Several members of Congress have introduced legislation during the 115th session of Congress (2017-2018) to make changes to 529 college savings plans.
Enacted changes to college savings plans
Two proposed changes have been acted, as part of the 2017 tax cut legislation (P.L. 115-97). These changes include:
- Allow tax-free rollovers from 529 plans to ABLE accounts. (In addition to being enacted by P.L. 115-97, this proposal appeared in S816, HR1897 and HR529. HR529 would have allowed rollovers from ABLE accounts to 529 plans in addition to rollovers from 529 plan accounts to ABLE accounts.)
- Allow qualified 529 plan distributions to pay for K-12 tuition of up to $10,000 per beneficiary per year.
Proposed changes in college savings plans
There are several proposals for changes to college savings plans that are still pending. These proposals have not yet been reported out of committee and therefore are not likely to be enacted, especially ahead of the midterm elections.
Several legislative proposals would allow employers to contribute to 529 plans and ABLE accounts while excluding the contributions from the employee’s gross income. HR3046 proposed a $5,000 annual limit for single filers and $10,000 for joint filers. The annual limits were lower in S1790 ($1,000) and HR529 ($100). HR529 would have required the employer contribution to be in connection with payroll deduction.
Other proposals would change the contribution limit on Coverdell education savings accounts. HR675 would increase the annual contribution limit from $2,000 to $12,000. HR716 would remove the dollar limitation on contributions entirely, but would require Coverdell education savings accounts to have safeguards to prevent contributions from exceeding the amount needed to cover the qualified education expenses of the beneficiary.
S1790 would create a non-refundable tax credit of up to $2,000 for contributions to a 529 college savings plan by low-income taxpayers.
Tax penalty for non-qualified distributions
HR3046 would increase the 10% tax penalty for non-qualified distributions to equal the taxpayer’s marginal tax rate or 10%, whichever is greater.
HR271 would allow rollovers from an Individual Development Account (IDA) to a 529 plan to pay for qualified higher education expenses. IDAs are specialized savings accounts for low-income families that match their deposits and help them save toward buying a home, paying for college and starting a small business.
(S1205 proposed establishing College Savings Accounts for low-income students who are eligible for a free or reduced price school lunch, but this was seen as being redundant with 529 plans and IDAs.)
S1790 allows 529 college savings plans to be rolled over tax-free into a Roth IRA of the owner or beneficiary of the 529 plan after 10 years.
Although the tax cut legislation treats distributions from a 529 plan to pay for K-12 tuition as a qualified expense, other bills went further. HR716 and HR675 allow certain K-12 expenses to be considered qualified expenses without a dollar limitation. These eligible expenses include tutoring, books, supplies, equipment, room and board, uniforms, transportation and cost of a computer (including internet access and peripherals), in addition to tuition. HR675 also adds special needs services as eligible expenses.
HR529 allows 529 plan distributions to be used to make payments of principal and/or interest on qualified education loans without the 10% tax penalty on non-qualified expenses.
HR716 allows home school expenses as a qualified distribution from a Coverdell education savings account.
HR3395 allows expenses associated with certain apprenticeship programs to be considered a qualified higher education expense for 529 plans. The apprenticeship programs must be registered and certified with the U.S. Department of Labor. Eligible expenses include required books, supplies and equipment, childcare costs, transportation costs and the cost of industry certification or other credentials associated with the apprenticeship program.
Impact on financial aid
HR4508 would exclude 529 plans and prepaid tuition plans from the definition of assets on the Free Application for Federal Student Aid (FAFSA). Unfortunately, the legislation fails to exclude qualified distributions from the definition of income. But, given the goal of eliminating any real or perceived penalty for saving, this flaw in the legislative language is likely to be fixed before any such legislation is enacted.
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The legislation mentioned in this article includes the following bills:
- P.L. 115-97 An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. Also known as the Tax Cuts and Jobs Act.
- S 1 An original bill to provide for reconciliation pursuant to title II of the concurrent resolution on the budget for fiscal year 2018
- HR 271 Stephanie Tubbs Jones Assets for Independence Reauthorization Act of 2017
- HRes 369 Resolution Recognizing May 29, 2017, as "National 529 Day"
- HR 529 529 and ABLE Account Improvement Act of 2017
- HR 675 Empowering Parents to Invest in Choice Act of 2017
- HR 716 Enhancing Educational Opportunities for all Students Act
- S 816 ABLE Financial Planning Act
- S 1205 American Dream Accounts Act
- S 1790 Boost Saving for College Act
- HR 1897 ABLE Financial Planning Act
- HR 3046 Help All Americans Save for College Act of 2017
- HR 3395 529 Opening Paths To Invest in Our Nation's Students Act (529 OPTIONS Act)
- HR 4508 Promoting Real Opportunity, Success, and Prosperity through Education Reform Act (PROSPER Act)