4 reasons to make 529 Day your new favorite workplace holiday

Did you know that May is Correct Posture Month/? National Asparagus Month? The time of year for National Dance Like a Chicken Day? Neither did I, but out of all of May’s fun holidays, the one most relevant to the work I do is 529 Plan Day on 5/29—and I believe this particular day deserves some attention from benefits providers. Here’s why:

For families that value education, it can sometimes feel like the financial deck is not stacked in your favor. Every dollar counts as education costs keep rising—along with inflation and volatility in the markets that can make saving for the future feel overwhelming. In 2021, family income and savings covered more than half of college costs, but not all families (just 58%) have a plan to pay for all years of college, according to Sallie Mae.

Employers can help their employees navigate this challenge with targeted education around education-focused benefits and choices, like 529 plans. Many of your participants might not know what a 529 Plan is or how it can make a difference in their educational planning. 

So, for this year’s 529 Plan Day, here are the basics your participants should know about this hidden gem of a financial tool, and how you can help them navigate their family’s education needs.

What is a 529 plan?

A 529 plan is a flexible, tax-advantaged investment account that lets families contribute money and grow it tax-free over the years. Once you’re ready to start paying for education costs, the 529 plan account owner can make tax-advantaged withdrawals as long as they are used for qualified educational expenses. 

A 529 plan can work with just about any budget. While some plans may have a low initial deposit requirement, there are no minimum required contributions once your account is open. 

Encourage your employees to check in with their tax advisor about their individual circumstances. Most withdrawals for qualified educational expenses are exempt from federal and (most) state income taxes. 529 plans are state-sponsored, but most plans welcome participants from all over. Many states even offer income tax deductions or credits (note, some may be limited to residents investing in the in-state plan) to encourage people to make contributions to 529 plans, so it’s possible to make a 529 plan part of your tax planning strategy. 

It’s important to highlight any resources or support your company offers employees, such as access to a financial or tax professional who can offer them advice on their educational planning needs. 

What can you do with a 529 plan?

When we talk about paying for education, many of us immediately think of four-year universities, but a 529 plan can be used for so much more. Do your participants know that?

Let me give you a sense of how flexible these accounts can be: When the account beneficiary is ready to go to school, you can put the proceeds toward many kinds of institutions—cooking schools, community colleges, trade and vocational schools, and even eligible international schools. 

And it’s not just about tuition. A 529 plan can be used for a wide array of qualified education expenses, including room and board, books and supplies, semesters abroad, and qualifying apprenticeship programs. Some elementary and high school tuition may also be eligible, and these days you may even be able to use funds from a 529 plan to repay a portion of qualified student loans. 

It’s clear that this financial tool can potentially help your participants with a wide range of educational expenses. Think about ways your company can raise awareness and educate participants on how to help maximize this tool, and any employer matching contributions you might offer. Maybe it’s time for a 529 Plan Day celebration at the office!

Who benefits from a 529 plan?

Your participants deserve to know that a 529 plan isn’t just for kids. Any adult can open a 529 plan for anyone’s future educational expenses—even their own! And anyone else can also contribute to the plan along the way, and that includes parents, grandparents, aunts, uncles, and friends. 

There are no income or age requirements for a 529 plan’s recipient, and with some limitations you can always swap out the account beneficiaries if you need to for any reason at any time. This feature gives you even more flexibility in terms of who can use the 529 plan proceeds, when, and why—if your niece earns a full ride, for example, or your spouse decides to go back to school.

And a 529 plan doesn’t necessarily mean that financial aid is out the window. If you are a parent and the 529 account you manage is for your child, then your child’s financial aid will decrease by no more than 5.64% of the account value. However, the rules are different depending on the relationship between the account custodian and beneficiary, so make sure to factor that into your decisions. 

Is a 529 plan right for your employees?

Given how flexible a 529 plan can be, it can be a great solution for a variety of education planning needs. However, it’s important to encourage your participants to dig through all your choices and make sure they understand how this type of account would affect taxes, overall financial planning, their own future retirement needs, and their intended recipient. Then, they can make an informed decision from there.

Employers can add value by offering employees access to financial coaches, tax professionals, or advisors to discuss their personal situations and explore tools and opportunities—or even offering  matching contributions to 529 plans or student loan repayment. Also, go the extra mile by helping your participants identify and contact any 529 plans they’re interested in to ask about their specific rules and tax implications.

The most important thing is that your employees understand that they have choices when it comes to their family’s education needs—and that they know you are there to help support them along the way. A 2019 survey by College Savings Plans Network found that more than two-thirds of people throughout the country hadn’t even heard of 529 plans—but it’s time we change that. Whether or not your company offers matching contributions, you can add value by offering your employees education around 529 plans, driving home the message that it’s “the earlier, the better” when planning for future education costs. 

Also, please note this important disclosure information: Assets can accumulate and be withdrawn federal income tax-free only if they are used to pay for qualified expenses. Qualified expenses include tuition, fees, room and board, books and supplies at virtually any accredited post-secondary school. Effective January 1, 2018, the definition of qualified education expenses expanded to include tuition for K-12 schools, as a result of the 2017 Tax Cuts and Jobs Act. The new tax law limits qualified 529 withdrawals for eligible K-12 tuition to $10,000 per beneficiary per year and state tax treatment will vary on a state by state basis. The state tax treatment of K-12 withdrawals is under review by many states. Account owners should consult with a qualified tax advisor prior to making such withdrawals as they may be subject to adverse tax consequences. Earnings on non-qualified distributions will be subject to income tax and a 10% federal income tax penalty. Note, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 signed into law Friday, December 20, 2019, expands the definition of qualified higher education expenses for federal income tax purposes to include certain costs associated with qualifying apprenticeship programs and up to $10,000 (lifetime limit per individual) in amounts paid towards qualified student loans of the 529 plan designated beneficiary (or such beneficiary’s sibling). Note, however, using 529 plan distributions to repay qualified student loans may impact the deductible of student loan interest. This new provision applies to 529 plan distributions made after December 31, 2018. The state tax treatment of 529 plans (including the state tax treatment of contributions and distributions) may be different from the federal tax treatment and may vary based on the particular 529 plan in which you participate and your state of residence. If the applicable state tax law does not conform with the federal tax law, 529 plan distributions used to pay certain expenses, such as principal and interest on qualified student loans and/or qualifying apprenticeship costs, may not be considered qualified expenses for state tax purposes and may result in adverse state tax consequences to the account owner or designated beneficiary.

Kate Winget is head of Corporate and Participant Engagement, Morgan Stanley at Work.

Disclosures: This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Investments in a 529 Plan are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so an individual may lose money. Investors should review a Program Disclosure Statement, which contains more information on investment options, risks factors, fees and expenses and possible tax consequences. Investors should read the Program Disclosure Statement carefully before investing.

If an account owner or the beneficiary resides in or pays income taxes to a state that offers its own 529 college savings or pre-paid tuition plan (an “In-State Plan”), that state may offer state or local tax benefits. These tax benefits may include deductible contributions, deferral of taxes on earnings and/or tax-free withdrawals. In addition, some states waive or discount fees or offer other benefits for state residents or taxpayers who participate in the In-State Plan. An account owner may be denied any or all state or local tax benefits or expense reductions by investing in another state’s plan (an “Out-of-State Plan”). In addition, an account owner’s state or locality may seek to recover the value of tax benefits (by assessing income or penalty taxes) should an account owner rollover or transfer assets from an In-State Plan to an Out-of-State Plan. While state and local tax consequences and plan expenses are not the only factors to consider when investing in a 529 Plan, they are important to an account owner’s investment return and should be taken into account when selecting a 529 plan. Tax laws are complex and are subject to change. This information is based upon current tax rules in effect at the time this was written. 

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