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Recent Federal News

Congress to consider bill improving 529 plans

(March 31, 2014) - Rep. Lynn Jenkins (R-KS) has introduced a bill into Congress (H.R. 4333) that would make 529 plans even more attractive. The bill would add computer technology to the list of qualified higher education expenses even when not required by the school, and it would allow four investment changes per year. These two changes have been part of previous bills.

The bill would also allow a 529 account owner to re-deposit withdrawn funds to the 529 account within 60 days if the beneficiary leaves college and receives a refund from the college. This change could help avoid tax and penalty when tuition and other expenses are paid in advance but then refunded due to the student leaving school.

Also, up to $25,000 in leftover 529 funds could be rolled to a Roth IRA under the bill provided the funds were in the 529 plan for at least 10 years.

Finally, the bill would eliminate the aggregation requirement in connection with 529 withdrawals from multiple plans. This would ease the administrative burden on 529 program managers.

IRS says bonus paid to open a 529 is a 1099 event

(March 15, 2013) - In PLR 201310043, the IRS informs a financial services company that an account opening bonus of $600 or more paid by the company into the 529 account of a customer must be reported to the customer on Form 1099.

The IRS views the bonus payment as a two-step transaction: (1) payment of cash to the customer (income subject to 1099 reporting), followed by (2) customer funding of his or her 529 account.

A similar type of bonus paid to a customer opening an IRA is not subject to 1099 reporting. The IRS distinguishes an IRA from a 529 plan and cites statutory authority for exempting the IRA bonus from 1099 reporting requirements.

For more information, click here.

H.R. 529 changed and re-introduced in Congress

(February 8, 2013) - H.R. 529 has been re-introduced in Congress by Rep. Lynn Jenkins (R-KS) but consists of only two of the changes that were included in the bill introduced in the prior Congress.

H.R. 529 would provide an expansion of the Saver's Credit to include contributions to 529 plans, and it would allow employers to make up to $600 per year in tax-free contributions to the 529 account of each eligible employee.

A separate bill will be introduced to increase the number of investment changes from once to four times in a year, and to expand the definition of qualified higher education expenses to include computers and computer technology.

Presumably, the second bill has a better chance of adoption even if H.R. 529 is not passed, since its tax revenue impact is modest.

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