP funds for student loan payments. Employers can pay the lender directly or reimburse the employee. The combined total for tuition and loan repayment cannot exceed the annual cap.

This is especially valuable in the early childhood education field. Many child care workers carry student loan debt from their degrees. Offering repayment assistance helps them pay down debt while growing in your program.

These allowances let employees complete degrees or earn certifications tax-free through your qualified EAP.

Why Child Care Centers Should Offer an EAP

The early childhood education industry faces high staff turnover. Offering an educational assistance program gives your center a real competitive edge. Here’s why it matters:

• Attract qualified candidates. Job seekers value employers who invest in their growth. An EAP helps your center stand out in a tight labor market.
• Retain experienced staff. Employees receiving education benefits are more likely to stay. This reduces costly turnover and training expenses.
• Build a stronger team. Better-educated staff provide higher-quality care. This benefits children, families, and your center’s reputation.
• Maximize tax savings. The deduction offsets the cost of the program. You invest in your team and reduce your tax liability at the same time.
• Meet licensing requirements. Many states require ongoing professional development for child care staff. An EAP helps employees meet these standards with financial support.

Strengthening Your Center’s Reputation

Providing education benefits also signals your commitment to quality. Families notice when a center invests in its teachers and caregivers. This can drive enrollment and strengthen your brand in the community.

Recent Changes to Section 127 for 2026

The One Big Beautiful Bill Act made two important updates to educational assistance programs:

• Permanent student loan repayment. The CARES Act temporarily allowed EAP funds for student loan payments through the end of 2025. This benefit is now permanent.
• Inflation-adjusted annual limit. The $5,250 cap will be indexed for inflation starting in 2026. The benefit will keep pace with rising education costs over time.

These changes make an EAP even more valuable for your child care center and your employees. They also signal strong federal support for employer-funded education benefits going forward.

Child care employers should review their existing plans to take advantage of these updates. If you don’t yet have an EAP, now is a great time to start one.

Get Started With Your Child Care Educational Assistance Program

Are you interested in offering a qualified EAP at your child care company? The tax experts at Honest Buck can help you design a compliant program that maximizes your savings.

Reach out to us today to find out if a child care educational assistance program is the right fit for your center and your team.