Pending 529 plan legislation

January 7, 2020

Several members of Congress have introduced legislation during the 116th session of Congress (2019-2020) to make changes to 529 college savings plans and other education savings programs.

Enacted Changes Related to College Savings

Three proposed changes have been enacted as part of the SECURE Act of 2019. These changes include:

Allow qualified 529 plan distributions to repay student loans, with a lifetime limit of $10,000 per beneficiary and $10,000 per each of the beneficiary’s siblings
Allow qualified 529 plan distributions to pay for registered apprenticeship programs
Revert the Kiddie Tax to the tax rates that were in effect prior to the Tax Cuts and Jobs Act of 2017

Proposals for changes to college savings plans that are still pending include:

Qualified 529 Plan Distributions

Although the SECURE Act treats student loan repayments and limited costs of apprenticeship programs as qualified 529 plan expenses, other bills go further. The Student Empowerment Act (H.R. 621, S. 157) allows 529 plans to cover K-12 expenses beyond tuition. H.R. 1084 and H.R. 65 include homeschooling costs as a qualified 529 plan expense.

Other proposals, including the 529 OPTIONS Act (H.R. 2679), S. 1623 and S. 220 expand qualified apprenticeship costs for 529 plans to include additional expenses such as travel and child care for individuals who participate in an apprenticeship program. The American Workforce Empowerment Act (H.R. 4469), H.R. 5339, S. 379 and the Generating Real Opportunities for Workforce Training and Hiring (GROWTH) Act (H.R. 4760 and S. 2620) include non-degree certificate programs as qualified 529 plan expenses. S. 220 also allows employer 529 plan contributions to be excluded from an employee’s gross income.

Gift Tax

The American Opportunity Accounts Act (H.R. 3922 and S. 2231) adds a cumulative limit of $50,000 per donor to the annual gift tax exclusion amount. 529 plan contributions are considered gifts for tax purposes, so this proposal would affect the amount of annual contributions a donor could make. Under current law, a donor can gift up to $15,000 per beneficiary, per year, to an unlimited number of beneficiaries.

Coverdell Education Savings Accounts

S. 1425 would eliminate the $2,000 annual limit on contributions to a Coverdell ESA. The bill also includes provisions to remove the $2,500 limit on the student loan interest deduction and removes the dollar limit on the deduction for qualified tuition and related expenses.

The Skills Investment Act of 2019 (H.R. 898, and S. 275) proposes expanding qualified Coverdell ESA expenses to include qualified educational or skill development expenses. The legislation also proposes changing the name of Coverdell Education Savings Accounts to Coverdell Lifelong Learning Accounts.

Savings Accounts for Military Families

The Education Savings Account for Military Families Act of 2019 (H.R. 1605, S. 695) allows parents of eligible military dependent children to establish savings accounts that can be used to pay for private elementary and secondary education. Funds in a Military Education Savings Account could also be used to make contributions to a 529 plan.

Savings Accounts for Parental Leave

The Working Parents Flexibility Act of 2019 (H.R. 1859) allows individuals to establish tax-advantaged savings accounts designed to supplement income during maternity or paternity leave. Tax-free distributions from a parental leave savings account could be used to fund a 529 plan or a qualified ABLE program.

Education Savings Accounts for Students in the District of Columbia

The Educational Freedom Accounts Act (H.R. 778) proposes establishing education savings accounts for students in the District of Columbia. Funds in an education savings account could be used to pay for a broad range of non-public school education costs, and to make contributions to a 529 plan or Coverdell ESA.

Savings Accounts for Lifelong Learning and Training

The Lifelong Learning and Training Account Act of 2019 (H.R. 4017, S. 539) proposes establishing tax-advantaged accounts designed to pay for a beneficiary’s qualified training expenditures. Double-dipping of tax benefits of a lifelong learning and training account and education tax benefits from U.S. Savings Bonds would not be allowed.