[Senate Report 114-56]
[From the U.S. Government Publishing Office]
Calendar No. 97
114th Congress } { Report
SENATE
1st Session } { 114-56
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A BILL TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO IMPROVE 529 PLANS
_______
May 21, 2015.--Ordered to be printed
_______
Mr. Hatch, from the Committee on Finance,
submitted the following
R E P O R T
[To accompany S. 335]
The Committee on Finance, to which was referred the bill
(S. 335) to amend the Internal Revenue Code of 1986 to improve
529 plans, having considered the same, reports favorably
thereon with an amendment and recommends that the bill, as
amended, do pass.
CONTENTS
Page
I. LEGISLATIVE BACKGROUND............................................1
II. EXPLANATION OF THE BILL...........................................2
A. Section 529 Programs (secs. 2, 3, and 4 of the bill
and sec. 529 of the Code)............................ 2
III.BUDGET EFFECTS OF THE BILL........................................6
A. Committee Estimates................................... 6
B. Budget Authority and Tax Expenditures................. 6
C. Consultation with Congressional Budget Office......... 6
IV. VOTES OF THE COMMITTEE............................................8
V. REGULATORY IMPACT AND OTHER MATTERS...............................9
A. Regulatory Impact..................................... 9
B. Unfunded Mandates Statement........................... 9
C. Tax Complexity Analysis............................... 9
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED............10
I. LEGISLATIVE BACKGROUND
The Committee on Finance has considered the Chairman's Mark
to S. 335, a bill that modernizes and improves the treatment of
college savings programs under section 529 of the Internal
Revenue Code of 1986 (``529 plans''). It treats computer
equipment and technology expenses as qualified higher education
expenses, and removes the aggregation requirement for
distributions. The bill also protects from Federal income tax
and penalties amounts taken as distributions, paid as tuition,
and then refunded, provided such amounts are re-contributed to
the 529 plan within 60 days. The Committee reports favorably
thereon and recommends that the bill, as amended, do pass.
Background and need for legislative action
The Committee believes that 529 plans are an important
vehicle for encouraging middle-income families to save for
higher education, and that these plans should be modernized,
improved, and simplified for such families.
Hearings
The tax treatment of 529 plans was one of several issues
discussed at a full Committee hearing held on June 24, 2014,
titled ``Less Student Debt from the Start: What Role Should the
Tax System Play?''
II. EXPLANATION OF THE BILL
A. Section 529 Programs (secs. 2, 3, & 4 of the bill and
sec. 529 of the Code)
PRESENT LAW
Section 529 qualified tuition programs
In general
A qualified tuition program is a program established and
maintained by a State or agency or instrumentality thereof, or
by one or more eligible educational institutions, which
satisfies certain requirements and under which a person may
purchase tuition credits or certificates on behalf of a
designated beneficiary that entitle the beneficiary to the
waiver or payment of qualified higher education expenses of the
beneficiary (a ``prepaid tuition program''). Section 529\1\
provides specified income tax and transfer tax rules for the
treatment of accounts and contracts established under qualified
tuition programs.\2\ In the case of a program established and
maintained by a State or agency or instrumentality thereof, a
qualified tuition program also includes a program under which a
person may make contributions to an account that is established
for the purpose of satisfying the qualified higher education
expenses of the designated beneficiary of the account, provided
it satisfies certain specified requirements (a ``savings
account program''). Under both types of qualified tuition
programs, a contributor establishes an account for the benefit
of a particular designated beneficiary to provide for that
beneficiary's higher education expenses.
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\1\Except where otherwise specified, all section references are to
the Internal Revenue Code of 1986, as amended (the ``Code'').
\2\For purposes of this description, the term ``account'' is used
interchangeably to refer to a prepaid tuition benefit contract or a
tuition savings account established pursuant to a qualified tuition
program.
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In general, prepaid tuition contracts and tuition savings
accounts established under a qualified tuition program involve
prepayments or contributions made by one or more individuals
for the benefit of a designated beneficiary. Decisions with
respect to the contract or account are made by an individual
who is not the designated beneficiary. Qualified tuition
accounts or contracts generally require the designation of a
person (generally referred to as an ``account owner'')\3\ whom
the program administrator (oftentimes a third party
administrator retained by the State or by the educational
institution that established the program) may look to for
decisions, recordkeeping, and reporting with respect to the
account established for a designated beneficiary. The person or
persons who make the contributions to the account need not be
the same person who is regarded as the account owner for
purposes of administering the account. Under many qualified
tuition programs, the account owner generally has control over
the account or contract, including the ability to change
designated beneficiaries and to withdraw funds at any time and
for any purpose. Thus, in practice, qualified tuition accounts
or contracts generally involve a contributor, a designated
beneficiary, an account owner (who oftentimes is not the
contributor or the designated beneficiary), and an
administrator of the account or contract.
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\3\Section 529 refers to contributors and designated beneficiaries,
but does not define or otherwise refer to the term ``account owner,''
which is a commonly used term among qualified tuition programs.
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Qualified higher education expenses
For purposes of receiving a distribution from a qualified
tuition program that qualifies for favorable tax treatment
under the Code, qualified higher education expenses means
tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of a designated beneficiary at an
eligible educational institution, and expenses for special
needs services in the case of a special needs beneficiary that
are incurred in connection with such enrollment or attendance.
Qualified higher education expenses generally also include room
and board for students who are enrolled at least half-time. For
taxable years 2009 and 2010 only, qualified higher education
expenses included the purchase of any computer technology or
equipment, or Internet access or related services, if such
technology or services were to be used by the beneficiary or
the beneficiary's family during any of the years a beneficiary
was enrolled at an eligible institution.
Contributions to qualified tuition programs
Contributions to a qualified tuition program must be made
in cash. Section 529 does not impose a specific dollar limit on
the amount of contributions, account balances, or prepaid
tuition benefits relating to a qualified tuition account;
however, the program is required to have adequate safeguards to
prevent contributions in excess of amounts necessary to provide
for the beneficiary's qualified higher education expenses.
Contributions generally are treated as a completed gift
eligible for the gift tax annual exclusion. Contributions are
not deductible for Federal income tax purposes, although they
may be deductible for State income tax purposes. Amounts in the
account accumulate on a tax-free basis (i.e., income on
accounts in the plan is not subject to current income tax).
A qualified tuition program may not permit any contributor
to, or designated beneficiary under, the program to direct
(directly or indirectly) the investment of any contributions
(or earnings thereon) more than two times in any calendar year,
and must provide separate accounting for each designated
beneficiary. A qualified tuition program may not allow any
interest in an account or contract (or any portion thereof) to
be used as security for a loan.
Distributions from qualified tuition programs
Distributions from a qualified tuition program are
excludable from the distributee's gross income to the extent
that the total distribution does not exceed the qualified
higher education expenses incurred for the beneficiary.\4\
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\4\Sec. 529(c)(3)(B)(i) and (ii)(I).
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If a distribution from a qualified tuition program exceeds
the qualified higher education expenses incurred for the
beneficiary, the amount includible in gross income is
determined, first, by applying the annuity rules of section
72\5\ to determine the amount which would be includible in
gross income if none of the amount distributed was for
qualified higher education expenses and, then, reducing that
amount by an amount which bears the same ratio to that amount
as the qualified higher education expenses bear to the amount
of the distribution.\6\
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\5\Under section 72, a distribution is includible in income to the
extent that the distribution represents earnings on the contribution to
the program, determined on a pro rata basis.
\6\Sec. 529(c)(3)(A) and (B)(ii). 7 Notice 2001 81, 2001 2 C.B.
617, December 10, 2001. 8 Ibid.
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For example, assume a taxpayer had $5,000 in a qualified
tuition program account, $4,000 of which was the amount
contributed. Also assume the taxpayer withdraws $1,000 from the
account and $500 is used for qualified higher education
expenses. First, the taxpayer applies the annuity rules of
section 72 which results in $200 being included in income under
section 72 assuming none of the distribution is used for
qualified higher education expenses. Then the taxpayer reduces
the $200 by one-half because 50 percent of the distribution was
used for qualified higher education expenses. Thus, $100 is
includible in gross income. This amount is subject to an
additional 10-percent tax (unless an exception applies).
The Code provides that, except as provided by the Secretary
of the Treasury (``Secretary''), for purposes of this
calculation, the taxpayer's account value, income, and
investment amount, are generally measured as of December 31st
of the taxable year in which the distribution was made. The
Secretary has issued guidance providing that the earnings
portion of a distribution is to be computed on the date of each
distribution.\7\
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\7\Notice 2001-81, 2001-2 C.B. 617, December 10, 2001.
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In the case of an individual who is the designated
beneficiary for more than one qualified tuition program, all
such accounts are aggregated for purposes of calculating the
earnings in the account under section 72. The Secretary has
provided in guidance that this aggregation is required only in
the case of accounts contained within the same 529 program,
having the same account owner and the same designated
beneficiary.\8\
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\8\Ibid.
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REASONS FOR CHANGE
The Committee recognizes that computer technology is an
essential part of higher education, and thus believes that
funds used to purchase such technology should be considered a
qualified educational expense for purposes of section 529.
Additionally, the Committee believes that certain rules
requiring aggregation of section 529 accounts are difficult to
administer, adding a burden to 529 administrators. Finally, the
Committee believes that 529 programs should be able to allow
students who have received a refund of tuition that had been
paid with the proceeds of a 529 account to recontribute such
refund back into the account without being taxed and penalized.
EXPLANATION OF PROVISION
The provision makes three modifications to section 529.
First, the provision provides that qualified higher
education expenses include the purchase of computer or
peripheral equipment (as defined in section 168(i)(2)(B)),
computer software (as defined in section 197(e)(3)(B)), or
Internet access and related services if the equipment,
software, or services are to be used primarily by the
beneficiary during any of the years the beneficiary is enrolled
at an eligible education institution.
Second, the provision repeals the rules providing that
section 529 accounts must be aggregated for purposes of
calculating the amount of a distribution that is included in a
taxpayer's income. Thus, in the case of a designated
beneficiary who has received multiple distributions from a
qualified tuition program in the taxable year, the portion of a
distribution that represents earnings is now to be computed on
a distribution-by-distribution basis, rather than an aggregate
basis, such that the computation applies to each distribution
from an account. The following example illustrates the
operation of this provision: Assume that two designated savings
accounts have been established by the same account owner within
the same qualified tuition program for the same designated
beneficiary. Account A contains $20,000, all of which consists
of contributed amounts (i.e., it has no earnings). Account B
contains $30,000, $20,000 of which constitutes an investment in
the account, and $10,000 attributable to earnings on that
investment. Assume a taxpayer receives a $10,000 distribution
from Account A, with none of the proceeds being spent on
qualified higher education expenses. Under present law, both of
the designated beneficiary's accounts would be aggregated for
purposes of computing earnings. Thus, $2,000 of the $10,000
distribution from Account A ($10,000 * $10,000/$50,000) would
be included in the designated beneficiary's income. Under the
provision, the accounts would not be aggregated for purposes of
determining earnings on the account. Thus, because Account A
has no earnings, no amount of the distribution would be
included in the designated beneficiary's income for the taxable
year.
Third, the provision creates a new rule that provides, in
the case of a designated beneficiary who receives a refund of
any higher education expenses, any distribution that was used
to pay the refunded expenses is not subject to Federal income
tax if the designated beneficiary recontributes the refunded
amount to the qualified tuition program within 60 days of
receiving the refund, to the extent that such recontribution is
not in excess of the refund. A transition rule allows for
recontributions of amounts refunded after December 31, 2014,
and before the date of enactment to be made not later than 60
days after the enactment of this provision.
EFFECTIVE DATE
The provision allowing computer technology to be considered
a higher education expense is effective for taxable years
beginning after December 31, 2014. The provision removing the
aggregation requirement in the case of multiple distributions
is effective for distributions made after December 31, 2014.
The provision allowing a recontribution of refunded tuition
amounts is effective for tuition refunded after December 31,
2014.
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate, the following statement is made
concerning the estimated budget effects of the revenue
provisions of S. 335 as reported.
The bill is estimated to have the following effects on
Federal budget receipts for fiscal years 2015-2025:
FISCAL YEARS
[Millions of dollars]
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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-20 2015-25
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-1 -2 -2 -3 -3 -4 -5 -6 -7 -8 -10 -15 -51
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B. Budget Authority and Tax Expenditures
Budget authority
In compliance with section 308(a)(1) of the Congressional
Budget and Impoundment Control Act of 1974 (``Budget Act''),\9\
the Committee states that no provisions of the bill as reported
involve new or increased budget authority.
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\9\Pub. L. No. 93-344.
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Tax expenditures
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that the revenue-reducing provisions of the
bill involve increased tax expenditures (see revenue table in
part A., above).
C. Consultation With Congressional Budget Office
In accordance with section 403 of the Budget Act, the
Congressional Budget Office has submitted the following
statement on the bill:
U.S. Congress,
Congressional Budget Office,
Washington, DC, May 7, 2015.
Hon. Orrin G. Hatch,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 335, a bill to amend
the Internal Revenue Code of 1986 to improve 529 plans.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Logan
Timmerhoff.
Sincerely,
Keith Hall.
Enclosure.
S. 335--A bill to amend the Internal Revenue Code of 1986 to improve
529 plans
S. 335 would modify the tax treatment of college savings
plans authorized under section 529 of the Internal Revenue
Code. Under current law, income earned on amounts in those
accounts accumulates on a tax-free basis, and the distribution
of such income is not included in the taxable income of the
recipient to the extent that it is used to pay certain higher
education expenses. S. 335 would expand the qualifying expenses
to include certain computer and related expenses. The bill
would also modify the computation of the taxable portion of a
distribution when the contributor has established multiple
accounts for the student. In addition, S. 335 would allow
beneficiaries to pay no tax in the event that they receive a
refund from the educational institution (for example, after
withdrawing from enrollment) and contribute the refunded amount
back to the savings plan within 60 days.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting S. 335 would reduce revenues, thus
increasing federal deficits, by $51 million over the 2015-2025
period.
The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting
direct spending and revenues. Enacting S. 335 would result in
revenue losses in each year beginning in 2015. The estimated
increases in the deficit are shown in the following table.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act.
On February 19, 2015, CBO transmitted a cost estimate of
the budgetary effects of H.R. 529, as ordered reported by the
House Committee on Ways and Means on February 12, 2015. The
language of S. 335 is identical to that of H.R. 529, and
therefore the estimated budgetary effects are also the same.
The CBO staff contact for this estimate is Logan
Timmerhoff. The estimate was approved by David Weiner,
Assistant Director for Tax Analysis.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR S. 335, AS ORDERED REPORTED BY THE SENATE COMMITTEE ON FINANCE ON APRIL 29, 2015
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By fiscal year, in millions of dollars--
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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-2020 2015-2025
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NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Impact....................... 1 2 2 3 3 4 5 6 7 8 10 15 51
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Source: Staff of the Joint Committee on Taxation.
IV. VOTES OF THE COMMITTEE
In compliance with paragraph 7(b) of Rule XXVI of the
standing rules of the Senate, the Committee states that, with a
majority and quorum present, S. 335 was ordered favorably
reported on April 29, 2015 as follows:
Amendment #5, Wyden/Brown #1, as Modified--Removing 529
plan balances from the TANF asset test--defeated by roll call
vote, 12 ayes, 14 nays.
Ayes: Wyden, Schumer (proxy), Stabenow, Cantwell, Nelson
(proxy), Menendez (proxy), Carper, Cardin, Brown, Bennet,
Casey, Warner.
Nays: Hatch, Grassley, Crapo, Roberts (proxy), Enzi
(proxy), Cornyn (proxy), Thune (proxy), Burr (proxy), Isakson
(proxy), Portman, Toomey (proxy), Coats, Heller (proxy), Scott
(proxy).
Amendment #11, Stabenow/Bennet/Brown/Wyden/Warner #2, as
Modified--Improving information students and their families
receive about federal tax credits for higher education--
defeated by roll call vote, 12 ayes, 14 nays.
Ayes: Wyden, Schumer (proxy), Stabenow, Cantwell, Nelson
(proxy), Menendez, Carper (proxy), Cardin, Brown, Bennet,
Casey, Warner.
Nays: Hatch, Grassley, Crapo, Roberts (proxy), Enzi
(proxy), Cornyn (proxy), Thune (proxy), Burr (proxy), Isakson
(proxy), Portman, Toomey (proxy), Coats, Heller, Scott (proxy).
Amendment #16, Menendez/Schumer/Brown/Stabenow/Warner/
Cantwell #1, as Modified--Student Loan Tax Relief Act--defeated
by roll call vote, 12 ayes, 14 nays.
Ayes: Wyden, Schumer (proxy), Stabenow, Cantwell, Nelson
(proxy), Menendez, Carper (proxy), Cardin (proxy), Brown,
Bennet, Casey, Warner.
Nays: Hatch (proxy), Grassley, Crapo (proxy), Roberts
(proxy), Enzi (proxy), Cornyn (proxy), Thune, Burr (proxy),
Isakson (proxy), Portman, Toomey (proxy), Coats (proxy), Heller
(proxy), Scott (proxy).
Amendment #26, Bennet/Brown/Wyden/Schumer #9, as Modified--
Fully excluding Pell Grants from Gross Income--defeated by roll
call vote, 12 ayes, 14 nays.
Ayes: Wyden, Schumer (proxy), Stabenow (proxy), Cantwell,
Nelson (proxy), Menendez, Carper (proxy), Cardin (proxy),
Brown, Bennet, Casey (proxy), Warner.
Nays: Hatch (proxy), Grassley, Crapo (proxy), Roberts
(proxy), Enzi (proxy), Cornyn (proxy), Thune, Burr (proxy),
Isakson (proxy), Portman (proxy), Toomey (proxy), Coats, Heller
(proxy), Scott (proxy).
Final Passage of the S. 335, A Bill to Amend the Internal
Revenue Code of 1986 to Improve 529 Plans, as Modified--
approved by roll call vote, 26 ayes, 0 nays.
Ayes: Hatch, Grassley, Crapo, Roberts, Enzi (proxy),
Cornyn, Thune, Burr, Isakson, Portman, Toomey, Coats, Heller,
Scott, Wyden, Schumer, Stabenow, Cantwell, Nelson, Menendez,
Carper, Cardin, Brown, Bennet, Casey, Warner.
V. REGULATORY IMPACT AND OTHER MATTERS
A. Regulatory Impact
Pursuant to paragraph 11(b) of rule XXVI of the Standing
Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact that might be
incurred in carrying out the provisions of the bill as amended.
Impact on individuals and businesses, personal privacy and paperwork
The bill modifies the treatment of 529 plans. The
provisions of the bill are not expected to impose additional
administrative requirements or regulatory burdens on
individuals or businesses.
The provisions of the bill do not impact personal privacy.
B. Unfunded Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the tax provisions of the
reported bill do not contain Federal private sector mandates or
Federal intergovernmental mandates on State, local, or tribal
governments within the meaning of Public Law 104-4, the
Unfunded Mandates Reform Act of 1995.
C. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (``IRS Reform Act'') requires the
staff of the Joint Committee on Taxation (in consultation with
the Internal Revenue Service and the Treasury Department) to
provide a tax complexity analysis. The complexity analysis is
required for all legislation reported by the Senate Committee
on Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
and has widespread applicability to individuals or small
businesses. The staff of the Joint Committee on Taxation has
determined that there are no provisions that are of widespread
applicability to individuals or small businesses.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In the opinion of the Committee, it is necessary in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of rule XXVI of the Standing Rules
of the Senate (relating to the showing of changes in existing
law made by the bill as reported by the Committee).
[all]