529 Conference 2016: Building Momentum with Corporate 529s

By Paul Curley | paul.curley@strategic-i.com | October 4, 2016

How can corporate 529s help you build momentum for an effective employee benefit strategy?

Based on recent legislation, the corporate 529 channel is poised for growth in the near future for financial advisers, accountants and estate planners. This year, four bills have been introduced that would expand incentives for employers to provide 529s as an employer benefit to employees. First on April 28th, 2016, U.S. Senators Richard Burr and Bob Casey introduced Senate Bill 2869 with a title of, “The Boost Savings for College Act” that would create an employer tax deduction on 529 savings plan contributions to employees up to $1,000. Second on May 10th, Representative Bruce Poliquin of Maine introduced House Bill 5186 that would create (if passed) a tax deduction for companies on contributions to employee’s 529 plans. Third on May 11th, Representative Dold of Illinois introduced House Bill 5191 that would create (if passed) a tax deduction for companies on contributions to employee’s 529s plans and student loans. Fourth on May 12th, Representative Lynn Jenkins of Kansas introduced House Bill 5193 titled, “529 and ABLE Account Improvement Act of 2016” that would encourage more employers to provide access to 529s. Building upon the volume of legislation focusing on the corporate 529 channel, the 529 Conference 2016 in Orlando included a session titled, “Corporate 529s: Building Momentum for an Effective Employee Benefit Strategy.” This week’s article will provide market sizing and data on the channel, an overview of the panel discussion and the pros and cons of focusing on this channel as a means to grow and protect your book of business.

Market Sizing: Based on data gathered directly from product providers and presented at the 529 Conference 2016 by Strategic Insight, the corporate channel contributed an estimated $628 million into 529 accounts in 2015. This represents 2.5% of industry gross sales for the year. Additionally, 12% of 529 users enrolled through their employer, based on survey data reported in the Strategic Insight 529 Industry Analysis 2016. Alternatively from the employer perspective, 6.0% of employers offer 529s as an employee benefit based on the PLANSPONSOR 2015 Defined Contribution (DC) Survey. Lastly, 65% of advisers believe that offering a 529 plan as part of an employer benefits package would certainly or very likely lead to usage of 529s based on the proprietary survey of advisers reported in the Strategic Insight 529 Distribution Analysis 2016. Therefore while the channel is currently being used, there is opportunity for growth were legislation to pass to incentivize employer matching programs.

Considerations for Corporate 529s:

—Demand Creates Value Proposition: Employees are increasingly demanding help in college financial planning, which drives demand for free employee education workshops by advisers. While paying for higher education should be a long-term goal and should therefore allow for a long-term plan, the demand is especially high for employees that are trying to start late-stage planning. This demand provides you with an opportunity to provide value to the employers and employees, and in turn be a resource for when the employees need to pivot to other financial planning needs. This ability to provide value in college financial planning in addition to other employee benefits will provide you with differentiation within the competitive field of planadvisers

—Access to Improved Pricing: One benefit to qualified employers based on number of employees is that they get to access to group advisor-sold options, which typically offer a competitive discount to participants. For example, employees may be able to access A-shareclasses at NAV or dedicated shareclasses for the employer channel such as E shares, which lowers the cost to participate.

—Employer Cost-Benefit Analysis: Plansponsors that provide college financial planning employee benefits are expected to improve their ability to gain and retain top talent. Additionally, this benefit is achieved with little to no cost to the employer in terms of setup and on-going costs, as the benefit can be offered to employees during onboarding and during the annual benefits review. Additionally, the setup does not impact W-2 as contributions are made after-tax, and setup does not impact other reporting such as Form 5500 as the product provider is responsible for administration of the plan. Therefore, the benefit is provided at little to no cost to the employer

—Auto-Enrollment: As an added benefit to the employee, automatic enrollment during onboarding helps the employee to save efficiently. As noted at the 529 Conference 2016 by Ryan White, 529 Specialist within the Product Management team of Columbia Threadneedle Investments, automatic contributions provide a benefit to the employee through enhanced college financial planning, based on the “Peace of mind contribution method – out of sight, out of mind.” Therefore corporate 529s build an effective employee benefit strategy for employers and planadvisers, and an effective college financial plan for employees.

—Portability Value-Add: Employees are able to retain their 529 plan assets when transitioning from one company to the next, as the product provider administers the plan. This lowers the administrative hurdle for employees.

—State Initiatives: In 2010, Illinois started to allow employers to claim a state tax credit of 25% of an employer match up to $500 per employee through 2020. This last year, a new bill was proposed that would increase the amount to $1,000 and extend the sunset of the legislation from 2020 to 2025. Additionally, Nevada passed Senate Bill 412 in 2015 that would provide a tax credit for employers who make matching contributions to employees participating in a Nevada 529 plan. Specifically, the employer receives a 25% tax credit on matched contributions up to $500 per employee, and is effective January 1, 2016. Additionally, any unused credits for the company may be carried forward for five years. Therefore, momentum is building at the state legislative level, in addition to the federal level.

—Suitability for Multi-State Employers: One factor that advisers, accountants and estate planners should review is their 529 plan selection process when employers have employees in multiple states. This issue arises when there is a state tax incentive available to an employee in certain states that may be missed if a plan is not offered by the employer. In order to ensure suitability of plan selection and align with best practices, advisers should create, document and implement a 529 plan selection process, and provide disclosure to employees of any potential state tax deduction missed if certain plans are used.

—Employee Tax on Employer Match: As contributions into 529 plans are made with after-tax dollars, employees would need to pay tax on 529 plan employer matches, unless the company pays the employee for that component as well.

Therefore, advisers, accountants and estate planners should understand the key components of corporate 529s, as well as the potential for additional growth should legislation provide additional incentives for employers to do the business. In doing so, you will provide value to your institutional and retail clients, and in turn, grow and retain your book of business. Have the college financial planning discussion with your clients today.