NFIB

Added Benefits: How a 529 College Savings Plan Can Attract Employees
07/ 17/ 2002

by Vicki Gerson

If you want to attract and keep talented employees without spending a lot of money, offering savings plans might be a good solution. One of the most recent ones to emerge is a 529 College Savings Program that benefits the company as well as all employees who want to take advantage of such a plan.

Lawmakers in Washington have responded to the increasing costs of higher education by providing a new tax-advantaged college savings program. Named after Section 529 of the Internal Revenue Code, these plans are usually sponsored by individual states. Since most states don't have investment management capabilities, many are working with independent investment management companies to manage the program in their state and provide participants with investment options.

The 529 College Savings Program provides tax-free investment growth. An employee can contribute $11,000 per beneficiary in any one calendar year and possibly more with accelerated gifting available in 529 plans. Under current law, all money withdrawn for qualified education expenses is free from federal taxes. An account such as this will grow larger than an identical taxable account. "And, keep in mind for estate planning purposes, these assets are removed from the contributing employee's estate," says Bradford M. Walker, associate vice president-financial advisor, First Union Securities, in Deerfield, Ill. explains.

"A business owner just needs to contact his or her financial advisor and ask to establish a 529 College Savings Program," Walker says. "There is typically no cost to the business to set up such a service for all employees. In fact, this will be similar to any other automatic payroll direct deposit you may currently have in place."

Best of all, unlike with a 401(k), the business owner doesn't have to do any IRS 5500 reporting.

Many employees are already saving for retirement. The 529 College Savings Program gives them another opportunity to save for a college education for their children or grandchildren. "This is truly a value-added benefit for your employees," says Walker.

Another advantage employers can point out to employees is that they don't have to travel to the bank or make separate deposits.

"Every employee who has a 401(k) understands the benefits of automatic, regular deposits," Walker says. "Point out to your employees they now have the opportunity to make systematic investments to cover the increasing costs of education and enjoy completely tax-free growth."

Unlike Education IRA's, this type of savings program has no income limits restricting eligibility. That means your hourly employees, salaried employees or executives can participate.

All employees may contribute on behalf of any single beneficiary regardless of relationship or state residence. Although removed from the estate, the employee remains in control of the account even after the beneficiary reaches the age of 18. Conservative, moderate and aggressive investment options are available within the 529 Plans.

Employees have the option to make withdrawals from their accounts at any time. However, if the withdrawal is not used for higher education purposes -- universities or vocational/technical schools -- the earnings will be taxed as ordinary income and a penalty will be assessed. However, the plan is flexible in selecting a new beneficiary if the intended recipient does not attend college.

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