529 and ABLE Account Improvement Act of 2016

To amend the Internal Revenue Code of 1986 to make improvements in the rules related to qualified tuition programs and qualified ABLE programs. 1. Short title This Act may be cited as the 529 and ABLE Account Improvement Act of 2016 2. Employer contributions to qualified tuition programs and qualified ABLE programs (a) In general Subsection (a) of section 132 or , or (9) qualified tuition program and qualified ABLE program contributions. . (b) Qualified tuition program and qualified ABLE program contributions defined Section 132 of such Code is amended by redesignating subsection (o) as subsection (p) and inserting after subsection (n) the following new subsection: (o) Qualified tuition program and qualified ABLE program contributions defined (1) In general For purposes of this section, the term qualified tuition and qualified ABLE program contributions (A) such contribution is made to an account under such program for which the designated beneficiary is the employee or a member of the family of the employee (within the meaning of section 529(e)(2)), and (B) such contribution is made in connection with a qualified payroll deduction contribution program established by the employer. (2) Qualified payroll deduction contribution program For purposes of this subsection, the term qualified payroll deduction contribution program (A) under which employees may elect to make contributions to accounts described in paragraph (1)(A) which reduce the amount of wages received directly by such employee by the amount of such contribution, and (B) which is made available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees (as defined in section 414(q)). (3) Limitation on exclusion The amount of qualified tuition and qualified ABLE program contributions which may be excluded from gross income under subsection (a)(9) with respect to any employee shall not exceed $100 in any calendar year. (4) Nondiscrimination rule for employer contributions Subsection (a)(9) shall only apply to contributions provided with respect to a highly compensated employee if such contributions meet the requirements of paragraph (2)(B). (5) Inflation adjustment (A) In general In the case of any taxable year beginning in a calendar year after 2016, the $100 amount contained in paragraph (3) shall be increased by an amount equal to— (i) such dollar amount, multiplied by (ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting calendar year 2015 calendar year 1992 (B) Rounding Any increase determined under subparagraph (A) shall be rounded to the nearest multiple of $25. . (c) Effective date The amendments made by this section shall apply to contributions made after December 31, 2016. 3. Tax credit for small employer costs of establishing direct payroll deduction into qualified tuition programs and qualified ABLE programs (a) In general Section 45E (f) Application to programs for payroll deduction contributions to qualified tuition programs and qualified ABLE programs In the case of a qualified payroll deduction contribution program (as defined in section 132(o)(2)) established by an employer— (1) such program shall be treated as an eligible employer plan for purposes of this section, (2) this section (including the limitation of subsection (b)) shall be applied separately with respect to such programs and any other eligible employer plans of the employer, and (3) subsection (d)(1)(A)(ii) shall be applied by substituting education retirement-related education . (b) Clerical amendments (1) The heading for section 45E of such Code is amended by striking pension (2) The table of sections for subpart D of part IV of subchapter A of chapter 1 of such Code is amended by striking the item relating to section 45E and inserting the following new item: Sec. 45E. Small employer plan startup costs. . (c) Effective date The amendments made by this section shall apply to costs paid or incurred in taxable years beginning after the date of the enactment of this Act. 4. Exemptions from additional tax for certain distributions from qualified tuition programs (a) In general Section 529(c)(6) This paragraph shall not apply to the extent that— (A) a payment or distribution is contributed to an individual retirement plan of the account owner or the designated beneficiary with respect to the calendar year in which the payment or distribution is received, (B) a payment or distribution is used (within 90 days of the payment or distribution) to make a payment of interest or principal on a qualified education loan (as defined in section 222(d)(1)) on behalf of the designated beneficiary or a member of the family of such designated beneficiary within the meaning of section 529(e)(2)), or (C) the recipient of a payment or distribution makes (within 90 days of the receipt of the payment or distribution) a contribution to an organization described in section 170(b)(1)(A) (other than any organization described in section 509(a)(3) or any fund or account described in section 4966(d)(2)), but only if— (i) a deduction for the entire payment or distribution is allowable under section 170, and (ii) the total payments and distributions taken into account under this subparagraph with respect to such recipient for any taxable year does not exceed $1,000. . (b) Effective date The amendments made by this section shall apply to distributions after the date of the enactment of this Act. 5. Clarification regarding investment direction in qualified tuition programs and qualified ABLE programs (a) Investment direction in qualified tuition programs Paragraph (4) of section 529(b) For purposes of this paragraph, rebalancing investments among broad-based investment strategies established under the program shall not be treated as investment direction by a contributor or designated beneficiary unless the specific investments within those broad-based strategies are directed by the contributor or designated beneficiary. (b) Investment direction in qualified ABLE programs Paragraph (4) of section 529A(b) of such Code is amended by adding at the end the following: For purposes of this paragraph, rebalancing investments among broad-based investment strategies established under the program shall not be treated as investment direction by a designated beneficiary unless the specific investments within those broad-based strategies are directed by the designated beneficiary. (c) Effective date The amendments made by this section shall apply with respect to calendar years beginning after the date of the enactment of this Act. 6. Rollovers between qualified tuition programs and qualified ABLE programs (a) Rollovers from qualified tuition programs to qualified ABLE programs Clause (i) of section 529(c)(3)(C) or , or (III) to an ABLE account (as defined in section 529A(e)(6)) of the designated beneficiary or a member of the family of the designated beneficiary. Subclause (III) shall not apply to so much of a distribution which, when added to all other contributions made to the ABLE account for the taxable year, exceeds the limitation under section 529A(b)(2)(B). . (b) Rollovers from qualified ABLE programs to qualified tuition programs Clause (i) of section 529A(c)(1)(C) of such Code is amended— (1) by striking such payment or distribution, into another such payment or distribution— (I) into another ; (2) by striking the period at the end and inserting , or (3) by adding at the end the following new subclause: (II) to a qualified tuition program (as described in section 529) for the benefit of the same designated beneficiary or a member of the family of such designated beneficiary. . (c) Effective date The amendments made by this section shall apply to distributions after the date of the enactment of this Act.

Summary: 529 and ABLE Account Improvement Act of 2016 This bill amends the Internal Revenue Code to modify the tax treatment of qualified tuition programs (known as 529 plans) and ABLE accounts. (Tax-favored ABLE [Achieving a Better Life Experience] accounts are designed to enable individuals with disabilities to save for and pay for disability-related expenses.) The bill excludes from gross income a fringe benefit consisting of up to $100 per year (adjusted for inflation after 2016) of employer contributions to an employee's 529 or ABLE account. The employer contribution must be made: (1) to an account for which the designated beneficiary is the employee or a member of the employee's family, and (2) in connection with a payroll deduction contribution program established by the employer. The bill also: (1) expands the tax credit for small employer pension plan startup costs to include the costs of establishing a payroll deduction contribution program for 529 plans and ABLE accounts;(2) permits 529 funds to be used for transfers to an Individual Retirement Account (IRA), education loan payments, or charitable contributions without being subject to the additional tax for distributions that are not used for qualified higher education expenses; and (3) permits tax-free rollovers of funds between 529 and ABLE accounts for the benefit of the same beneficiary or a family member of the beneficiary. For the purpose of current law restrictions on the frequency of investment directions that a beneficiary or contributor may provide for a 529 or ABLE account, rebalancing investments among broad-based investment strategies established under the program is not an investment direction unless the beneficiary or contributor directs the specific investments within the strategies.