NOW THEREFORE BE IT RESOLVED, that the National Association of State Treasurers and its affiliate, the College Savings Plans Network, urge the President and the Congress of the United States to revise the Higher Education Act to include language in the reauthorization of the Higher Education Act of 1965 to change the current federal financial aid methodology to:
1. Exempt up to $35,000 of the assets in all 529 accounts held by the parent(s) from counting as parental assets in determining a family’s expected contribution; and
2. Allow for the reporting of 529 plan assets held by grandparents or noncustodial parents as parental assets on the FAFSA and then not count those assets as income to the student in the following year when used towards eligible expenses.
NOW, THEREFORE BE IT RESOLVED, that the National Association of State Treasurers and its affiliate, the College Savings Plans Network, urge the President and the Congress of the United States to enact legislation to encourage and incentivize employers to support its employees’ efforts to save for higher education in a Section 529 Qualified Tuition Program to benefit themselves or their families.
NOW, THEREFORE BE IT RESOLVED, that the National Association of State Treasurers and its affiliate, the College Savings Plans Network, urge the President and the Congress of the United States to enact legislation to include contributions to Section 529 qualified tuition programs to the list of deferrals or contributions that qualify for the Saver’s Credit.
NOW, THEREFORE BE IT RESOLVED, that the National Association of State Treasurers and its affiliate, the College Savings Plans Network, will continue to work with the President and Congress of the United States to strengthen Section 529 college savings plans and opposes any legislative or regulatory measures to limit or repeal the current tax treatment of 529 Plans.
The Protecting Americans from Tax Hikes (PATH) Act provided an important update to 529 plans, retroactive to the beginning of 2015. However, since Congress didn’t get around to passing the legislation until the mid-December, 529 plan administrators were left in a bind to adjust their software to issue correct 1099-Qs that reflect the new rules. Fortunately for 529 plan administrators, the IRS has promised not to impose penalties for earnings computations that do not reflect the new law.
Prior to the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, the earnings portion of 529 withdrawals, even when used to pay for college, was taxable income to the beneficiary. Because of this, all 529 savings accounts in one state with the same account owner and beneficiary had to be aggregated for the purposes of calculating of earnings reported on Form 1099-Q when withdrawals were made. Even after EGTRRA made distributions for qualified education expenses non-taxable, the distribution aggregation requirements remained for any distributions in excess of the student’s qualified higher education expenses.
The issue with the remaining distribution aggregation law is it required cumbersome compliance and reporting requirements for plan providers with almost zero benefit to anyone else. The aggregation requirements applied to plan contribution maximums as well as distributions, so parents who wished to put more money into a 529 plan might open one in another state to get around the limits, but there was no reason to open another plan in the same state for the same beneficiary.
However, even though the proposed legislation to eliminate distribution aggregation requirements first popped up in January of 2015 with H.R. 529, a bipartisan piece of legislation drafted by Rep. Lynne Jenkins (R-KS) and Rep. Ron Kind (D-WI) in response to President Obama’s short-lived proposal to eliminate the federal tax benefit of 529 plans, it didn’t become law until PATH was enacted in mid-December 2015.
When David and Miyuki Nishijima bought their son James a computer for his freshman year at California Polytechnic State University—San Luis Obispo in the fall, they couldn’t use funds from his college savings account to foot the roughly $2,400 bill.
But that changed in late December, when Congress passed long-awaited legislation making computers and related equipment a qualified education expense under 529 plans, or tax-advantaged college savings accounts. Withdrawals that don’t qualify are subject to taxes and penalties.
The Nishijimas may have been among the first to take advantage of the new law – which took effect retroactively on Jan. 1, 2015 – withdrawing the funds from James’ 529 plan in late 2015 and reimbursing themselves for the cost of the Macbook.
Calling it a “significant expense for college,” David Nishijima says it was nonetheless a necessary one for his son, who is an electrical engineering major.
“These days it’s so core,” he says.
The legislation does two other things regarding 529 plans: It allows account owners who take a withdrawal but then get a refund from the school – for instance, because their child gets sick and has to drop out for the semester – to redeposit that money in the 529 plan within 60 days with no penalties. It also changes reporting standards that apply to account holders with more than one plan per beneficiary.
Here are answers to questions about the new legislation.
1. What exactly is included under the new computer provision? The definition of qualified education expenses expanded to include computer and peripheral equipment, computer software or Internet access and related services, to be used primarily by the designated beneficiary of a 529 account while enrolled at an eligible educational institution.
2. So, what’s a computer? “It’s pretty clear a desktop and laptop are a computer,” says Jamie Canup, a partner and chair of the tax practice at Hirschler Fleischer in Richmond, Virginia, and member of the College Savings Plans Network.
Tablets, such as an iPad, also fall under the definition of a computer, says Randy Hardock, a partner at Davis & Harman in the District of Columbia, and counsel for the College Savings Foundation.
3. What’s peripheral equipment, software and Internet access? Peripheral equipment is defined as auxiliary machines designed to be placed under control of the central processing unit of the computer. This includes printers, both Canup and Hardock say.
Exceptions include typewriters, calculators, adding and accounting machines and copiers.
While software is included, there are exceptions for software designed for games, sports and hobbies, unless it’s predominantly educational in nature, Hardock says.
Beneficiaries will also be able to use 529 funds to pay for Internet access, but Hardock says to check with a tax professional if the Internet bill comes bundled with other services, such as cable.
4. Since the legislation is retroactive to Jan. 1, 2015, can I withdraw funds now to pay for a computer I purchased last year? The rules aren’t clear once you cross the calendar year. The Nishijimas took advantage of the small window between the time the legislation passed and the end of the 2015 calendar year to get a reimbursement, but Canup says he wouldn’t risk trying to do it now that it’s 2016.
“Most tax advisors tell their clients: ‘Make sure your expenses and distributions occur in the same year,'” he says.
However, any college-related computer purchases in 2016 and beyond can be paid with 529 distributions.
5. Can I still redeposit funds if I got a refund from a school in 2015? Yes. Congress included a special rule that states that account holders have 60 days from the date it became law, Dec. 18, to redeposit a refund from 2015 into a 529. That brings investors to Feb. 16.
Still, account holders would be wise to hurry.
“They’re running out of time,” Canup says. “They’ve got to be aware of the rule. They have to take the money if they still have it and recontribute it.”
6. What are the new reporting standards, and will they affect me? The change in reporting affects only those account holders with more than one 529 account for the same beneficiary.
Most 529 accounts are made up of money from contributions and earnings. Under the old rules, plan administrators aggregated all accounts with the same account holder and beneficiary, but under the new rules, each 529 account will maintain its own discrete ratio of contributions and earnings.
This is good news for account holders, Canup says, because it allows them to cherry-pick where withdrawals are coming from. This matters because only earnings are subject to taxes and penalties for withdrawals that don’t qualify as educational expenses.
WASHINGTON, D.C. – Today, Congress gave final approval to legislation that makes important enhancements to 529 college savings plans. The three provisions, which were contained in H.R. 529 and S. 335, were included as part of a Congressional proposal to restore expired tax provisions.
Betty Lochner, chair of the College Savings Plans Network (CSPN)—the nation’s leading source of information about Section 529 College Savings Plans and Prepaid Tuition Plans—issued the following statement:
“This year D.C. policymakers have taken an active role in enhancing and improving 529 college savings plans for the benefit of American families – and their children’s college education.
H.R. 529/S. 335 provides critical elements to help middle class families cope with the rising costs of college and take full-advantage of their savings for future higher education expenses. With 12 million accounts open and nearly $250 billion invested, 529 plans are a consistent and powerful savings tool for families across the country.
This important legislation will make 529 plans more flexible by making computers an eligible education expense; allowing the redeposit of college refunds without negative tax implications in certain circumstances and updating outdated accounting rules.
The College Savings Plans Network applauds the inclusion of H.R. 529 and S. 335 in the tax extenders bill. We congratulate Representatives Lynn Jenkins (R-KS) and Ron Kind (D-WI), Senators Chuck Grassley (R-IA), Bob Casey (D-PA), Richard Burr (R-NC), Mark Warner (D-VA), Pat Roberts (R-KS), and Ben Cardin (D-MD), and all the other Congressional supporters of this legislation for their hard work to help ease the financial burden for families trying to cover escalating college tuition costs.”
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NOW, THEREFORE BE IT RESOLVED, that the National Association of State Treasurers and its affiliated College Savings Plans Network urges the enactment of federal law or policy that would allow account holders to have two years following the tax year in which Qualified Higher Education Expenses are incurred to take a tax-free distribution from a 529 account for Qualified Higher Education Expenses incurred during the first two years after the effective date of the legislation or policy; and then to have one year following the tax year in which Qualified Higher Education Expenses are incurred to take a tax-free distribution from a 529 account for Qualified Higher Education Expenses for each subsequent year.
NOW, THEREFORE BE IT RESOLVED, that the National Association of State Treasurers urges any private or public organization entering a state to advocate that the state grant tax or other benefits to out-of-state section 529 qualified tuition programs first advise the public official responsible for administration of the state’s plan of their intent to participate in the discussion of state tax or other benefits for section 529 qualified tuition programs.
TN State Treasurer David Lillard visits local schools to promote the state’s financial literacy programs #FinancialLiteracyMonth https://t.co/Mcv9lHI5Ym