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Attorney Suggests Changes to Qualified Tuition Program Guidance

SEP. 11, 2006

Attorney Suggests Changes to Qualified Tuition Program Guidance

DATED SEP. 11, 2006
DOCUMENT ATTRIBUTES
  • Authors
    Hatcher, Christopher W.
  • Institutional Authors
    Williams & Jensen PLLC
  • Cross-Reference
    For Notice 2001-55, see Doc 2001-23435 [PDF] or 2001 TNT 175-

    10 2001 TNT 175-10: Internal Revenue Bulletin. For Notice 2001-81, see Doc 2001-30416 [PDF] or 2001 TNT

    237-8 2001 TNT 237-8: Internal Revenue Bulletin.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2006-19708
  • Tax Analysts Electronic Citation
    2006 TNT 183-24

 

September 11, 2006

 

 

Mr. Michael Desmond

 

Tax Legislative Counsel

 

1500 Pennsylvania Ave., N.W.

 

Room 3040

 

Washington, D.C. 20220

 

(by electronic mail)

 

 

Dear Mr. Desmond:

 

 

This letter follows up on our recent discussions about the new regulatory authority provided to the Treasury Department in the section 1304(b) of the Pension Protection Act of 2006 (P.L. 109-280), related to Internal Revenue Code ("Code") section 529 qualified tuition programs. We absolutely share the Treasury Department's goal of ensuring these plans continue to be valuable tools that are used as intended, to help families save for higher education costs.

In light of that goal and our expectation that the Treasury Department will consider issuing regulations in this area, we are offering a set of possible regulatory changes related to Code section 529 qualified tuition plans for your consideration. Included in the list is regulatory guidance designed to limit beneficiary changes, clarify the treatment of generation skipping gifts, and enhance reporting and transfers of funds. Also included are several proposed regulatory changes that would clarify existing guidance on 529 plans, or offer additional clarification of several other outstanding issues related to 529 plans.

In each case, we believe the Treasury Department has ample authority to issue regulations suggested. We hope the Treasury Department will take the opportunity to clarify and offer guidance on a number of issues related to Code section 529 plans. We hope to continue to discuss these issues and remain available should there be any questions about these suggestions.

Thank you.

Sincerely,

 

 

Christopher W. Hatcher

 

Attorney

 

POTENTIAL REGULATORY PROVISIONS FOR 26 U.S.C. SECTION 529

 

 

I. IRS Notice Confirmation

Confirm investment direction and account owner self-certification of qualified higher education expenses set out in Notices 2001-55 and 2001-81.

II. Limit Account Owner Changes

Inter vivos account owner changes only allowed (i) between spouses, (ii) pursuant to a valid court order, (iii) in cases of the account owner's disability or incapacity, (iii) for scholarship accounts, (iv) in the case of a state-sponsored matching grant program, and (v) for accounts established under Uniform Transfers to Minors or Uniform Gifts to Minors statutes (including individual account owner transfers of ownership to a custodial account). Allowable account owner changes should also include transfers from non-individual account owners to individual or non-individual account owners (examples: corporate employers, trust dissolution).

III. Non-Account Owner Contributors

Specify that contributions to an account from a person other than the account owner are a completed gift to the account owner.

IV. Remove Back End Aggregation

Remove requirement in proposed regulations that has been interpreted to require programs to aggregate earnings across all savings trust accounts in the same state program with the same account owner and beneficiary combination.

V. Computers as QHEE

Expand the definition of Qualified Higher Education Expenses to include computers as equipment required for the enrollment or attendance of a designated beneficiary regardless of whether the particular eligible educational institution requires students to purchase a computer.

VI. Rollover Processing

Require that all rollovers be plan-to-plan transfers.

VII. School Refunds and Withdrawal Errors

Allow re-deposit of amounts refunded by a school or withdrawn by the account owner in error within 60 days from the later of (i) the date of withdrawal or (ii) the school refund, without having them considered non-qualified distributions. The redeposited amount, however, would have to be recorded as basis and earnings and not just as a contribution of principal. As a 1099Q would not be issued until the beginning of the next tax year, it would be the taxpayer's responsibility to provide notice of the re-deposit and the principal/ earnings breakdown of such funds at the time of the re-deposit. If the amount is less than the original amount of the distribution, the calculation should be made with the same principal/earnings ratio as the corresponding withdrawal.

VIII. Matching Distributions and Expenses

Clarify issue concerning matching expenses and distributions in the same tax year (lack of conformity between taxable year and academic year). If this is a requirement, a window of 90 days into the next year calendar year needs to be allowed to accommodate the academic/tax year differential. Sample language from 26 U.S.C. Section 25A: If qualified tuition and related expenses are paid by the taxpayer during a taxable year for an academic period which begins during the first 3 months following such taxable year, such academic period shall be treated as beginning during such taxable year.

IX. National Cap

Establish a maximum national cap (market value) per beneficiary across all 529 plans (not just per state). Account owner could not make any additional contributions for the designated beneficiary in any 529 account once the national contribution cap had been reached. An individual state may have a lower cap but the account owner would be bound to the national cap for all of his/her accounts across all of the states.

 

(i) This cap would be initially determined based on the guidance provided in the existing PLR's (four or five years of undergraduate education and three years of graduate education, which today is approximately $320,000) and would be indexed. A possible index to use would be the Bureau of Labor Statistics' Consumer Price Index under "tuition, other school fees, and childcare" subcategory in the "Education" subheading. An alternative index could be the Independent College 500® Index compiled and published by the College Board. The contribution cap would be determined annually but must reflect increases based upon the designated index.

(ii) A certification from the account owner when establishing an account regarding the acknowledgment of the national cap could be required to help avoid intentional overfunding by using interstate programs.

(iii) Clarify that rollovers with market value balances exceeding the state/national cap but with contributions (principal amount) at or below such caps can be deposited into the plan receiving the distribution.

 

X. Reporting to IRS

Each qualified tuition program would be required to report market value of accounts by account owner and beneficiary annually to the Internal Revenue Service.

XI. 1099Q Always Issued to Account Owner

While distributions may be made to any payee (including account owners, beneficiaries, landlords, eligible educational institutions), the Form 1099Q should always be issued to the account owner. This would eliminate the potential to shift any income tax resulting from a non-qualified distribution to the beneficiary who most likely has a lower tax rate.

XII. Grace Period for New Regulations

Any new rules will have to apply to all existing and future accounts. Many of the proposals would require programming changes and a phase-in period of at least nine months should be afforded for such changes.

XIII. Limit Beneficiary Changes

No designated beneficiary change would be allowed unless it is to a member of the family (as defined in Section 529).

XIV. Treatment of Account Upon Death of Beneficiary

Change the current provision that requires the value of a Section 529 account to be included in the designated beneficiary's estate upon the death of the designated beneficiary even if there is no distribution of the account so that only such amounts (if any) paid to the designated beneficiary's estate or pursuant to the designated beneficiary's general power of appointment will be included in the designated beneficiary's gross estate.

XV. Clarify that 529 Plans are not tax shelters

No 529 Plan that is in compliance with these regulations shall be deemed to constitute a plan or arrangement, a principal or significant purpose of which is the avoidance or evasion of any tax imposed by the Internal Revenue Code.

XVI. Confirm that 529 Plans are required to obtain Social Security Numbers

It would be helpful to the Plans if the regulations confirm that the Plans are required to obtain both the account owner's and designated beneficiary's Social Security Number. We believe this is currently the case, but with privacy concerns, it would be helpful if this requirement were stated specifically.

DOCUMENT ATTRIBUTES
  • Authors
    Hatcher, Christopher W.
  • Institutional Authors
    Williams & Jensen PLLC
  • Cross-Reference
    For Notice 2001-55, see Doc 2001-23435 [PDF] or 2001 TNT 175-

    10 2001 TNT 175-10: Internal Revenue Bulletin. For Notice 2001-81, see Doc 2001-30416 [PDF] or 2001 TNT

    237-8 2001 TNT 237-8: Internal Revenue Bulletin.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2006-19708
  • Tax Analysts Electronic Citation
    2006 TNT 183-24
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