Can a Business Contribute to a 529 Plan?

Businesses of various sizes and structures, including corporations, partnerships, and LLCs, can contribute to 529 plans, which are tax-advantaged savings accounts designed for education expenses. These contributions can serve as a valuable employee benefit, helping to attract and retain talent by supporting their families’ educational savings goals.

Tax Implications for the Business and Employee

An employer’s contribution to an employee’s 529 plan is treated as employee compensation. For any business structure, including C Corporations, S Corporations, and LLCs, this contribution is deductible as an ordinary and necessary business expense, similar to a salary or bonus. This deduction reduces the company’s taxable income, and for pass-through entities, it lowers the net income that flows through to the owners.

Since the contribution is considered compensation, it is a taxable fringe benefit for the employee. The amount is subject to federal income and payroll taxes, such as Social Security and Medicare, and must be included in the employee’s W-2 wages. The business is responsible for withholding and remitting these taxes.

State tax rules for business contributions to 529 plans vary significantly. Many states offer a state income tax deduction or credit to encourage these contributions. Some states provide these tax benefits only if the contribution is made to that state’s own 529 plan. The value of these credits or deductions can be a factor for a business deciding whether to implement a 529 contribution program.

Beneficiary Impact

For the beneficiary, the funds contributed by the business grow within the 529 plan on a tax-deferred basis. This means that any investment earnings are not subject to federal income tax as they accumulate. When the money is later withdrawn to pay for qualified education expenses, such as college tuition, fees, books, and room and board, the withdrawals are entirely free from federal income tax. This tax-free growth and withdrawal are the primary advantages of using a 529 plan for education savings.

Establishing or Contributing to a Plan

The company must first decide on the structure of its 529 program. A primary decision is whether the business will contribute to an employee’s existing 529 plan or if the business will open and own a new plan on behalf of an employee’s beneficiary. The more common approach is to contribute to an employee-owned account. The business will also need to determine its contribution strategy, such as offering a set amount per employee or a matching contribution.

The business must gather specific information. This includes the company’s own Employer Identification Number (EIN) for any tax reporting purposes. For the contribution itself, the business will need the beneficiary’s full name and Social Security number, as well as the specific 529 plan account number if contributing to an existing plan.

If contributing to an employee’s existing account, the business may need to obtain a deposit coupon or contribution form from the 529 plan administrator, which is then mailed with a check. Many plans also facilitate electronic funds transfers directly from the business’s bank account.

If the business decides to open a new 529 account that it will own, it must obtain an entity application form from the chosen state’s 529 plan provider. These forms are different from the applications used by individuals. The business will need to complete the application with its information as the account owner and the employee’s child as the beneficiary, and submit it along with the initial contribution.