Dear Workforce What Are the Audit Requirements for 529 Plans

By Staff Report

Jun. 11, 2004

Dear Wary:

First, a reminder/disclaimer that this article is intended to provide useful information, but shouldn’t be construed as legal advice or a legal opinion.

With that out of the way: Officially known as the Section 529 College Savings Plan, this program is not subject to provisions of the federal Employee Retirement Income Security Act of 1974 (ERISA). There are no participation requirements, plan documents, summary plan descriptions, Form 5500 filings or discrimination tests. Employers have no fiduciary responsibility for the plan, nor any tax-reporting obligation.

Because they aren’t governed by ERISA regulations, 529 plans also have no audit requirements. That does not mean, however, that some element of audit or compliance won’t be instituted in the future.

Employees expect the company to monitor the plan’s performance, especially if it is an employer-sponsored plan. This requires periodic assessment and an investment of time and money.

About 529 plans
Many companies are considering offering 529 plans to their employees. These plans aren’t new, but they’re getting increased attention, thanks largely to the Economic Growth and Tax Relief Reconciliation Act of 2001. This federal law created additional tax benefits and greater portability among state programs.

Surrounded by economic uncertainty and escalating benefit costs, employers want to provide benefits that support financial security without draining their budgets. On an ongoing basis, a 529 plan is relatively inexpensive. An employer only has to set up a payroll deduction and periodically assess the plan’s performance. However, there may be significant up-front costs for choosing an investment fund, educating employees and communication.

Fund selection
Select an investment-funds manager that demonstrates due diligence. All 50 states, as well as the District of Columbia, sponsor 529 plans. These plans have the same features and are treated identically by federal tax laws, but vary regarding state income taxes, contribution limits, penalties, out-of-state issues, fund performance and other matters.

Selection costs could be significant, depending on the analysis required. For example, if your employees live in several different states, you’ll need to research the tax benefits each state offers.

If an employer selects one state plan, chances are good that employees living in that state will enjoy tax savings not experienced by employees who don’t live there. Also, plan designs differ from state to state. In New York State, for example, a student must be in the plan for three years before distributions can be made. This type of plan probably won’t work for employees whose children are already in college.

Ensure the program’s success by providing employees with adequate education andcommunication. Without those important elements, you’ll wind up supporting a program for a small percentage of employees. Communication can be costly. It might include newsletters, brochures and information sessions. Your investment manager also should have excellent communication materials.

SOURCE: Annamaria Azzara, Principal, Buck Consultants Inc., New York, New York, July 11, 2003.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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