DIY 529 Plan

[Guest snmhanson]

My wife owns a S-Corp and several years ago we started a cafateria plan. I am a former accountant and took it upon myself to become educated about 529 plans and wrote and implemented the plan. It has been running for over five years now and everything has gone smoothly. The plan is very small and only has three or four participants during any year out of four or five eligible employees (I know that my wife and I are not eligible to participate of course). I understand the basic rules and regulations about eligibility and participation as well as how the plan needs to operate and as far as I can tell we are doing everything correctly. If we had to pay a TPA to implement and administer the plan we would probably not be able to offer it to the employees as it would probably cost us more than it saves the employees in taxes. The main reason we started the plan is to be able to offer health insurance to the employees that needed it while not having to pay for employees that don't need it (the plan is funded by salary reduction agreements). We also have a medical FSA that a couple of employees take advantage of and a dependant care FSA which no one currently uses. I am comfortable that as a whole we are running the plan properly and have been very careful about making sure I am following the rules. I know it is a bit after the fact but I am looking for opinions from people who have more experience working with 529 plans about whether we are making a mistake operating this plan ourselves. I waded through the rules and regulations and although there are alot of them they all seemed pretty straight forward when applied to our situation. As long as we run the plan correctly as far as enrollment, eligibility, granting benefits, applying the use-it or lose-it rules, etc... should we be pretty safe? Were 529 plans created with the idea that a TPA would always be used or is it feasible for business owners to run the plans themselves? Are there many other small business owners who write and implement 529 plans on their own? I know these are pretty general questions and I will probably get a wide variety of responses so feel free to make whatever comments you would like. Thanks for any input you can offer.

Matt

[Guest TXCafe]

My first question on reading your post was, "What's a 529 Plan?". So I googled it. I came up with this: http://www.sec.gov/investor/pubs/intro529.htm . Apparently, 529 Plans are College savings vehicles? I'm hoping you didn't draft the document to call it a 529 and that you didn't refer to that Section of the IRS Code. I'm going to assume you're talking about a Section 125 Cafeteria Plan. I think it's absolutely possible (and legal) to administer your own 125 Plan. However, there may be times that you think you understand the regulations and you don't. My suggestions would be to 1) price TPAs, you would be surprised how well the tax savings and fees might balance out in addition to the expertise you should be getting with a TPA that may save you quite a bit more should the IRS ever take a look at you and 2) if you decide against a TPA, look into purchasing some guidance from EBIA or one of the other companies that offer it (I mention EBIA because that's who I use but I am under the impression there are others). You might also consider having an expert (be it a benefits attorney or a TPA) review your Plan. If you're going to administer your plan yourself, do your best to keep up with any new regulations and such as there have been changes made and you may find you need to make some amendments to the Plan you have now. Hope that helps!! (My disclaimer is that I'm a Cafeteria Plan Administrator for a mid-sized TPA so my bias is going to be toward getting expert help from a TPA but I tried to also give other recommendations.)

[Guest snmhanson]

Yes, I did mean 125 plan, not a 529 plan. I am a financial advisor and have been doing alot of work with 529 plans lately so 529 was stuck in my head. Sorry about the confusion.

Thanks alot for the help and advice. I have priced the plan out with a couple of TPAs and because there is so little participation it just doesn't pencil out. Just the annual cost (not including monthly maintainance) ends up costing more than the tax savings. If I had to go the TPA route we would probably still offer the plan as a service to the employees but the cost to us (and possibly to them) would definately wipe out any tax benefit. I would scratch the plan altogether if there was a way I could discriminantly offer health insurance to only the employees that need it but the only legal way I found to do that was through a 125 plan.

I research changes in rules and regs at least annually when I am preparing the election forms for the next year and usually more often. I like your idea about getting some guidance from EBIA or somewhere else. It's unfortunate the IRS doesn't administer more concise guidance concerning cafateria plans (or anything else for that matter). I may talk to a benfits attorney or TPA about getting the plan reviewed just to be on the safe side.

Thanks again for the input on our 125 plan.

Matt

[leevena]

I agree with TXCafe completely. Usually groups under 10 lives or so find it difficult to breakeven on the costs. But I do have some other suggestions that might be of help. 1. Some carriers sometimes offer free or reduced cost plans if you purchase their products or services. (Voluntary carriers like AFLAC or Colonial, and regular carriers). 2. Some brokers/agents might offer some help (reduced costs or subsidy) via their company. 3. You said you were a former accountant, perhaps you know of an accounting person/firm that does this type of work and would be willing to barter/professional discount?

I realize these may not fit your needs, but they are things that I have seen over the years. And, as for my disclaimer, I am not affiliated with any of these companies mentioned. I use their names as a ready source only. Good luck.