Small businesses often struggle to compete with larger companies when it comes to providing competitive employee compensation. With the increasing value of benefits as tools for recruiting and retaining talent, small business owners have to find innovative ways to differentiate themselves.

Many companies that are not in a position to offer 401 (k) or other retirement plans are bringing 529 plans into their workplaces. With rising college costs and soaring student debt, helping employees save for their children or grandchildren’s education provides a unique and desirable benefit for employees.

Turning a 529 Plan into a Benefit

A 529 plan is an education savings plan, operated by a state or educational institution, that is designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code, which created this type of savings plans in 1996.

Many states offer employer-supported 529 plans, which allow companies to provide a voluntary benefit to their employees in the form of automatic payroll deductions deposited into a 529 plan. Companies large and small are taking advantage of these employer-sponsored plans and establishing automatic contribution programs for their employees.

In order to participate, the employee is responsible for opening the account, authorizing the automatic payroll deduction, and ensuring that all information is up to date. All employee contributions must be after-tax contributions, and the employee may have to agree to minimum deduction amounts for each payroll period.

Unlike other employee benefits, there is virtually no cost to your company to offer automatic payroll deductions on 529 plans. Enrollment in the program is free. It is a voluntary benefit, so there are no costs associated with mandatory compliance. Representatives of your state’s 529 plans can provide free onsite training for your employees on the benefits of 529 plans, how they work, and how to take advantage of the program you are offering.

Understanding the Risks and Rewards

Some employers are offering matching or other direct contribution programs for 529 plans, but many small business owners are proceeding with caution. College savings matching programs work similarly to 401(k) programs because the matching dollars are deposited directly into the plan. However, unlike 401(k)s, the money deposited is taxable.

The contributions would be treated as compensation to your employee, even when the employee’s child is named as beneficiary, and all payroll tax and withholding rules would still apply. Employers and parents need to be clear about the tax implications, restrictions, and exactly how much is matched.

Helping your employees save for future college costs can be a win-win for everyone. However, it is important to seek professional legal and tax advice to help you set up your plan. You will need to find out if your state offers a program that supports automatic payroll deductions for 529 plans, as well as understand all of the costs and tax risks associated with these plans.

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