A 529 plan, also known as a “qualified tuition program” according to the Internal Revenue Code, is a way to save for college that has some nice tax benefits.
The Internal Revenue Service (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 (including parents, grandparents, uncles, aunts, other family members, and even employers) to 529 college savings plans on behalf of the designated beneficiary. With the annual gift tax exemption and lifetime exclusion, taxpayers can often avoid gift tax on those 529 contributions, too.
Contributions are subject to federal income tax, but when it’s time for the money to be used, the withdrawal is tax-free as long as it’s being used by the account owner 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. (Some but not all are Federal Deposit Insurance Corporation (FDIC)-insured, which means your money is protected by the US government up to a certain amount if the financial institution where you placed your funds defaults.)
Prepaid tuition 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 for many of these state plans, eligibility requires you and/or the beneficiary to be in-state residents in order to participate.
Here’s a quick look at the features of a prepaid tuition plan:
pays for a future higher education at today’s rates
can be used on higher education tuition and fees
sponsored by state governments and higher education institutions
many plans have state residency requirements
Education savings plans
The second type of 529 plan is the college education savings plan. This investment option isn’t tied to any particular educational institution and can be used for out-of-state schools and is open to out-of-state savers. For example, New York state’s Direct Plan—with Vanguard as the investment manager and Ascensus as the program manager—is available to those who aren’t NY residents, but depending on considerations, someone may still choose to get a plan through the beneficiary’s home state if it offers additional benefits, such as financial aid.
Education savings plans aren’t savings accounts; rather, they’re investment accounts that enable you to save for qualified higher education expenses, including tuition, fees, and room and board. These investment plans can also be used for tuition for elementary or secondary school enrollment (up to $10,000 a year), as well as qualified costs associated with apprenticeship programs registered with the Secretary of Labor’s National Apprenticeships Act. They can also be used for student loan repayments, but up to the $10,000 lifetime limit per beneficiary.
Whether the beneficiary is currently younger, like a toddler, or older, like a college-age individual, someone might choose an age-based investment approach, depending on risk tolerance for more conservative or aggressive investments. With 529s, you can’t invest in individual mutual funds, exchange traded funds (ETFs), or the like; you select investment portfolios, offering a combination of options.
There are tax advantages, too. Earnings from education savings plans are tax-deferred 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 based on investment objectives.
Here’s a quick look at the features of an education savings plan:
puts money in investment accounts
in certain states, it can be used on higher education tuition, fees, room and board, and K-12 tuition
sponsored by state governments
many plans don’t have state residency requirements
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?
Yes, you can offer a 529 plan to your employees as a voluntary benefit to help them pay for college expenses and invest in their financial wellness.
In fact, including a 529 plan in your benefits package can be a real bonus when it comes to attracting talent and retaining employees. According to a 2022 survey, 55% of Americans still see the importance of saving for higher education despite current socio-economic conditions. 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 limit.
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 state income tax deduction or credit to employees and/or employers for their 529 contributions.
What are the benefits of an employer-sponsored 529 plan?
Employer-sponsored 529 plans benefit both employees and employers. For employees, an employer-sponsored 529 plan is a convenient, structured way to save for education expenses. Plus, if employers match a certain percentage of their employees’ 529 contributions, employees’ savings can grow even more. Some states even give employees a state tax deduction or credit for contributing to a 529.
For employers, offering an employer-sponsored 529 plan is a great way to show employees that you’re invested in their personal and professional well-being—and that of their families. Matching your employees’ 529 contributions up to a certain percentage can also help foster loyalty and raise employee retention rates. From a financial standpoint, a 529 plan is a good move, too. Depending on which state you’re in, you may be able to get a 20% tax credit for offering a 529 plan.
Do employers contribute to or match contributions to a 529 plan?
Employers can contribute to their employees’ 529 plans, but they don’t have to. There are two ways to contribute: with regular contributions (i.e., a direct deposit) or by matching a certain percentage of employees’ contributions. Plenty of states also offer tax incentives to employers who contribute to their employees’ 529 plans.
Are there contribution limits to an employer-sponsored 529 plan?
There aren’t set monetary limits, though the IRS says a contribution can’t reasonably exceed what it takes to cover the education-related expense. Contributions over $19,000 per person in 2025 require you to file a gift tax return. Some states also have built-in contribution limits for their 529 contribution tax incentives, in the sense that they won’t let you deduct over a certain amount on your tax return.
What happens to my employer-sponsored 529 plan if I leave my job?
If you leave your job, your employer-sponsored 529 plan is still yours—as are the funds you’ve accumulated. You’ll continue to own it the same way you did before; the only thing that will potentially change is how you make contributions. If you relied on automatic payroll deductions that went straight to your 529 account, you won’t have those any longer, nor will you have any employer contribution matching.
Are there any fees associated with an employer-sponsored 529 plan?
It depends on the plan you choose. In general, employer-sponsored 529 plans are free for employers—it’s the employees who usually pay the fees to access their accounts. Some plans will have a fixed annual account maintenance fee, which often gets waived if employees set up automatic contributions, ranging from $10 to $25 a year. Other plans have investment fees (asset-based fees that are a percentage of total investments, usually starting around 0.10%) or transaction fees that employees are required to pay.
Quick note: This is not to be taken as legal, benefits, or HR advice. Since regulations change over time and can vary by location and employer size, consult a licensed broker or HR certified expert for specific guidance. See how to offer benefits with Gusto.
