49–010 

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 


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1 Except where otherwise specified, all section references are to the Internal Revenue Code 

of 1986, as amended (the ‘‘Code’’). 2For 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. 

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. 

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 beneVerDate Sep 11 2014 02:12 May 27, 2015 Jkt 049010 PO 00000 Frm 00002 Fmt 6659 Sfmt 6602 E:\HR\OC\SR056.XXX SR056

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3Section 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. 

ficiary. 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. 

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 halftime. 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 


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4Sec. 529(c)(3)(B)(i) and (ii)(I). 

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. 6Sec. 529(c)(3)(A) and (B)(ii). 7 Notice 2001 81, 2001 2 C.B. 617, December 10, 2001. 8 Ibid. 

7 Notice 2001–81, 2001–2 C.B. 617, December 10, 2001. 

8 Ibid. 

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

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

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

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

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 ComVerDate Sep 11 2014 02:12 May 27, 2015 Jkt 049010 PO 00000 Frm 00004 Fmt 6659 Sfmt 6602 E:\HR\OC\SR056.XXX SR056

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mittee 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. 


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9Pub. L. No. 93–344. 

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] 

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015–20 2015–25 

¥1 ¥2 ¥2 ¥3 ¥3 ¥4 ¥5 ¥6 ¥7 ¥8 ¥10 ¥15 ¥51 

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. 

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: 


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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. 


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CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR S. 335, AS ORDERED REPORTED BY THE SENATE 

COMMITTEE ON FINANCE ON APRIL 29, 2015 

By fiscal year, in millions of dollars— 

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015– 

2020 

2015– 

2025 

NET INCREASE IN THE DEFICIT 

Statutory Pay-AsYou-Go Impact ... 1 2 2 3 3 4 5 6 7 8 10 15 51 

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). 


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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. 


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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). 

Æ 


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