A 529 plan, also known as a “qualified tuition program,” is a way to save for college that has some nice tax benefits. The IRS defines a 529 plan as a tool that makes it easier for people to save for educational costs on behalf of a beneficiary, such as a child or a grandchild.
Anyone can make contributions to 529 college savings plans on behalf of the beneficiary, including parents, grandparents, uncles, aunts, and even employers.
Contributions are subject to federal income tax, but when it’s time for the money to be used, it can be withdrawn tax-free as long as it’s being used for the qualified purposes described below.
What are the different types of 529 plans?
There are two types of 529 plans: prepaid tuition plans and education savings plans.
Prepaid tuition plans let parents and other contributors pay for future college tuition and fees using today’s rates, which are based on the rates at institutions that participate in the plan.
State governments sponsor the majority of prepaid tuition plans, and many of them require you and/or the beneficiary to be residents of their state in order to participate.
The second type of 529 plan is the education savings plans. These plans are not tied to any particular institution.
Education savings plans are investment accounts that enable you to save for qualified higher education expenses, including tuition, fees, and room and board. They can also be used for elementary or secondary school tuition (up to $10,000 a year).
Earnings from education savings plans are exempt from federal income taxes as long as distributions are used for qualified educational expenses. Many states also do not tax these earnings.
All education savings plans are sponsored by state governments, but many do not have residency requirements, which means you can shop around for the most advantageous plan.
Can I offer a 529 plan as an employee benefit?
In fact, including 529 plan in your benefits package can be a real bonus when it comes to attracting talent and retaining employees. 86% of respondents in a nationwide survey said they would participate in a 529 college savings plan if offered by their employer.
You can choose to only offer your employees the option of contributing to a 529 plan via payroll deductions, or you can also provide a matching contribution.
Federal law treats 529 contributions as taxable, as do many states. This means income and payroll taxes apply to employee contributions as well as matching contributions you make to their accounts.
However, the majority of states offer some tax deduction or credit to employees and/or employers for their 529 contributions.
Updated September 17, 2018
This article provides general information and shouldn’t be construed as legal, benefits, or HR advice. Benefits and insurance regulations may change over time and may vary by location and employer size. So, please consult a licensed broker or appropriately certified expert for advice specific to your business’s benefits options.