Hi:

If an employer makes a contribution to a 529 account set up by an employee for the employee's child, is the contribution taxable to the employee (529 account owner) or the child (529 beneficiary)? Or is it a gift from the company to the employee's child?

If taxable to the child (doubtful), is this a good way to shift income to a lower tax bracket?

If a gift, does the 529 rule re aggregating five years of gift tax exemptions (allowing a $50K contribution) apply to the employer, allowing it to make up to a $50K contribution at any one time (so long as it doesn't exceed $50K during a five year period)? If so, wouldn't a good strategy be to ask an employer to fund an existing 529 plan rather than pay a discretionary bonus next year?

Brad

If an employer makes a contribution to a 529 account set up by an employee for the employee's child, is the contribution taxable to the employee (529 account owner) or the child (529 beneficiary)? Or is it a gift from the company to the employee's child?

Sounds like taxable wages to me.

Phil Marti
VITA Volunteer

Phil -

<<If an employer makes a contribution to a 529 account set up by an employee for the employee's child, is the contribution taxable to the employee (529 account owner) or the child (529 beneficiary)? Or is it a gift from the company to the employee's child?

Sounds like taxable wages to me.>>

That's my first impression too! However, aren't 529 Plans designed to allow for gifts from a whole host of donors? Could the employer make a "gift" to the employee's child? I might not want to sit through that audit, but...

Regards, PP

That's my first impression too! However, aren't 529 Plans designed to allow for gifts from a whole host of donors? Could the employer make a "gift" to the employee's child?

As you imply by the use of the quotation marks, the idea of a gift from an employer to an employee's child is farfetched. Now if we're talking about a truly magnanimous employer who makes nondeductible contributions to employees' childrens' college accounts, you might be able to make a case. But I didn't get the impression that was what we were talking about.

Phil Marti

I'm interpreting the previous posts to say that if the contribution is limited to one employee's child, it looks too much like income shifting.

What if the (magnanimous) employer had a company-wide benefit plan for funding 529 plans established by employees for their children, with the amount of the annual funding being a percentage of, let's say, the salary (or total compensation?) of the employee? Would that avoid classification of the annual employer contribution as wages of the employee?

Brad

Phil -

I made that statement with tongue firmly in cheek... ;)

PP

What if the (magnanimous) employer had a company-wide benefit plan for funding 529 plans established by employees for their children, with the amount of the annual funding being a percentage of, let's say, the salary (or total compensation?) of the employee? Would that avoid classification of the annual employer contribution as wages of the employee?

We're way outside my area of expertise here, but I think I'd stay as far away from the word "benefit" as possible. Tax law prescribes the treatment of employee benefits, and if the law doesn't say it's exempt, it's taxable.

As I said before, I think the only possible approach would be true gifts made by, but not deducted by, the employer.

Phil Marti