Should You Offer a 529 Savings Plan?
In a MetLife study, 74 percent of employees said their employer's financial benefits program helped them achieve peace of mind. For many employees, this peace of mind is obtained through employer-sponsored life insurance and retirement plan. However, a growing number of employers are assisting with their employees' education expenses via 529 savings plans.
What is a 529 plan?
529 plans are qualified state tuition programs authorized by Section 529 of the Internal Revenue Code. They enable individuals to prepay tuition or sock away money to cover education expenses for their beneficiaries, such as a child or grandchild. All 50 states offer 529 prepaid tuition plans and/or educational savings plans.
Prepaid tuition plans are typically sponsored by the state government, though some private colleges and universities sponsor them as well. These plans allow individuals to pay for future tuition at the current tuition rate, at participating colleges and universities.
Educational savings plans let individuals save money (in an investment account) to pay for qualified education costs. The saver does not have to live in the state to utilize the state's savings plans; he or she can enroll in an out-of-state plan.
While states can offer both types of plans, qualified educational institutions can provide only prepaid tuition plans.
How does the savings plan benefit employees?
A 529 savings plan not only acts as a savings vehicle, but it also delivers tax advantages. Accumulated earnings and interest are not subject to federal income tax and in some cases state income tax, as long as the money is used to pay for qualified education expenses — such as tuition, books, and room and board.
The state may offer state tax deductions only to current residents; therefore, employees with out-of-state plans might not qualify for state tax deductions.
What's in it for employers?
Employers are not required to pay for employees' education expenses. But, according to the Society for Human Resource Management, by providing access to 529 savings plans, employers can help build a culture of educational and financial support, thereby strengthening employee loyalty. Also, depending on your state, you may qualify for state tax credits if you offer matching contributions.
Administratively, 529 savings plans are not expensive to maintain, as they are directly funded by employees, with after-tax dollars — requiring no adherence to special tax withholding rules or changes in W-2 reporting.
You have the final say in what role you will play in helping your employees save on education expenses. For example, you can allow employees to save via payroll deductions. You can also make ongoing matching contributions, or a one-time contribution such as when employees enroll in the program. If neither of those options is practical, you can simply educate your employees about 529 plans and supply them with links to provider websites.