State tax incentives for employer 529 plan matching
States encourage residents to save for college by offering state income tax breaks, matching grants and scholarships for families who use 529 plans. Some states also drive 529 plan participation through employers by offering a tax incentive to businesses that contributions to employee 529 plans.
States promote saving for college
State-sponsored 529 plans are tax-advantaged accounts designed to help families save for college and avoid excessive student loan debt. Children who have money saved for college are 64% more likely to graduate from college than a child without savings. Funds in a 529 plan grow on a tax-deferred basis and distributions are tax-free when used to pay for qualified expenses at any eligible public, private, 2-year or 4-year college.
States promote 529 plan usage with tax breaks and other incentives for residents. For example, over 30 states offer a state income tax credit or deduction for 529 plan contributions. Many states also run promotions on “529 Day (May 29) and during the month of September for National College Savings Month. These include scholarship contests, matching grants and other giveaways.
State tax incentives for employers
Seven states have enlisted the help of local businesses to drive 529 plan participation. Companies in Arkansas, Colorado, Illinois, Nebraska, Nevada, Wisconsin and Utah are eligible for a state income tax credit or deduction for matching employee 529 plan contributions.
529 Plan Employer Tax Incentive
State income tax deduction for 529 contributions; maximum $500 deduction per employee per year
20% tax credit for 529 plan contributions; maximum $500 credit per employee per year; beginning January 1, 2019
25% tax credit for 529 plan contributions; maximum $500 credit per employee per year; unused credits may be carried forward for five years
25% tax credit for 529 plan contributions; maximum $2,000 per year; beginning January 1, 2021. Matching contributions may not be used to pay for K-12 expenses.
25% tax credit for 529 plan contributions; maximum $500 credit per employee per year
25% tax credit for 529 plan contributions; maximum $200 credit per employee per year (2018); 25% tax credit on 25% of maximum individual contribution; beginning January 1, 2018
State income tax deduction for 529 contributions; maximum $2,040 deduction per year (2019)
529 plans as an employee benefit
Paying for college is a top concern among parents, yet few employers offer 529 plan solutions as an employee benefit. In fact, only 11% of HR professionals recently surveyed by SHRM work at companies that allow 529 plan contributions through payroll deduction, and only 2% work for employers who offer 529 plan contributions or matching contributions.
By offering tax incentives for employer 529 plan contributions, states hope to encourage more businesses to include 529 plans in their employer benefits package. In a survey of Colorado businesses, 60% of companies said they would be interested in starting an employer 529 program if there was a tax incentive to do so.
Encouraging employers to match employee 529 plan contributions may also increase employee awareness of college savings plans. Less than a third of parents of minor children have heard about 529 college savings plans.
To simplify the 529 plan enrollment and contribution matching process, some businesses hire a third-party company such as Gradvisor. Gradvisor provides customized advice to employees on selecting a 529 plan, tracking 529 plan investment performance and how much to contribute.
Employee 529 plan tax considerations
An employer-sponsored 529 plan may not be suitable for all employees. For example, to qualify for a state income tax credit or deduction, most states require residents to contribute to their home state’s 529 plan. If the employer offers a 529 plan from a different state, the employee could miss out on potential tax savings. It’s also important to review the fees and investment options offered by the employer-sponsored 529 plan before enrolling.
Employees may also be surprised to learn that employer 529 matches are taxed as income. Unlike a 401(k), a 529 plan is funded with after-tax dollars. Employees who receive matching contributions to their 529 plan will owe federal and state income taxes on the amount contributed. However, there is pending federal legislation that would allow employer 529 plan contributions to be excluded from the employee’s gross income. In the meantime, some companies offer employees money to cover the income taxes owed on the 529 plan contribution.
[Originally published on December 5, 2018. Last updated on April 23, 2020.]
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