529 Savings Plans: An Easy Way to Help Bring College Within Reach

August 21, 2019

Many parents start saving for college as soon as their children are born. It’s little wonder. Tuition plus room and board costs put college out of reach for many high school graduates.



The College Board’s Trends in College Pricing survey reports that 2018-2019 tuition fees and room and board for a four-year public college are $90,000. Costs for private non-profit colleges are about $200,000. Add in some of the costs NerdWallet says many students forget — like paying for laptops, social activities, study abroad, transportation and extra classes and the importance of starting to save early becomes more imperative. Unfortunately, according to Sallie Mae’s study How America Saves for College, most parents only saved an average of $18,135.



As an employer, you can make your employees’ saving efforts for their children’s educational futures more successful by providing easy access to 529 college savings plans with payroll deduction and matching contributions.



A 529 plan is a tax-advantaged savings plan sponsored by states, state agencies or education and authorized by Section 529 of the Internal Revenue Code. Funds invested in the account grow on a tax-deferred basis and distributions are tax-free when used to pay for qualified expenses at any eligible public, private, two- or four-year college.



There are two types of 529 plans: prepaid tuition plans and education savings plans — although some states only offer one of them.



With a prepaid tuition plan, the account holder purchases units or credits at a participating public/in-state college or university to put toward future tuition and fees.



Prepaid plans are not guaranteed by the federal government, although some state governments guarantee the money paid into the prepaid tuition plans.



An education savings plan is an investment account that can be used to pay for future qualified higher education expenses, such as tuition, mandatory fees and room and board. The funds generally can be used at any U.S. college or university — and some non-U.S. college and universities also qualify. Education savings plans also can be used to pay tuition costs up to $10,000 each year at any public, private or religious elementary or secondary school.



A 529 Plan as an Employee Benefit



An employer-sponsored 529 plan is funded with after-tax money. When choosing a plan, it’s important to review the fees and investment options offered by the employer-sponsored 529 plan before enrolling.



Remember, a 529 account is not just for parents whose children might go to college. Grandparents, aunts and uncles or anyone who wants to help a family save for an education can set up and contribute to a fund. An employee also can set up a personal 529 so they can return to school. Another perk is your employees will have access to their plans even if they leave their job.



Employees should know that if they receive matching contributions to their 529 plan, they will owe federal and state income taxes on the amount contributed. However, there is federal legislation pending that would allow employer 529 plan contributions to be excluded from the employee’s gross income.



Tax Breaks for Matching Contributions



You can offer to tie payroll deductions to an employee-sponsored 529 plan and choose to match a portion of what your employees put into the account to help them reach their goal more quickly.



A new bill introduced in Congress, the 529 Expansion and Modernization Act of 2019 [S. 220], would allow an exclusion from income on federal income tax returns for employer contributions to 529 plans.



Six states already allow companies to earn a state income tax credit or deduction if they offer 529 plans and matching employee plan contributions. These states include Arkansas, Colorado, Illinois, Nevada, Utah and Wisconsin. Nevada, for example, offers companies a 25 percent tax credit for 529 plan contributions with an $800-per-employee tax credit per year. 



For help setting up an employer-sponsored 529 plan, please contact us.

The information provided in this alert is not, is not intended to be, and shall not be construed to be, either the provision of legal advice or an offer to provide legal services, nor does it necessarily reflect the opinions of the firm, our lawyers or our clients. This is not legal advice. No client-lawyer relationship between you and our lawyers is or may be created by your use of this information. Rather, the content is intended as a general overview of the subject matter covered. Barrow Weatherhead Lent LLP is not obligated to provide updates on the information presented herein. Those reading this alert are encouraged to seek direct counsel on legal questions. © 2023 Barrow Weatherhead Lent LLP. All Rights Reserved.

About Alera Group 

Alera Group is an independent, national insurance and wealth services firm with more than $1.1 billion in annual revenue, offering comprehensive employee benefits, property and casualty insurance, retirement plan services and wealth services solutions to clients nationwide. By working collaboratively across specialties and geographies, Alera Group’s team of more than 4,000 professionals in more than 180 locations provides creative, competitive services that help ensure a client’s business and personal success. For more information, visit https://aleragroup.com/ or follow us on LinkedIn.