House Member Urges Treasury to Allow 529 Plans to Invest in 817 Funds

[1] I write to call your attention to an important matter regarding qualified state tuition programs under Section 529 of the Internal Revenue Code ("529 plans"). As you may be aware, I was the author of legislation creating Michigan's post-secondary education savings account plan during my tenure in the Michigan legislature, and I continue to believe that education is central to our prosperity as a nation. Unfortunately, too often the educational opportunities for our students and families are limited by tuition costs or the prospect of a crushing debt-load. That is why I was extremely pleased that my colleagues and President Bush supported my proposal to allow distribution of 529 plans to be a non-taxable event if spent on higher education expenses.

[2] I believe 529 plans can be made even more attractive. One requirement imposed on 529 plans is that plan contributors and beneficiaries may not directly or indirectly control the investments of a 529 plan account. Under federal tax law, a similar rule prohibiting investment control applies to owners of variable annuities and variable life insurance contracts not used in connection with pension plans. Internal Revenue Code section 817(h) and the income tax regulations thereunder provide rules applicable to these variable insurance product funds ("section 817 funds"). However, as the section 817 fund rules pre-date the creation of 529 plans, there is no provision allowing 529 plans to invest in section 817 funds, though the tax policy goals are very similar.

[3] I believe the Treasury Department should rectify this situation by amending the regulations to provide that 529 plans may invest in section 817 funds. I understand there is presently an open regulation project under section 529. As such, there is no better time than now to make this simple, but important, change.

[4] Thank you for your consideration. Please feel free to contact me if you wish to discuss this important issue in greater detail.

Sincerely,