Every 7 seconds, a baby is born in the U.S. That means that every 8 seconds, you have a set of parents that will worry for the next 18 years about how to finance that baby’s college education. This concern isn’t misplaced.
According the National Center for Education Statistics, it currently costs over $31,000 per year to attend a private 4-year college. If college costs continue to rise at 5 percent annually (as they have since 1990), then parents of a new-born baby in 2011 will need over $290,000 to pay for a college education. Even after factoring in financial aid, the family contribution to the total cost could easily surpass $100,000. If your employees have kids, then this is on their minds.
You can help ameliorate the concern by offering your employees the ability to make automatic payroll deductions into a 529 savings plan.
529 Savings Plan Primer
It’s important to remember that there are two types of 529 plans: Savings plans and pre-paid tuition plans. This program is for the 529 savings plans which are basically tax-deferred investment accounts. The proceeds from this investment can be used to pay for tuition at any college or university. The plans are sponsored by state government, state agencies and educational institutions. There are currently 118 such plans in the U.S., and each state has a 529 with different investment options and fees. You are free to open a 529 savings plan in any state, regardless of where you live.
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How your business can turn this into a benefit
Many states offer employer supported 529 savings plans. These plans allow companies to offer their employees a voluntary benefit in the form of automatic payroll deductions deposited into a 529 savings plan. Numerous studies, including several by the Employee Benefit Research Institute prove that auto-enrollment and auto-contribution features on retirement accounts improve participation significantly and are seen as valuable by employees. The same principles apply to 529 savings plans.
The plans typically support two methods of payroll deduction: ACH direct deposit and “Check and roster,” whereby a lump-sum amount for all employees is sent by check each pay period accompanied by a roster which indicates the contribution instructions of each employee.
Typically, employees must abide by certain rules in order to participate:
1. The employee is responsible for opening the account, authorizing the automatic payroll deduction and ensuring that all information is up to date.
2. All employee contributions must be after-tax contributions.
3. The employee must be the account owner.
4. The employee may have to agree to minimum deduction amounts for each payroll period (although these tend to be quite low).
The cost to your business is virtually zero
Unlike other employee benefits, the cost to your company of offering automatic payroll deductions on 529 savings plan is effectively zero. There may be some minimal expenses related to updating your payroll records, but that is it. There is no cost to enroll in the program. There are no additional reporting requirements. It’s also a voluntary benefit so there are no costs associated with mandatory compliance. Institutional representatives of your state’s 529 plans can provide free, onsite training for your employees on the benefits of 529 plans, how they work and how to take advantage of the new automatic payroll deductions you are offering.
First step to getting started with a 529 savings plan: automatic payroll deduction
It’s important to confirm if your state offers a program that supports automatic payroll deductions for 529 savings plans. Upromise Investments, Inc, a division of Upromise, the largest college savings service provider in the country, manages 529 plans in numerous states that support payroll deductions. You can start there.