Employers looking for low cost employee benefit programs should consider sponsoring an Indiana College Choice 529 “payroll deduction” program for employees. This PayDay will discuss the advantages of IRS Section 529 plans as to both tax benefits as well as how employers can offer this program at zero cost to employees.
WHY DO PEOPLE SET UP IRS 529 PLANS FOR THEIR KIDS, GRANDKIDS OR EVEN THEIR OWN EDUCATION?
IRS Code Section 529 provides that anybody can establish a plan to help save for college (or in some cases K-12 education) for their children, grandchildren, their own education, or anybody for that matter, by contributing funds to administrators of state 529 plans (NOTE—each state has their own 529 plan rules within the IRS/federal 529 tax law). The tax and financial advantages of a 529 plan are as follows:
- Funds invested into a 529 plan (with after-tax dollars) grow tax-deferred over time and the accumulated funds can be withdrawn income tax-free if used for qualified educational expenses. As we all know from examples of tax-deferred growth in IRA/Roth retirement funds, the fund balance can grow more quickly/larger if taxes are not imposed on the fund earnings.
- Distributions from a 529 plan are not taxed if used for qualified educational expenses—so the tax “deferral” becomes tax “free” if the funds are used for the intended purpose of education of a beneficiary of the 529 plan (By the way, the account owner can change the beneficiary to another family member if desired.)
- Indiana offers a state tax credit of 20% of up to $7,500 of contributions, by household, for Indiana taxpayers/residents. Since a tax “credit,” unlike a “deduction,” is worth dollar for dollar, Indiana taxpayers can receive up to $1,500 each year from Indiana to help fund a 529 plan for education. This is true even if the beneficiary attends school outside the state of Indiana, and the Indiana tax credit is also true if the plan is used to fund K-12 education to an Indiana private school. This Indiana tax credit (free money) is limited to $1,500 per household, regardless of how many beneficiaries are involved in the 529 plan—So a “cap” of $1,500 per Indiana household! The credit is available for funding of educational expenses at trade/technical schools as well as colleges, graduate school, medical/law schools, etc.—NOTE—each state has their own state tax laws on 529 plan distributions!
- Effective January of 2024, unused funds in an IRS 529 plan can be rolled tax-free into the beneficiary’s Roth IRA plan IF the 529 plan funds have been in the account for at least 15 years. Other conditions apply for the tax-free rollover to a beneficiary’s Roth IRA account, so ask a tax advisor about 529/Roth IRA rollover details.
- Wealthy taxpayers can use 529 plan account funding to reduce a taxable estate by contributions to 529 plans. Ask your financial advisor about using 529 plan contributions for estate planning purposes.
QUALIFIED EDUCATIONAL EXPENSES WHICH CAN BE USED FOR 529 PLAN DISTRIBUTIONS
IRS Section 529 defines educational expenses/costs as tuition, room/board, fees for labs, etc, books, study materials, etc—so 529 plans can be used rather broadly for educational expenses.
An exception exists for costs of attending K-12 private schools in that only tuition costs are qualified for 529 tax-free distributions. Each state’s 529 plan sponsor can provide further details about what costs can be used in their specific state in a tax-free manner.
TYPES OF SCHOOLS WHICH QUALIFY FOR IRS 529 PLAN FUNDING
The original purpose of 529 was to provide incentives for people to save funds for college education in a tax-wise manner. The majority of 529 plans continue to be used to fund college and graduate education, and are often established and funded by parents and grandparents for family members. However, the tax law was changed a few years ago to permit 529 accounts for K-12 education, with limitations (NOTE—Indiana permits 529 plans to be used for K-12 education/tuition up to $10,000 per student in the same household—other states will have their own special rules for K-12 education). Also, many people are not aware that they can fund 529 plans and take distributions the same year to pay for their own/personal education, such as attending college while also working. In Indiana, adults can contribute to their own 529 plans, claim the tax credit of 20% of their contributions with a $1,500 per year cap, and use the funds to pay for their own education/college costs. We suspect that many Indiana residents are not aware that they can obtain $1,500 of tax-free money from Indiana to help pay for their own education by funding and withdrawing 529 plans in the same year!
IRS 529 plans can also be used for trade/technical schools and graduate school costs such as law/medical schools and MBA costs.
IMPACT ON FINANCIAL AID/FAFSA FORMS
Indiana College Choice estimates that only about 3-6% of the value of a 529 plan, owned by somebody other than the student, is “counted” for financial aid/FAFSA purposes—in other works, Indiana says that 529 plans have a minimal impact on how much financial aid a student can receive. We do recommend that people concerned about the impact of a 529 plan on financial aid/FAFSA consult with the states’ 529 administrators, the college’s admissions advisors and financial advisors in general who are experts in educational fund planning.
EMPLOYERS WHO WISH TO SET UP PAYROLL DEDUCTION PROGRAMS AS AN EMPLOYEE 529 BENEFIT PROGRAM
Employers can promote 529 plan funding as “after-tax payroll deductions” from employees by having an employee complete “recurring contribution” payroll deduction forms obtained from Indiana College Choice’s website (or any other state’s website) and providing them to the employer. Each employer can promote the no cost 529 benefit plan by drafting their own memo to employees—no discrimination or participation requirements are in play with offering this benefit plan. AccuPay can withhold the employee’s contributions “after-tax” based upon receiving the account number of the employee’s 529 plan(s) and the dollar amounts requested to be withheld. Indiana requires that the employee contribute a minimum of $10 per payroll period per 529 account. The employees will then be able to manage their own 529 accounts online with Indiana or other states’ 529 plan administrators. AccuPay can help any of our clients in the following ways:
- We will setup an employee’s payroll deduction information based on receipt of the payroll deduction form from the employer (we can not deal directly with your employees)
- AccuPay will withhold and “route” each employee’s payroll deduction amount to their 529 plan accounts—quite similar to direct deposit funding
- AccuPay will code the 529 plan contributions and report the YTD total in “information box 14” of the annual W-2. Employees will then have their total annual 529 contributions for their personal state income tax returns (Indiana has a Form IN-529 which is completed to claim the tax credit on an individual’s IN tax return.)
CONTACT INFORMATION TO LEARN MORE ABOUT INDIANA’S 529 PLAN DETAILS AND PAYROLL DEDUCTION FORMS
You can obtain more information about Indiana’s IRS 529 plan program by visiting their website at www.collegechoicedirect.com or calling 866-485-9415 to answer specific questions. Account holders can set up recurring contributions and print payroll deduction forms off the website. Outside Indiana employees can visit their own state’s 529 plan administrator for special rules/forms in their own state.
FOR MORE INFORMATION TO OFFER A 529 PLAN FOR YOUR EMPLOYEES FROM ACCUPAY
Contact your payroll specialist at AccuPay to indicate your desire to offer a 529 payroll deduction plan to your employees. Payroll deduction forms may be submitted in the same manner as direct deposit forms. Your Payroll Specialist can assist you with setting up this information online if that is your preference. If you write up a plan document/narrative to offer the plan to employees, please send it to your Payroll Specialist so we can see and understand the details of your plan. You can make your own rules as to participation, waiting periods, etc. As with any employee payroll deductions, you may wish to have HR review your written plan. You may keep it very informal if you prefer, as this does not require a “plan document,” legally.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.
