Thinking of Offering an Employer Match to a 529 Plan? Think Deeply

Many employers are searching for more ways of increasing the benefits they can offer to their employees. As we’ve noted before, employers are carefully watching IRS determination letters for how employers can treat payments on student loans, and many schools and nonprofits are working on new ways to use contributions to 403(b) plans. So its not surprising that many employers are contemplating contributing to 529 plans in a similar way to the contributions they make to Health Savings Accounts.
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529 plans are tax-advantaged plans that help families save for children’s education. Why families, not parents? Because anyone can contribute to the 529 account. The tax advantages may differ, as we noted last year when talking about gifts of stock and retirement. Those tax advantages are set by states, not by federal rules though the benefit impacts federal income.  Here’s how the IRS defines it: “A qualified tuition program (QTP), also referred to as a section 529 plan, is a program established and maintained by a state, or an agency or instrumentality of a state, that allows a contributor either to prepay a beneficiary's qualified higher education expenses at an eligible educational institution or to contribute to an account for paying those expenses.”
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Most people don’t consider using a 529 account to prepay for tuition. Instead, they think of a 529 plan as saving for college. According to the IRS, the benefits of the 529 plan are: 1) Earnings accumulate tax free while in the account; 2) Distributions aren't taxable when used to pay for qualified higher education expenses (unless the tuition is less than the amount distributed); and 3) the beneficiary doesn't generally have to include the earnings from a QTP as income.
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Employers may want to carefully consider how 529 plans are treated in each state before following along with others in their industry and offering a match to an employee’s contributions.  Things can get pretty complex for employees when it comes to 529 plans. Employees don’t have to choose a plan in their own state, or even in the state nearby. One author wrote about contributing to their niece’s 529 plan in Ohio even though the niece was a resident of California, while the author lived in an entirely different state. The tax impact and benefits vary from state to state. There are so many plans and varieties that whole websites are set up just to compare them.
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Additionally, there is sometimes confusion over who owns the assets held by the 529 account. In most scenarios, a 529 account is owned by an account holder for a child’s education. In other words, the account is similar to a trust, with the college bound child in the position of a beneficiary. The account holder can change the beneficiary whenever they wish. The assets are considered the property of the account holder.  
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So employers may want to offer contributions to 529 plans, but may need to turn the heavy lifting of discussing the pros and cons of that to their financial advisors in terms of employee education sessions. Among the topics many employees may be interested in is the impact the 529 plan has on their child’s ability to get financial aid. This topic may be the center of some debate, with sharp opinions on each side. And for good reason, recall that there are so many 529 plans and permutations that folks have to rely on websites comparing them side-by-side. That means, two people who think they are similarly situated (both have similar salaries and tuition burdens) may have different results.
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And there’s one more nearly impossible to predict variable: the forms schools use to measure assets for the child in need of tuition assistance aren’t necessarily the same. It’s a trap for the unwary. As one writer pointed out, the factors that go into how a 529 plan impacts a child’s financial aid package are pretty varied: “In general, how 529 plans are counted towards your child’s financial aid package depends on the financial aid form used, who owns the 529 plan, and your child’s college’s formula on how 529 plans are counted towards financial aid packages.”
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That doesn’t mean employers shouldn’t, where feasible and appropriate, offer contributions to 529 plans to their employees as part of a benefits package. The employers who offer contributions to 529 plans usually do so through a matching plan similar to contributions to health savings accounts. For example, some employers offer a $1000 match to 529 plans for employees and others vary their plans.
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In short, providing an employer match to 529 plans may hinge not just on whether the employer has the assets but on other factors, like whether an employer can find the information employees may need. Employers may need to consider whether funds can be divided among 529 plans (for multiple children).  The administrivia (compliance, paperwork, fund management) of handling the match to the 529 plan may be more than some employers can bear, but for those who can, it can be of great use to employees and their families.

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