Some Questions Answered Regarding 529 College Savings Plans

Do Employers Need to "Provide" Section 529 Plans to Employees?

Due to rising college prices and the recent additional tax benefits afforded to 529 college savings plans, employers are receiving requests to assist employees with 529 plan recommendations and/or payroll arrangements. This article outlines an employer's various choices in "providing" a 529 plan, highlights critical considerations for determining an employer's level of desired involvement in doing so and provides sources for additional information to employers wishing to assist employees with their college savings needs. Due to rising college prices and the recent additional tax benefits afforded to 529 college savings plans, employers are receiving requests to assist employees with 529 plan recommendations and/or payroll arrangements. This article outlines an employer's various choices in "providing" a 529 plan, highlights critical considerations for determining an employer's level of desired involvement in doing so and provides sources for additional information to employers wishing to assist employees with their college savings needs. A 529 college savings plan is similar to a Roth IRA: It is a savings account to which after-tax contributions are made; earnings and "qualified" withdrawals are free of federal income tax. Under a 529 savings plan, an individual account owner (typically, a parent or grandparent) makes after-tax contributions to the plan to fund "qualified" higher education expenses10 for a named beneficiary. In this era of rapidly escalating higher education costs, qualified state tuition programs, more frequently called Section 529 college savings plans,1 have recently been promoted by the press, mutual fund companies and elsewhere as effective college savings tools. Although they have been in existence since 1996, the recent popularity of 529 college savings plans is largely due to additional tax benefits created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which are effective in 2002. These include tax-free earnings accumulation and withdrawals for "qualified" higher education costs, increased rollover ability and the removal of a dollar limit on "qualified" room and board expenses. Added to this, many states no longer restrict use of accounts to instate schools. Although 529 college savings plans are, by law, state-sponsored programs,3 many employees may perceive these programs as benefits that their employers could provide to help them meet skyrocketing college expenses. As a result of this perception and Section 529 plans' recent popularity, employers are receiving requests to assist employees with plan recommendations and/or payroll arrangements. The focus of this article is to guide employers in deciding to what extent, if any, they want to "provide" 529 plans to respond to their employees' perceived needs. Before exploring an employer's choices in "providing" a 529 plan, a brief review of college costs and an overview of 529 plans are in order.