Federal 529 Initiatives
The College Savings Plans Network (CSPN) monitors federal legislative and regulatory activities and promotes legislation that will positively affect Section 529 plans. Building upon the success achieved in 2006 with passage of the Pension Protection Act, legislation that included a provision to make permanent the income tax exclusion for qualified distributions from Section 529 college savings programs, the National Association of State Treasurers (NAST) and CSPN have launched a new phase of federal advocacy.
H.R. 529 was introduced on February 6, 2013 by Rep. Lynn Jenkins (R-KS) and Rep. Ron Kind (D-WI) in the House of Representatives. CSPN has worked with Congress on the two significant enhancements included in H.R. 529 which are designed to encourage more moderate income families to save for college:
Extend the current Saver’s Tax Credit to college savings
This bill would extend the SAVER’s tax credit (currently limited to retirement contributions) to contributions to 529 college savings plan accounts. The SAVER’s credit allows a nonrefundable tax credit to the contributor of up to $1,000 for single filers or $2,000 for joint filers. The eligibility for this credit is limited to those with incomes at or below $29,500 single/$59,000 joint for 2013. Research shows that children from moderate income families who have a college savings account of any size are more likely to attend college and are more likely to complete college than similar children without any dedicated college savings (Elliot & Beverly, Center for Social Development at Washington Univ. in St. Louis, 2010).
Encourage employers to match employees’ college savings
This bill creates an incentive for employers to help their employees save for college for themselves and/or their families by allowing employers to match employees’ 529 plan contributions up to $600 per year. The employee would be allowed to exclude the employer match from gross income, much as they can currently exclude greater amounts (up to $5,250) that employers provide to employees today through existing educational assistance plans.
Other NAST/CSPN Federal Initiatives
In May 2009, NAST and CSPN passed this resolution urging Congress to increase the period of time a participant has to make qualified withdrawals from their 529 Plan.
In July of 2007, NAST and CSPN passed resolutions endorsing three initiatives:
Exclude from income, employer contributions to an employee’s Section 529 Plan or a Section 529 scholarship program(Adobe PDF)
Given the success of federal tax law encouraging retirement savings by promoting employer contributions into the retirement plans of employees, NAST and CSPN are seeking a similar tax benefit that allows employers to exclude from an employees’ gross income and wages certain contributions made to Section 529 Qualified Tuition Programs to benefit employees and their families and / or to develop or create scholarship programs with the contributions.
Inclusion of Section 529 plans in the Saver’s Credit (Adobe PDF)
In 2001, as part of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), Congress created the Saver’s Credit to encourage middle- to low-income individuals to save for retirement. The law permits a taxpayer whose adjusted gross income does not exceed $50,000 to take a nonrefundable income tax credit for employee contributions made to an employer sponsored retirement plan or an individual retirement account. The maximum annual contribution eligible for the Saver’s Credit is $2,000. NAST and CSPN are seeking legislation to include contributions to Section 529 Qualified Tuition Programs to the list of deferrals or contributions that qualify for the Saver’s Credit.
Inclusion of computers, internet access, and educational software as qualified higher education expenses within section 529 plans (Adobe PDF)
A computer is considered an allowable higher education expense for Section 529 plans only when the college or university specifically requires a computer for enrollment or attendance. Computers are already an allowable expense for Coverdell Education Savings Accounts for K-12 expenses, even if it is not required by the school or for a class. Regardless of whether or not students are specifically required by a college or university to have a computer and online access, their necessity is self evident in this day and age. NAST and CSPN are seeking legislation to include the cost of computers, Internet access, and educational software as qualified higher education expenses under Section 529 Qualified Tuition Programs.
In December 2008, CSPN approved the addition of the following items to be added to its Federal Initiatives:
Quarterly or twice-annual investment direction change. The IRS currently allows only one investment direction change per calendar year. No similar restrictions exist in other types of investment programs. This would provide additional flexibility in 529 plans.
Expand definition of “Eligible Educational Institution.” Add Study Abroad programs, unaffiliated Medical Resident programs (living expenses). See broader definition from Section 7, 26 USC 221.
Remove aggregation requirements. Plans currently aggregate accounts to determine the percentage of contributions and earnings in a withdrawal. Current tax treatment of withdrawals eliminates the need for aggregation, and elimination of this requirement would decrease administrative burdens on 529 plan administrators.
Permit re-deposit of refunds from school without tax or penalties. Current treatment as non-qualified distribution creates a hardship on families who suffer death/illness/other cause sufficient to generate a refund from a higher education institution.
Allow GI Bill Disbursements into 529 plans. Allow unused benefits under the new GI Bill to be contributed to a 529 plan until such time as the beneficiary (or dependent) is ready to use the funds.
Include all costs included in schools’ “Cost of Attendance” from FAFSA. Include expenses such as transportation and living expenses.
Amend Individual Development Act (IDA) statutes to include 529 programs as eligible for contributions. Would provide additional opportunities for low income families to participate in 529 plans.
Include 529 programs within definition of “qualified institutional buyer” under Section 144A (consistent with trusts, 501(c)(3)).
The following is a summary of recent improvements that NAST and CSPN have worked on with members of Congress, the administration and federal regulatory agencies.
Permanency of Section 529 Plans Federal Tax Exemption
On August 17, 2006, President George W. Bush signed the Pension Protection Act of 2006 into law, repealing the 2010 sunset of the federal tax exemption for Section 529 plans. This was an important day for families across the country as they are now assured that the money they have saved for higher education can be used tax-free to help their children pay for college. Permanency of tax treatment of Section 529 plans will encourage more families to begin saving because they now realize that they will be rewarded for saving for college.
NAST and CSPN worked with Congress for more than fifteen years to clarify the federal tax treatment of these plans. Making the federal tax exemption permanent eliminates a major source of confusion for families saving for college.
Financial Aid Treatment of Section 529 plans
As part of the Deficit Reduction Act of 2005 both Section 529 prepaid and savings plans are now considered parental assets in the determination of federal financial aid. Previously, the plans had been treated differently with Section 529 prepaid plans being considered a student resource, resulting in a dollar-for-dollar reduction in need-based financial aid packages.
The President and Congress have clearly shown their support to the more than 1.25 million hard-working families who are saving for their children’s college education in Section 529 prepaid plans across the nation. By improving the treatment of these plans in the financial aid calculation, these families are no longer being penalized by saving in a Section 529 prepaid tuition plan. NAST and CSPN worked with Congress and the Administration for a decade to improve the treatment of the prepaid tuition plans in the calculation of financial aid.
CSPN recently submitted this letter to the Senate HELP Committee, outlining how the committee can improve the financial aid treatment of 529 plans as part of the Reauthorization of the Higher Education Act.
529 Plan Disclosure
CSPN, the states, and their partners in the financial services industry are firmly committed to clarifying and enhancing disclosure for 529 plans. CSPN has worked with the Municipal Securities Rulemaking Board, the National Association of Securities Dealers, and the Securities Exchange Commission in developing meaningful disclosure for investors. To that end, CSPN has adopted a detailed set of Disclosure Principles (Disclosure Principles Statement No. 1, or DP1; Disclosure Principles Statement No. 2, or DP2; and Disclosure Principles Statement No. 3, or DP3) that provide enhanced comparability of information that investors should consider when determining which 529 plan best fits their investing goals and needs.
Every state and the District of Columbia have implemented DP1 & 2 in their 529 plan offering materials. On December 9, 2008, CSPN approved DP3 and it is expected that plans will implement DP3 as their offering materials are updated.
DP1 provided unprecedented standards of disclosure for entities exempt from the registration and reporting requirements of the federal securities laws. Because the states and financial services firms are committed to ensuring the availability of the best information for investors, DP1 provided guidance on standards for summary information, risk factors, fees, federal and state tax information, performance data, sample tabular presentations and a host of other areas of disclosure.
Based upon feedback from the SEC, the MSRB, and others, the CSPN membership adopted DP2 to enhance and clarify certain disclosure matters related to the comparability of Section 529 plans to one another. For example, DP2 provides an enhancement of the table of contents or “locator” concept. Because many 529 plans provide disclosure through more than one document, the CSPN membership believed it important to ensure that each investor would be able to compare plans in an efficient manner. Having a global locator within a 529 plan’s offering materials will allow an investor to quickly find key disclosure items, such as fees and costs.
The Disclosure Principles focus on improving comparability between 529 plans, including precise, uniform tables to show fees and costs associated with these plans. The format adopted mirrors those required and adhered to by all registered mutual fund companies. Following discussions that CSPN had with officials from the US Dept. of Treasury about the intended use of 529 plans, CSPN added anti-abuse language to the Disclosure Principles as part of DP3.
Disclosure Principles Statement No. 1 Adopted December 2, 2004 (Adobe PDF)
Disclosure Principles Statement No. 2 Adopted July 26, 2005 (Adobe PDF)
Disclosure Principles Statement No. 3 Adopted December 9, 2008 (Adobe PDF)
Disclosure Principles Statement No. 4 Adopted December 17, 2009 (Adobe PDF)
Disclosure Principles Statement No. 5 Adopted May 3, 2011 (Adobe PDF)
529 Plan Governance Principles