Employers may be missing a tremendous opportunity to help employees save for one of the most important, and expensive, investments they will ever make – the college education for their children.
We all know that one of the biggest advantages of an employer-sponsored retirement program is the automatic payroll deduction. “Out of sight, out of mind” is what I hear consistently from employees when they think about the funds that are contributed to their 401(k) plans.
Well, you can make it just as easy for college costs by offering payroll deduction for your state’s 529 College Savings Plan.
This can be an easy supplemental benefit that costs the employer nothing, but provides the convenience for employees to make payroll contributions towards the cost of college for their children, which is viewed very favorably as an employee incentive. Because the payroll deduction would simply be set up as an automatic direct deposit, it requires no W-2 adjustments or 5500 administration on your part from an HR perspective.
The 529 College Savings Plans have special tax treatment, so it is also important to not only provide the ability to contribute to the plan, but also to educate your employees on the advantages and disadvantages of signing up.
On the federal level, the account grows tax-free and withdrawals are not taxed if used for qualified college expenses. However, if a withdrawal is made for any other purpose, the growth would be not only taxed, but also subject to a 10 percent penalty in 2010. Many states also provide a tax incentive, either in the form of a credit or a deduction. My home state of Pennsylvania offers up to a $13,000 per beneficiary state income tax deduction, and both New York and Connecticut offer up to a $5,000 single or $10,000 married filing joint deduction. These state incentives are sometimes subject to recapture if a withdrawal is made for anything other than college costs.
To find out which 529 Plan is offered by your state, check out www.savingforcollege.com and contact the plan provider to get started on establishing a payroll deduction option for your employees. Launch the program with a College Planning workshop so that your employees can make an educated decision on joining the plan and have a chance to get their questions answered about the new benefit.
This was originally published on the Financial Finesse blog for Workplace Financial Planning and Education.