Magazine article Workforce

A Short Course in College Savings Plans

Magazine article Workforce

A Short Course in College Savings Plans

Article excerpt

Given the staggering costs of college education-up to $225,000-these 529 plans, with their significant tax advantages, are a voluntary benefit you might want to offer employees. But it pays to know what you're getting into.

Nary a day goes by without a Madison Avenue bombardment of ads hawking the hottest topic in financial services: Section 529 plans. Simply stated, the deals are college-savings plans with tax advantages that address and exploit a primary family financial concern.

As the plans gain widespread acceptance, they are increasingly becoming a must-have benefit for any company looking to offer a competitive benefits program. If you wish to attract and retain key employees, you should consider offering this program. As with any new benefit, however, there are pitfalls that informed human resource executives should be aware of.

It is, of course, easy to understand why the plans are so inviting. College costs are fast becoming out of reach for the average household. Studies have shown that college costs have risen at twice the rate of inflation for most of the past two decades. According to the College Board's annual survey "Trends in College Pricing," by the time a child born today enters college in the year 2020, the cost of a four-year education at a public university will be more than $85,000. The price at a private institution: a staggering $225,000.

To help offset these expenses, the federal government created Section 529 plans in 1996. Though they have evolved since then, the basic premise is to provide a tax-advantaged plan to help people save money for college expenses. In addition, there is an estate-tax benefit that removes the assets from the donor's estate and allows donors to accelerate the use of the annual gift-tax exclusion. The Economic Growth and Tax Relief Reconciliation Act of 2001 has made these programs even more attractive by allowing qualified withdrawals to be taken completely free of federal income taxes when used to pay for qualified education expenses-at least through 2010. These expenses include tuition, room and board, books and fees, and any other required student expenses at any accredited college or university in the United States. Previously, withdrawals were taxed at the beneficiary's rate. According to the College Savings Plans Network, an affiliate of the National Association of State Treasurers, more than 3 million children across the country are enrolled in a state college-savings plan. Assets in these programs now exceed $18.3 billion.

What to watch out for

In selecting a 529 plan, it is important to shop around. Established mutual fund companies and 401 (k) providers such as Fidelity Investments, Putnam Investments, TIAA-CREF, Vanguard, and Merrill Lynch have rushed into the exploding marketplace to offer and create their own proprietary solutions. Typically, insurance or 401 (k) vendors will describe the plans as "just like a 401 (k)" but easier to administer. Most will say there's no cost to the company, and virtually no work or maintenance-no plan documents, no ERISA provisions, and no nondiscrimination testing. It is commonly said that there is no liability involved, since companies technically aren't sponsors but are merely facilitating the benefit by offering it in the workplace. Also, unlike an Education IRA or other vehicles, 529s have no age or income restrictions, thus allowing parents, grandparents, and even family friends to contribute to a beneficiary's account. Plans are available for post-tax payroll deduction or direct deposit to make it easier for employees to save.

The reality can be quite different. The plans, in fact, aren't all the same. The federal government authorized individual states to oversee these programs. Subsequently, there are now about 50 different programs available, all with varying features, capabilities, and tax benefits. Some states offer state tax deductions for residents using their own state's plan. …

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