Offering 529 Savings Plans Helps Families Avoid Student Debt

Although 529 plans have provided a tax-advantaged opportunity for college savings for more than two decades, employers have not embraced them as they have health savings accounts and other nonretirement savings vehicles. That could be short-sighted.

In the Society for Human Resource Management's 2019 Employee Benefits survey of more than 2,500 HR professionals:

• Only 11 percent of respondents offered 529 plans at their companies.
  

• Only 2 percent included an employer contribution or match.

Employees are likely not asking their employers for this benefit simply because it's not on their radar, as only 29 percent of U.S. adults know that 529 plans are an education savings tool, according to a 2018 survey with more than 1,000 respondents by investment firm Edward Jones.

Meanwhile, higher-education costs are rising rapidly and moving out of reach for many, given that the average college tuition bill has more than doubled over the last 30 years. That's a big reason why student loan debt has grown to more than $1.5 trillion in the U.S.

Advocates of 529 plans hope to ease this debt crisis by encouraging more employers to offer these plans to employees, who, in turn, can build college savings by making automatic payroll deductions into their plan accounts, similar to how employees contribute to their 401(k) retirement savings plans. 

How They Work

In 1996, 529 accounts were created to promote long-term saving for higher education. These plans are available to everyone, and people can use them to save for their own education costs, but they are used primarily by parents on behalf of their children.

While 529 plan participants' contributions are made with after-tax dollars and are not tax-deductible, earnings are tax-free when used for qualifying education expenses, such as tuition, books or computers.

The plans are sponsored by individual states, and every state except Wyoming has at least one 529 plan, said Matthew Toner, director of strategy and business development with Gradvisor, a digital-platform company that provides an employer dashboard for 529 plans, allowing employees select college savings plans that meet their needs.

While it's not necessary for state residents to use their home state's plan, "over 30 states offer [their residents] some sort of additional state tax deduction or credit on their contributions in a 529 plan," Toner noted.

Total plan contribution limits vary from state to state, but every state's 529 plan allows for maximum contributions of at least $235,000 per beneficiary, according to the website Savingforcollege.com. For most states, the maximum is higher.

Lack of Awareness

Merrill Milani, a relationship marketing strategist with Virginia's 529 plan, Virginia529, said use of the plans is limited because people don't know about them. She said she has a hard time understanding why employers wouldn't want to make such an option available.

"There's no cost to them. It's something employees value," she noted. And state plans like Virginia's can help educate employees about how 529 benefits can be used and the tax advantages they provide.

'State plans can help educate employees about how 529 benefits can be used.'

California's ScholarShare 529 is another state-specific program that is working to raise awareness and increase the availability of 529 plans through the workplace. Currently, almost 1,000 California employers participate in the program.

The benefits of 529 plans are particularly appealing to Millennials, said Julio Martinez, executive director of ScholarShare's investment board. "Our research confirms that younger employees are increasingly looking to their employers for help accessing college savings options, more so than their older counterparts," he said. "Many Millennial employees report being interested in learning more about a workplace college savings program and that they would feel more comfortable selecting a 529 plan if it were available through work."

[SHRM members-only toolkit: Designing and Managing Educational Assistance Programs]

Barriers to Adoption

Milani acknowledged that there are some legitimate barriers, along with common misconceptions, that may make employers hesitate to offer a 529 plan funded through payroll deductions.

She often hears, for instance, the misconception that only people with young children can benefit from such plans. "Not true," she said. "Anyone can participate in the plan and contribute money for someone else, or even themselves." If you fund an account for someone other than yourself or your spouse, however, federal gift taxes would apply to annual contributions of more than $15,000 per recipient in 2019.

'Anyone can participate in the plan and contribute money for someone else, or even themselves.'

"If you realize the value of an education and you have the opportunity to help someone, whether it's your child, your grandchild, a niece or nephew—anyone—you can use these plans," Milani pointed out. "It definitely has an appeal to more people than an HR person might think of."

Recognizing that this is a benefit that affects a much larger segment of the workforce than generally understood can help to boost interest among employers.

Misty Guinn, director of benefits and wellness at software firm Benefitfocus, agrees. Her firm's BenefitsPlace platform includes Gradvisor and other offerings that can help employees and their dependents plan and pay for college.

Guinn said that 529 plans represent "a benefit that every generational segment of a workforce can take advantage of, especially when you consider the alternative could be dipping into a 401(k) to pay for your children's continued education."

She added, "Even extended family members, such as grandparents, are looking for opportunities to invest in their grandchildren's future."

Milani advises employers that offer 529 plans to present lunch-and-learn sessions that introduce employees to the programs and how they work, and to emphasize that starting to save early—before employees' children are college age—provides more time for invested dollars to grow tax-free.

Toner pointed out that there are some administrative issues with 529 benefits that may be particularly vexing for employers with remote workers. For instance, many of the states that offer additional tax advantages require that plans be opened in an individual's home state. That can be an administrative burden for companies with employees based in multiple states, but it is a hurdle that Gradvisor helps companies address.

Benefits for Employers

Some HR managers, Milani said, feel they already have too many topics to educate employees about and so are hesitant to promote 529 plans. "I totally understand that," she acknowledged. However, she's passionate about the value that the programs can offer not only to employees, but to employers.

"[Employers] get to promote financial wellness," she explained. "They get to educate their employees about something that might be really important to them. It helps to attract and retain employees and improves employee satisfaction overall."

Jacqueline Lozano, senior HR analyst with the city of Chino, Calif., said the benefits to employers convinced the city to offer its employees ScholarShare 529. "It sounded like a great benefit, and, when we looked more closely, the fact that it wasn't going to cost the employer anything and that there was zero reporting required was a huge plus," she said.

The process was "totally seamless," she noted, and the ScholarShare team has been available to answer questions and handle the administration.

Benefitfocus offers its own employees access to 529 plans through Gradvisor, Guinn said. "We had around 20 associates immediately enroll within the first month, and we are continuing to see growth as we offer year-round enrollment in this benefit."

With a multistate initiative underway to raise awareness of 529 plans, now is a good time to ask whether your employees would value this benefit. Chances are, the answer is yes.