With National 529 Day approaching on May 29th, benefit managers should start a conversation around the importance of supporting
529 plans are a tax-advantaged education savings option that can broaden K-12 and higher learning opportunities for employees' families, and save people the hardship of
"These accounts are not just for four-year traditional college," says Patricia Roberts, a 529 expert, author and chief operating officer at education funding platform Gift of College. "[They can be used for] K -12 tuition, community college, trade and technical school, registered apprenticeships, graduate and professional studies."
Yet, a 2024 survey by Edward Jones showed that only half of Americans knew what a 529 plan is. Benefit managers can offer access to free education and resources, from explaining the basics of a 529, to walking employees through state-specific guidelines. For example, while all 529 plans are the same in that earnings are not taxed and withdrawals for qualified educational expenses are tax-free, every state has its own options and guidelines, explains Roberts.
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Choosing the right 529 plan
The Gift of College website offers a comprehensive state-by-state breakdown of all 529s available, as well as prepaid college savings plans and the 529 ABLE account program, which allows disabled persons to save money in their own name. People can research which plan is best, then register for contributions. Anyone — including employers — can contribute to 529 plan or student loan repayment registries with the Gift of College's gift cards, as well as online contributions, or payroll deductions, which, when in place, increases employees' contribution amounts, notes Roberts.
"Typically, a 529 plan provider will be going into an employer and offering 529 benefits, but if the plan they're offering doesn't suit all of the employees, it becomes problematic," says Roberts. "Our plan takes the responsibility off of the benefits team or HR in deciding which plan is best. Instead, there's a platform through which the employee can select any plan, or you can connect an account that you already have.'"
Roberts emphasizes that even if a 529 account is not opened when a child is young, it is never too late to start saving. As higher education costs continue to rise, this type of investment could not be more timely: According to the Education Data Initiative, college students living on campus at a four-year, in-state institution pay an average of $27,146 per year. Those who take out loans pay an average of $2,636 in interest annually and take approximately years to pay them off.
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To further drive home the benefits and flexibility 529 accounts offer, Roberts answers some common questions and shares how employers are getting in on the action.
Who has control of the funds in the 529 account?
There's an account owner and there's a beneficiary, meaning future student, on that account. That account always belongs to the owner — the child can never get access to that money unless you decide to disperse the funds for a particular purpose.
What happens if I open a 529 account, but my child doesn't use it?
At any time, you can change the beneficiary on the account to a member of the original beneficiary. You can use it for yourself if you're part of the family, a sibling, a half sibling, a step sibling, a cousin, an aunt or uncle, or a future child of your child. There's lots of flexibility about who you could switch to if that child didn't want it. The other thing you should know is there's no time limit on these accounts, so you can have that money invested indefinitely.
If you really don't know anyone who wants to use it, you can roll the money into a Roth IRA of the original beneficiary — not for you or somebody else. As long as you've had the account open at least 15 years, you can take up to $35,000 of the account balance and roll it to a Roth IRA for that child [over the course of time determined by the specific IRA].
You can also take a non-qualified withdrawal. The beauty of 529 plans is they grow tax deferred, so as you're earning money on your contributions, you're never paying tax. If you're not going to use it for its intended purpose, you will owe federal and state tax on the earnings only. So if you put $10,000 in and it's now worth $11,000, we're looking only at $1,000 of growth, and you'll owe tax on that.
However, you will never pay a penalty if the reason you didn't use the funds was because the child received a scholarship, attended a military academy, or some other scenario where something else was paying for the cost of the college.
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What are some of the ways employers are getting directly involved?
Some employers are matching, some are doing a simple one-time contribution when the employee opens a 529, others are doing annual contributions. Whatever they're doing, employees don't want to leave that money on the table, and they are participating.
Gift of College has gift cards for college savings accounts, and these can be redeemed into any 529 plan in the nation. Employers are using our gift cards to welcome new additions to employees' families. I am so proud that a growing number of employers are learning through us that they can give an initial contribution, getting an employee off on favorable financial footing for their child's future.
What's happening is the employee that got the gift card and opened the 529 is now being followed up with by the employer and signing up for payroll deductions, and they're starting to contribute, and we're there educating them about the fact that their friends and family can also contribute. It's a wonderful way to kick off a new arrival in an employee's family.
