At first, a 529 college savings plan may look like just another benefits brainteaser. Three out of four Americans have no clue what the thing is even though saving money for school is a top financial concern for parents.

So how can your employees make the grade and save enough money for both college and K-12 education?

Put away those flashcards—we’ll help you cram. In this article, you’ll learn why a 529 college savings plan might be the exact thing you need to kick your benefits package into high gear.

What is a 529 savings plan?

A 529 plan is a program that allows families to sock money away for their kids’ college education and public, private, or religious elementary and secondary school education. The best part? Participants don’t have to pay federal tax (and usually state tax*) on the earnings.

Withdrawals from 529 plans that are used for qualified education expenses are free from federal tax, as long as the withdrawals fall within any applicable annual limits (including the $10,000 annual limit for K-12 tuition expenses described below).

Families can reap the tax benefits only if the money is used for qualified education expenses. Here’s what that generally means:

  • Higher education: Expenses covering tuition, books, supplies, fees required by the educational institution, certain equipment, and room and board.
  • K-12 education: Tuition for enrollment or attendance at an elementary or secondary public, private, or religious school.

Companies can choose to match a portion of what their employees put in, similar to the matching game that happens with certain retirement plans. Think of it as a school-flavored version of a Roth IRA or Roth 401(k), just with a different set of numbers. This is because contribution dollars are after-tax, and therefore earnings are generally tax-free.*

Contributions to 529 plans also qualify for the annual federal gift tax exclusion ($15,000 as of 2018). Figuring out how the federal gift tax applies to 529 plans can get complicated, so anyone contributing to a plan should consult with their tax advisor for more information.

How the Tax Cuts and Jobs Act changes 529 plans

With the passing of the Tax Cuts and Jobs Act, some states will allow you to withdraw up to $10,000 a year from 529 plans (per student) to pay for qualified K-12 expenses. Before, 529 withdrawals needed to be used for qualified higher education expenses in order to reap the tax benefits.

Keep in mind that not every state recognizes K-12 costs as eligible expenses, which means you could have to pay state income tax on that amount.

Why are 529 plans a great employee benefit?

A 529 plan helps fulfill a real need many families have. Paying for K-12 education and college are some of the most colossal investments people will ever make, and it happens well before retirement.

Because of this, it can be an extremely meaningful (and unique) perk to offer your team, and at the same time, attract people who want to be on your team.

Keep reading for a few more reasons why 529 plans can make a lot of sense:

  • It can help your team save more: A Sallie Mae study found that American parents with children under the age of 18 who had college savings plans socked away 76 percent more than parents who still saved but didn’t have an official plan.
  • You might be able to nab some tax credits: Some states offer tax credits to employers who use their in-state 529 plans to help encourage more people to save for education. For instance, Nevada gives employers a 25 percent tax credit (up to $500 per employee) for matching 529 contributions.

How do 529s impact employees, tax-wise?

While employer matches for 529 contributions aren’t safe from income tax for individuals, the earnings on 529 contributions (including earnings on employer matches) are generally tax-free as long as they’re used for qualified education costs.*

Some companies choose to pour in a little extra to help cover the income tax that employees need to pay on the employer match. In addition, over 30 states offer a tax deduction or credit to employees on their own 529 contributions.

  • It helps people stay loyal: When your team sees that you’re (quite literally) invested in their families’ education, it can really deepen their loyalty. Sending a child to school can be an emotional time for families, so easing the burden is pretty unforgettable.
  • It builds culture: Your benefits package reflects all the things you value as a company. By showcasing how much you care about everyone’s life outside of work, it reinforces it to the rest of the team.

Talking to your team

The first step is to get a show of hands for how many people are interested in participating. Edward Jones found that 86 percent of Americans would participate in a 529 plan if their company offered it.

Here are a few key things to point out to your team as you’re introducing the idea:

  • Your employees will always have access to their plans: 529s will always belong to your employees, regardless of whether they stay with you or not (but hopefully they do!). Keep in mind that while employees will never lose their relationship with their 529 plans, if you are offering a 529 plan through a platform, your employees may not be able to use certain account features (like an account dashboard) once they leave.
  • It will grow faster if you offer matching: As you pad your team’s accounts, the amount contributed will rise faster than if they were the only ones adding to it. So for people looking to grow their accounts, taking advantage of a match should be a no-brainer.
  • It’s not just for parents: Think about all the grandparents, aunts, uncles, and other folks who want to help out their families with saving for education. Some people also open 529s up for themselves so they can return back to school.

Launching a plan

There are a grab bag of ways you can use 529 plans to help your benefits package shine. To start, think about whether or not you’d like to contribute to each person’s plan, and if so, what the most is you’d want to offer, which is called your maximum contribution.

You can still offer 529 plans without contributing any extra money, but many employers decide to do so to help their team get even closer to reaching their education goals. You can also try to encourage your employees to put away more by matching a sliver or all of their contribution.

Next, identify how you’ll make this all happen. Ideally, you’ll want to integrate the plan with your payroll service, which makes it easier for employees to participate. Some companies (like Gusto!) allow you to sync contributions with each payroll you run.

By weaving a 529 plan into your benefits offering, you can help your team realize a wish that can impact their families forever. When that happens, your benefits package can turn into a giant magnet — attracting the right folks while bringing your team closer and closer to their amazing goals.

*Earnings within a 529 plan aren’t subject to federal tax and generally aren’t subject to state tax when used to pay for qualified education expenses. Anyone that invests in a 529 plan should check the applicable state tax requirements for the plans they invest in. Please also check with a tax advisor for more information on the tax implications of 529 plans.

Alexis Barker Alexis is on Gusto’s customer experience team, where she leads the training and operations behind workers’ comp. When she's not busy helping solve customer questions, she loves running her heart out in local triathlons.
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