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[Senate Report 114-56]
[From the U.S. Government Publishing Office]

                                                        Calendar No. 97
114th Congress     }                                     {       Report
                                 SENATE
 1st Session       }                                     {       114-56

======================================================================

 
 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\
---------------------------------------------------------------------------
    \7\Notice 2001-81, 2001-2 C.B. 617, December 10, 2001.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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--
                                                      --------------------------------------------------------------------------------------------------
                                                        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]
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