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As higher education becomes ever more expensive, some states are giving employers incentives to contribute to 529 college savings accounts for their workers.
Fifteen percent of employers with 500 or more employees now help workers fund 529 plans, either by letting them deposit their own money through paycheck deductions or by providing employer contributions or matching funds as well, according to the Employee Benefit Research Institute. Still, college savings accounts have a way to go before they become as common as other workplace benefits. By comparison, about a quarter of such employers offer help with managing student loans.
But at least eight states now offer tax credits or deductions for employers that contribute to workers’ 529 accounts, and some have recently fattened their incentives to make them more enticing.
Wisconsin, for instance, this year revised the way it calculated a tax credit available to employers for contributing to employees’ state 529 accounts. Previously, the maximum credit was about $240 per employee; now, it’s $800 per employee. (The credit is 50 percent of the employer’s contribution. An employer could contribute $1,600, for example, and get the maximum credit. The employer could contribute more, but the credit wouldn’t increase.)
And Pennsylvania this year approved a new 25 percent tax credit, effective next year, on employers’ 529 contributions of up to $500 (meaning that an employer contributing $500 would get a $125 tax credit).
Other states offering employer tax perks for 529 contributions include Arkansas, Colorado, Idaho, Illinois, Nebraska and Nevada.
State-sponsored 529 accounts — named for part of the federal tax code — are used to pay for college expenses and other education costs. Money deposited in the accounts can be invested and grows tax free. The funds are withdrawn tax free when used for eligible expenses like tuition, housing, food and books.
Permissible uses for money in the accounts have broadened since 529 plans became available more than 20 years ago. Most recently, under the federal Secure 2.0 law, up to $35,000 in a 529 account can now be rolled over to a Roth individual retirement account for the beneficiary of the 529 if certain conditions are met.
Congress had already expanded the use of 529 funds to allow families to save for educational expenses other than college costs, like tuition for kindergarten through Grade 12, as well as for apprenticeships. Also, up to $10,000 from a 529 can be used to repay student loans.
There were almost 17 million 529 accounts, with an average balance of just over $30,000, at the middle of this year, according to the College Savings Plans Network, a group that promotes saving in 529 plans.
Yet industry surveys show many Americans are unaware of 529 plans, even as the price of college rises. The average published price for tuition, fees, housing and food for the 2023-24 school year was $24,030 in-state at a public, four-year college, and $56,190 at a private, nonprofit four-year college, according to the College Board, which administers the SAT college entrance exam.
State employer tax incentives show promise in bolstering employee participation and spreading awareness of saving in 529 accounts, plan representatives say.
As of this year, about 400 companies are enrolled in Colorado’s corporate contribution program, with about 1,300 employees participating, said Angela Baier, the chief executive of CollegeInvest, the state’s 529 program.
“I’m thrilled by the uptake,” Ms. Baier said.
Colorado offers employers that contribute to a worker’s CollegeInvest 529 plan a tax credit of 20 percent of the contribution, up to a maximum credit of $500 per worker per year. (That means an employer can contribute $2,500 per employee, and get $500 per person as a credit.)
Colorado employers can make a one-time gift to workers or match employee contributions over time. Employers have contributed about $4.5 million to employees since the tax credit became available in 2019, Ms. Baier said.
Brett Grischo, the founder of Explore Communications in Denver, said he began matching 529 contributions for employees of his small advertising agency as soon as the credit became available.
Mr. Grischo said he had two children in college and knew the values of saving in a 529 plan and of making employees feel appreciated. “It’s a no-brainer,” he said. It’s not just workers with children who participate, he said, noting that one employee is saving for graduate school expenses.
Kory Woolley, the U.S. manager of retirement at PCL Construction in Denver, said his company contributed a one-time $250 gift whenever an employee became a parent and opened a 529 account. Workers receive a congratulatory email that briefly explains the benefits of a 529 plan and a link to open the account. To qualify for the gift, workers agree to contribute at least $15 per pay period. They can have funds automatically deducted from their paycheck or from a bank account. About 110 employees, of the company’s 1,900 nationally, now participate and about 20 enroll each year. “We understand paying for college can be a daunting task,” Mr. Woolley said.
Jim Holtje, an area manager for PCL Construction in Tampa, Fla., said the company’s offer of a contribution upon the birth of his youngest daughter prompted him to open accounts for her and her older siblings. “It was enough for me to say, ‘I’m going to do this,’” he said.
Some states don’t offer tax breaks to employers, but their 529 plans promote the benefit of offering college savings via payroll deduction. California’s ScholarShare 529 plan offers such a workplace program. A spokeswoman for ScholarShare 529 said 1,350 employers were participating.
Veronica Jordan, the director of people and culture at Buffini & Company, a real estate training firm in Carlsbad, Calif., that participates in ScholarShare’s program, said that while the company didn’t match contributions, payroll deductions offered a simple way to help workers save.
Ms. Jordan said she contributed through her own paycheck to save for her three children. “It’s a great benefit,” she said. “The cost of college keeps going up and up.”
Commonwealth, a nonprofit that promotes saving and financial security, views workplace 529 plans as a way to encourage college savings by low- and moderate-income families. Those workers underuse 529s, research shows, even though attending college can help their children advance economically. But in a survey of 1,000 low- and moderate-income parents, 87 percent said they were likely to enroll in a 529 plan if an employer matched contributions, Commonwealth recently reported.
Brenda Velazquez, a senior vice president at Commonwealth, cited research finding that a low-income child with even a small amount in school savings was more likely to graduate from college than a similar child with no savings account was — perhaps because simply having money designated for that purpose set an expectation that the child would attend college.
Here are some questions and answers about 529 college savings plans:
Do I get a tax break for contributing to a 529 plan?
There’s no federal tax deduction for contributing to a 529 plan, but many states offer tax deductions or credits at the state level.
How can I compare 529 plans?
The College Savings Plans Network offers a comparison tool of plans’ various features.
Morningstar, an investment research company, rates 529 plans annually, based on factors like the quality of a plan’s investment manager, its fees relative to competitors’ and the structure of its investment options.
The pioneering 529 website Saving For College was bought last year by Backer, a financial technology company, and has updated its rating system. Jordan Lee, the chief executive at Saving For College, said that in addition to criteria like plans’ average investment performance over time, the revised approach considered “what the modern consumer values in a 529,” like factors that could affect how much a person saved. For instance, he said, plans that make it simple to automatically increase contributions each year, or to invite family and friends to contribute, can help increase savings.
Do some governments directly seed college savings?
Some state and local governments, as well as school districts and nonprofit groups, arrange modest contributions to newborns or young children to seed their college savings and encourage their families to save more. The funds are often deposited into a state 529 account.
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