The New 401(k)? Employer-Sponsored 529 Plans Shift into High Gear

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Brian O'Connell

By Brian O'Connell

March 6, 2019

Parents saving for college tend to look under every rock and couch cushion for some extra cash to cover future college costs. Now, employers are helping by providing easy access to 529 college savings plans with payroll deduction and matching contributions.

Increases in Sticker Prices Spur College Savings Anxiety

Average one-year college costs for 2018-19 stand at $21,370 for public colleges (in-state) and $48,510 for private non-profit colleges, including only tuition, fees, room and board, according to the College Board’s Trends in College Pricing.

Average four-year college costs are likely to total about $90,000 for public colleges and about $200,000 for private non-profit colleges.

But, according to Sallie Mae’s How America Saves for College, parents have saved an average of $18,135. Parents of high-school age children have saved an average of $22,985. That’s about a quarter of current college costs at an in-state public college.

Employers Help Employees Save for College

One place college-savers may go for college savings help is their own workplace. Increasingly, more and more companies are stepping up and offering employer-sponsored college 529 savings plans, including helpful provisions like direct deposit, matching contributions and automatic payroll deduction.

Some companies aren’t exactly new to the party on offering staffers access to a college 529 savings plan.

Exhibit “A” is Quicken Loans, which has offered a payroll deduction-based 529 college savings plan for several years, with employees putting away anywhere from $15 per paycheck to over $100.

Small and medium-sized businesses are getting into the act, too. For instance, Michigan-based Dawn Food Products Inc., a family-owned baking products company, helps its 4,500 employees to contribute to the Michigan Education Savings Program through payroll deduction.

A Winning Trend

The trend seems like a win-win for both cash strapped college savers at work, and the employers who lend a hand.

For employees: The numbers make it loud and clear – parents who are saving for college and who have access to a formal college savings plan save much more than parents who don’t.

According to a Sallie Mae study, parents who have 529 plans save 76% more for college than parents who saved for college but didn’t use a 529 college savings plan.

For employers. In several states (and the number is growing), companies can earn a state tax break if they offer 529 plan savings help inside the workplace.

Nevada, for example, offers companies a robust $500-per-employee tax credit if they match an employee’s 529 plan contributions.

In fact, there is a bill introduced in Congress, the 529 Expansion and Modernization Act of 2019 [S. 220] that would allow an exclusion from income on federal income tax returns for employer contributions to 529 plans.

An Accelerating Trend

Companies that are in the business of providing 529 college savings plans to companies say the strategy is really taking off.

“We have seen a huge uptick in demand lately for 529 plans and related benefits as financial wellness becomes paramount to employers’ benefits strategies,” says Matthew Toner, director of strategy and business development at Miami-based Gradvisor, a digital-based platform that helps employers extend college savings plans to their employees.

Toner points to a new white paper from Guardian, called College Debt in America, which found that 49% of employees are interested in a 529 plan at work.

“That’s ahead of even the media darling student loan repayment benefits (47%),” Toner notes. “The study also found that even more workers are concerned about this issue, with the percent rating saving for their children’s education as ‘highly important’ up 16% from just 2016 to 2018.”

The issue of tying payroll deduction to employee-sponsored 529 plans is still jelling, as both employers and employees – with support of service providers like Gradvisor – see what is working best with their plans. Toner, for one, would like to see that pace move more quickly on the plan payroll deduction front.

“The Guardian whitepaper found that 7% of employers were currently offering a 529 plan to their employees via payroll deduction,” he says. “This is leaving a huge gap between how concerned parents are and how much help they are receiving from their employer.”

Gradvisor does offer payroll deduction to its clients, and more will leverage the service once they figure out what employees want from their 529 plans.

“As 529 plans are post-tax, some employers opt to just allow employees to contribute from their own checking/savings account,” he says. “Currently, it is a 50/50 split with our clientele between payroll and non-payroll deduction. While payroll deduction can certainly help jumpstart someone to begin saving, it is certainly not the core issue as to why parents are not saving in a 529 plan.”

Tax Breaks in Play for Matching Contributions

Further fueling the fire are state tax breaks that are increasingly being offered to employers who offer 529 college savings plans to their employees with matching contributions.

As of December 2018, seven states are using tax breaks to drive 529 plan participation. Companies in Arkansas, Colorado, Illinois, Nebraska, Nevada, Utah and Wisconsin are eligible for a state income tax credit or deduction for matching employee 529 plan contributions.

Here’s a breakdown.

  • Arkansas – State income tax deduction for 529 contributions; maximum $500 per employee per year.
  • Colorado – 20% tax credit for 529 plan contributions; maximum $500 per employee per year; beginning January 1, 2019.
  • Illinois – 25% tax credit for 529 plan contributions; maximum $500 per employee per year; unused credits may be carried forward for five years.
  • Nebraska – 25% tax credit for 529 plan contributions; maximum $2,000 credit per employee per year; beginning January 1, 2021. Matching contributions may not be used to pay for K-12 expenses. 
  • Nevada – 25% tax credit for 529 plan contributions; maximum $800 per employee per year.
  • Utah – State income tax deduction for 529 contributions; maximum $1,960 per year.
  • Wisconsin – 25% tax credit for 529 plan contributions; maximum $800 per employee per year.

The Need for Personalized Advice

Another issue that had vexed companies who offered 529 plans to employers was good, personalized investment advice. Specifically, the lack of it.

“529 plans can partner with employers to have their college savings plan used by the employees,” Toner says. “However, these plans provide no financial advice on how to invest, which is the main area employees need help with. That’s the case with multi-state employers, who run the risk of their employees losing out on powerful state-tax benefits if they partner with a single 529 plan.”

For example, if an employer is based in Texas and offers the Texas 529 plan, a New York employee can lose up to a $10,000 state tax deduction by investing in the Texas plan and not the New York plan, since most state tax benefits are limited to contributions to the state’s own 529 plan. “Fees also vary widely between plans so even if you are a single state employee, your state’s 529 plan may carry with it high fees,” Toner notes.

Gradvisor has clients who, before they came aboard, were already offering a single 529 plan via payroll deduction to their employees, but started looking for an experienced partner because they were seeing terrible participation rates.

In as little as one month after working with Gradvisor, those companies were seeing 8-to-10-times more registrations.

“That was because of the personalized advice we were offering,” Toner says. “Parents felt comfortable about taking that next step and opening a plan knowing they were getting the right advice about where to invest their money.”

The New 401(k)?

While employer-based 529 plans are definitely gaining traction, there’s much more work ahead in getting companies to on-board their own plans and to make employees aware of their college-saving benefits.

“We have seen a tremendous response so far,” Toner says. “We have over 275 employers currently on our platform, including three Fortune 500 clients.”

Toner adds, “Our goal is simple – we want to help corporate 529 plans do for college savings what the 401(k) plan has done for retirement savings, making it more affordable and accessible to a wider spectrum of families.”

A good place to start:

See the best 529 plans, personalized for you