May 29 is 529 Day in Idaho and a great time for employers to considering offering this low-maintenance benefit to their employees. The benefit is a 529 plan, which is the Internal Revenue code for a tax-advantaged college savings plan. The plans are state sponsored and Idaho has been a leader in its offerings since Congress made them available in the mid ‘90s.
The beauty of a 529 plan is that it enables an individual to save for college with earnings that grow tax-deferred and qualified withdrawals that are tax-free. Plus, savers get to deduct up to $4,000 a year for singles, and $8,000 for married couples filing jointly, from their state income taxes.
The plan is also very flexible. Individuals can save for themselves, or for their children, nieces, nephews, or children of their friends. The funds can be used to pay not only tuition, but also certain other higher education expenses like fees, computers and course-related software, and room and board. If you save for a child who decides not to go onto college, in many cases you can transfer the beneficiary. And, the funds can be used at eligible schools worldwide, including vocational/technical schools. In other words, if you save in an Idaho 529, you can use those funds to pay for schools out of state or out of the country.
Employers can offer these plans as part of their total rewards by enabling employees to sign up for payroll direct deposit. The minimum contribution is $15 per paycheck per account. Like a 401(k) or other retirement savings account, employees have control over their account assets, which are professionally managed and offer a variety of investment options, depending on an individual’s risk tolerance and savings timeline.
Making this program available can make a significant difference in an employee’s ability to save for higher education expenses. According to the IDeal program website, an individual who saves $100 per month for 18 years and earns 5 percent returns could have $35,000 to spend on higher education. However, if that same individual had to borrow the $35,000 for higher education, she would likely pay an additional $17,200 in interest, assuming an 8.5 percent rate. That’s money that people could instead put into their retirement or other savings.
Project Student Debt reports the average college senior graduates with nearly $25,000 in student loan debt and is projected to keep rising. Helping both employees and their children reduce or eliminate this kind of debt provides financial security for employees and their families. It’s a benefit with winning returns for the workplace when employees can focus on their job and their performance instead of debt.
Michelle Hicks, a senior professional in human resources, is a director in the communication practice of Buck Consultants, a Xerox company.