Treasury expected to rework 529 regs

MIAMI BEACH, Fla. — After winning a major legislative victory in Congress last year that made federal tax breaks for Section 529 college savings plans permanent, this year the industry has its sights set on the Department of the Treasury, which is expected to begin writing tax regulations for the popular plans.
Addressing the annual conference of the Washington-based College Savings Foundation here this month, College Savings Plans Network chairwoman Jacqueline Williams called the Treasury regulations the “800-pound gorilla” facing the industry. She is also executive director of the Ohio Tuition Trust Authority.
In a subsequent session on “529 Policy in the new Democratic Congress,” James Canup, an attorney for the Atlanta-based law firm Troutman Sanders LLP, advised industry leaders to focus their efforts on “how to influence” the forthcoming regulations.
“You should be looking toward Treasury as much as toward the Hill,” he said.
According to another panelist, attorney James Delaplane, the Treasury was concerned primarily with the “potential abuses” of 529 plans that could theoretically arise from a wealthy individual seeking to avoid paying estate tax by funding multiple 529 accounts in different states to the maximum limit and naming different people as beneficiaries but never actually giving them the money. He is a partner in Davis & Harman LLP in Washington.
But such a case actually has never been uncovered, according to 529 officials, who also point to the relatively small size of an average 529 account, which is less than $10,000.
In addition, 529 plan officials who are meeting with Treasury officials are concerned that tax regulations also would burden states with increased operational costs, Diana Cantor, executive director of the Richmond, Va.-based Virginia College Savings Plan, the nation’s largest, said in an interview at the conference.
“We want to provide added safeguards, and we’ve agreed to measures that would make account owner transfers more restrictive,” said Ms. Cantor, a past chairwoman of the College Savings Plan Network in Lexington, Ky. “We just don’t want them to throw out the baby with the bath water.”
Tax issues
Confusion surrounding how states treat 529 plans for income tax purposes also was a concern for 529 program managers at the conference.
State income tax treatment of out-of-state plans owned by residents remained a particularly critical issue for the industry, said Peter Mazareas, treasurer of the College Savings Foundation and chief executive of Nahant, Mass.-based Strategic Advancement Group Inc. He is a proponent of tax parity, or having states give a tax break to all 529 plans.
Just three states — Kansas, Maine and Pennsylvania — allow some form of state tax deduction or credit for out-of-state plans owned by residents. At least two more states — Connecticut and Maryland — will be considering similar legislation this year, conference attendees were told at a session reviewing state tax legislation.
Ultimately, the tax parity issue may be decided in the U.S. Supreme Court by a municipal bond case, according to Len Weiser-Varon, an attorney for Boston-based law firm Mintz Levin Cohn Ferris Glovsky & Popeo PC.
If the Court agrees to hear Davis v. Department of Revenue, Mr. Weiser-Varon said, and upholds a Kentucky appellate court decision that held unconstitutional a state statute allowing state taxpayers to exempt interest on municipal bonds issued by state entities but not on out-of-state municipal bonds, then states may end tax breaks for residents enrolled in state plans or allow residents enrolled in out-of-state plans also to receive a tax break.
“The idea would be to achieve parity,” he said in an interview after his presentation. “Either no one gets a break or everybody gets one.”

Related Topics: Conference Call