Treasury receives letter suggesting changes to the 529 regulations

The U.S. Treasury Department has released a letter received from Christopher W. Hatcher, attorney with Williams & Jensen PLLC, dated September 11, 2006, containing a list of suggested regulatory changes affecting qualified tuition programs (“529 plans”). The proposed changes are summarized below:

1) Confirm the guidance previously contained in Notices 2001-55 and 2001-81.

2) Prohibit account owner changes except when changing to a spouse, pursuant to court order, upon owner’s disability or incapacity, for scholarship accounts and state-sponsored matching grant programs, when changing to or from a “custodial” 529 account, and when the existing account owner is not an individual.

3) Treat a contribution from a third-party individual as a completed gift to the account owner.

4) Remove the requirement that all 529 accounts in a state with the same owner and beneficiary be aggregated for tax recordkeeping purposes.

5) Include the purchase of a computer as a qualified higher education expense whether the institution requires the computer or not.

6) Eliminate 60-day rollovers and require that all rollovers be direct plan-to-plan transfers.

7) Permit the full or partial reversal of a 529 account distribution through a re-contribution of funds within 60 days of the distribution, or if later within 60 days of receiving a refund from the school. Restore the basis and earnings for the account.

8) Remove the uncertainty as to whether qualified higher education expenses must actually be paid within same tax year as the 529 account distributions. At a minimum, allow a 90-day grace period after the end of the calendar year.

9) Set a national cap for maximum contributions per beneficiary into any 529 plan, and require that the account owner aggregate accounts in multiple states.

10) Require that each qualified tuition program annually report account values to the IRS.

11) Require that Form 1099-Q be issued to the account owner regardless of the recipient (“distributee”), so as to prevent any shifting of income to the beneficiary.

12) Apply the new regulations retroactively, and permit a minimum 9-month phase-in for programming changes where appropriate.

13) Prohibit beneficiary changes to non-family members.

14) Include the value of the account in the beneficiary’s estate only to the extent distributions are made to the beneficiary’s estate or are made pursuant to the beneficiary’s general power of appointment.

15) Clarify that 529 plans in compliance with the regulations will not be deemed a tax shelter for purposes of the special rules for tax shelters.

16) Require that the account owner’s and beneficiary’s social security number be obtained by the plan administrator.
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