LB 865 and LB 1042 — two bills that relate to employer contributions to the Nebraska educational savings plan — are on the Legislature’s agenda today.
Both measures would allow employees to deduct employer contributions to 529 college savings plans from their income taxes. The bills also specify that 529 contributions should not be included as income in means testing for Supplemental Nutrition Assistance Program benefits.
LB 1042 would cap deductions for employer contributions at $10,000 for married couples filing jointly and $5,000 for others. Presently married couples filing jointly are subject to a $10,000 cap on deductions for their own contributions to 529 plans. It’s unclear based on how LB 1042 is written if it creates a separate cap just for employer contributions, thus allowing married couples filing jointly to deduct $20,000 total — $10,000 in employer contributions and $10,000 in their own contributions. This could effectively double the existing caps on deductions for participant contributions and increase the state fiscal impact of deductions for 529 plan contributions. It also leaves room for owners of businesses who also act as employees to take both deductions while the company also receives an incentive payment under LB 610, passed last year.
A pending revenue committee amendment to LB 1042 — AM 2181 — would remove a provision that allows the measure to be used as a mechanism to reduce taxable income in the short term. As an example, without the amendment, LB 1042 would allow a couple to invest $10,000 into a 529 account, deduct it from their taxes, and then turn around and withdraw that same amount to pay off an existing student loan or sibling’s student loan, as there’s no requirement that funds remain in a 529 account for any length of time. The removal of this provision also is likely to considerably reduce the fiscal impact of LB 1042. The bill’s fiscal note, which doesn’t account for AM 2181, shows LB 1042 would reduce state revenues by about $18 million a year by FY 23. AM 2181 also removes a provision that would allow 529 plans to pay for apprenticeships.
Another change proposed in LB 1042 would allow Nebraskans to put their tax refunds into their 529 accounts.