529 Tax

Employer Involvement In College Savings Plans: Various Approaches

Employers may find 529 college savings plans appealing because they could be a relatively inexpensive way to "provide" a new benefit to employees in many instances; however, 529 plans also present some complexities and may create additional obligations or liabilities for the employer. Careful thought, therefore, should be given to the extent of an employer's "involvement" with a 529 plan. In view of this, the following approaches appear to be the most viable.

Minimal Approach

This approach would be useful for employers who want to be somewhat responsive to employees with 529 plan questions, but who believe that individual decision elements, including state residence, income level, investment objects and estate planning concerns, as well as additional employer obligations or liability, make it difficult or undesirable to assist individual employees with 529 plan requests. Under the "minimal" approach, an employer would assist employees who have 529 plan questions by referring them to various Internet sites33 or other information resources for 529 plans. This may be a good approach for employers that do not want to use their administrative resources for 529 plan purposes, such as providing payroll withholding, especially since most 529 programs themselves offer the option and privacy of electronic transfers from personal savings and checking accounts. This may also be a good approach for employers that do not want to get involved in understanding the intricacies of 529 plans.

Middle-of-the-Road Approach

This approach would be useful for employers who want to provide a vehicle to assist employees in setting up a 529 savings plan, but who do not want further involvement with the plan. Under this approach, an employer would accommodate payroll withholding for employees who want to contribute to a 529 plan, by contracting with a state's 529 plan vendor to make direct deposits of withheld amounts. Employers with employees in various states may need to be cautious, however. A major drawback to 529 plans is that while all plans enjoy the new favorable federal tax benefits, favorable state tax benefits are generally limited to residents of the state where the plan is sponsored.

Therefore, employers with employees in various states may want to consider contracting with multiple state plan vendors to make sure that their employees get all available state tax benefits. If contracting with multiple vendors is not appealing, an employer could consider contracting with just a primary vendor. Even though that could result in assisting only a limited number of employees, an employer has that flexibility because a 529 plan is not an employer-sponsored employee benefit plan and is not subject to any nondiscrimination requirements under the Internal Revenue Code.

Proactive Approach

This approach is for employers that want to actively participate in assisting employees in setting up 529.plans and are willing to take responsibility for more intensive involvement. Under this approach, in addition to payroll withholding and direct deposits to a state plan (or multiple state plans), an employer might consider providing a match to employees who make 529 contributions. In addition, employers could consider providing investment and other education to assist employees in making decisions about their selection of a 529 plan and investment strategy. This could include providing:

* Information on projected college costs

* A general explanation of the 529 plan concept, with a general comparison to other types of college savings programs (including a general description of tax and other benefits)

* A description and comparison of various 529 state plans, including a comparison of investments being offered by them

* A description of risk and return aspects of various types of investment portfolios over both long and short periods of time

* A description of general investment strategies, such as diversification and dollar-cost averaging.

Alternatively, employers might find it useful to contract with an investment manager to perform this service, rather than creating their own education program. Further, some employers that are concerned that they may be creating an additional responsibility or liability for themselves by providing this sort of information, may consider hiring an investment manager to perform a due diligence analysis (which would involve reviewing, comparing and testing the plans for costs, reputation of provider, and features) and to provide an investment analysis comparing various plans.

529 Tax