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Are 529 Employer Matches the New Company Perk?

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Last month, several news outlets reported on a company offering an employer match for 529 college savings plans for its 600 employees, much like many employers now offer matching contributions to their employees’ 401(k) retirement plans.

A 529 plan lets you deposit funds intended for eligible college expenses and grow that money tax-free. Each state offers at least one 529 plan and although you’re not restricted to your home state, some offer state tax breaks or other benefits to residents who invest in their state’s plan.

With college costs outpacing inflation, the news about a 529 employer match had some people wondering if 529 employer matches might be the next big thing in employee benefits.

Not likely, says Mark Kantrowitz, publisher of Fastweb.com and FinAid.org. “Employers are more likely to help employees pay off their student loans, since there’s a more direct benefit to the employer, not just the employee,” he says, adding that student loan repayment can work as an employee retention mechanism because the loan is typically repaid over time. “Usually it’s doled out a certain percentage or a certain dollar amount per year for years,” he adds. “Maybe it’s a 10 or 15 percent per year.” That provides a powerful incentive for employees to stay put.

The other benefit to employers is that repaying a student loan can be cheaper than giving an employee a raise or offering to match 529 contributions for employees’ children, because a loan repayment is a finite amount of money. A raise is permanent and employees with young children could mean matching 529 contributions for the next 18 years or even longer.

Student loan repayment is most common in professions like nursing. “Because they’re in great demand, some skilled nursing facilities offer this as a kind of bonus,” says Kantrowitz. “The other variation is where if a graduate worked in a public service job and is repaying loans under income-based repayment, some schools will actually make the rest of the loan payments after a certain number of years.”

However, having an employer or college repay a student loan can result in taxable income for the borrower, a fact that some legislators are trying to change. According to Kantrowitz, Rep. Steve Israel of New York introduced legislation that would facilitate student loan repayment using pre-tax dollars through the workplace but it was never reported out of committee. Still, some employers offer direct deposits from the paycheck to a 529 account so that contributions are automatic.

Kantrowitz says employers matching 529 contributions or repaying student loans would be more common if tax benefits were granted to employers or employees. However, he adds that it’s still a good idea for the employee to contribute to a 529 plan even if employer matching isn’t available.

“The most important thing is to get started saving for college, no matter how little,” he stresses. “Set up one of these automated savings plans where you can have an automatic transfer as little as $25 a month. Once you get started, it becomes easier to increase that amount. When the baby no longer needs diapers or your kids no longer need childcare, increase the amount you’re saving.”

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