SEC. 2. TAX TREATMENT OF CONTRIBUTIONS TO 529 
PLANS. 
(a) EXCLUSION FROM GROSS INCOME
FOR EM-
PLOYER CONTRIBUTIONS.— 
(1) IN GENERAL.—Part III of subchapter B of 
chapter 1 of the Internal Revenue Code of 1986 is 
amended by inserting after section 139F the fol-
lowing new section: 
‘‘SEC. 139G. EMPLOYER CONTRIBUTIONS TO 529 PLAN OR 
ABLE ACCOUNT. 
‘‘(a) IN GENERAL.—In the case of an individual who 
is a qualified account owner, gross income shall not in-
clude the amount of any contribution to such account dur-
ing the taxable year by the employer of the account owner. 
‘‘(b) LIMITATION.—The amount exempt from gross 
income by subsection (a) for a taxable year shall not ex-
ceed the lesser of— 
‘‘(1) an amount equal to the compensation in-
cludible in the individual’s gross income for such 
taxable year, or 
‘‘(2) $5,000 ($10,000 in the case of a joint re-
turn) for each dependent who of the taxpayer is the 
designated beneficiary of an account under section 
529. 
‘‘(c) QUALIFIED ACCOUNT OWNER.—For purposes of 
this section, the term ‘qualified account owner’ means— 
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‘‘(1) in the case of an account in connection 
with a qualified tuition program, the account owner 
of an account of a designated beneficiary under sec-
tion 529, and 
‘‘(2) in the case of an ABLE account, the des-
ignated beneficiary in connection with the ABLE ac-
count under section 529A(e)(3).’’. 
(2) CAFETERIA PLAN DOES NOT INCLUDE EM-
PLOYER CONTRIBUTIONS TO 529 PLANS OR ABLE AC-
COUNTS.—Section 125(d)(2) of such Code is amend-
ed by adding at the end the following: 
‘‘(E) EXCEPTION FOR CONTRIBUTIONS TO 
529
PLAN
AND
ABLE
ACCOUNTS.—Subpara-
graph (A) shall not apply to a plan to the ex-
tent of amounts which a covered employee may 
elect to have the employer pay as contributions 
to an account under section 529 or 529A.’’. 
(3) CLERICAL AMENDMENT.—The table of sec-
tions for part III of subchapter B of chapter 1 of 
such Code is amended by inserting after the item re-
lating to section 139F the following new item: 
‘‘Sec. 139G. Employer contributions to 529 plan or ABLE account.’’. 
(b) FEDERAL INSURANCE CONTRIBUTIONS.— 
(1) WAGES.—Section 3121(a) of such Code is 
amended by striking ‘‘or’’ at the end of paragraph 
(22), by striking the period at the end of paragraph 
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(23) and inserting ‘‘; or’’, and by inserting after 
paragraph (23) the following: 
‘‘(24) the amount of any contribution made to 
or on behalf of an employee if at the time of such 
contribution it is reasonable to believe that the em-
ployee will be able to exclude such contribution from 
income under section 139G.’’. 
(2) 
NET
EARNINGS
FROM
SELF-EMPLOY-
MENT.—Section 1402(a) of such Code is amended 
by striking ‘‘and’’ at the end of paragraph (16), by 
striking the period at the end of paragraph (17) and 
inserting ‘‘; and’’, and inserting after paragraph 
(17) the following: 
‘‘(18) there shall be excluded any contribution 
made to or on behalf of an employee that is not in-
cludible in gross income of the employee under sec-
tion 139G.’’. 
(3) CONFORMING AMENDMENTS TO SOCIAL SE-
CURITY ACT.— 
(A) WAGES.—Section 209(a) of the Social 
Security Act (42 U.S.C. 409(a)) is amended by 
striking ‘‘or’’ at the end of paragraph (19) and 
inserting a semicolon, by striking the period at 
the end of paragraph (20) and inserting ‘‘; or’’, 
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and by inserting after paragraph (20) the fol-
lowing: 
‘‘(21) The amount of any contribution made to 
or on behalf of an employee that is not includible in 
gross income of the employee under section 139G of 
the Internal Revenue Code of 1986.’’. 
(B) NET EARNINGS FROM SELF-EMPLOY-
MENT.—Section 211(a) of the Social Security 
Act (42 U.S.C. 411(a)) is amended by striking 
‘‘and’’ at the end of paragraph (15), by striking 
the period at the end of paragraph (16) and in-
serting ‘‘; and’’, and inserting after paragraph 
(16) the following: 
‘‘(17) There shall be excluded any contribution 
made to or on behalf of an employee that is not in-
cludible in gross income of the employee under sec-
tion 139G of the Internal Revenue Code of 1986.’’. 
(c) RAILROAD RETIREMENT.—Section 3231(e) of 
such Code is amended by adding at the end the following: 
‘‘(13) EMPLOYER CONTRIBUTIONS TO 529 PLAN 
OR ABLE ACCOUNT.—The term compensation shall 
not include any contribution made to or on behalf of 
an employee that is not includible in gross income of 
the employee under section 139G.’’. 
(d) DEDUCTION FOR INDIVIDUAL CONTRIBUTIONS.— 
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(1) IN GENERAL.—Part VII of subchapter B of 
chapter 1 of the Internal Revenue Code of 1986 is 
amended by redesignating section 224 as section 
225 and by inserting after section 223 the following 
new section: 
‘‘SEC. 224. CONTRIBUTIONS TO 529 PLANS AND ABLE AC-
COUNTS. 
‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of an 
individual, there shall be allowed as a deduction for the 
taxable year an amount equal to the sum of— 
‘‘(1) the aggregate contributions made by such 
individual to qualified tuition programs (as defined 
in section 529) during such taxable year, and 
‘‘(2) the aggregate contributions made by such 
individual to ABLE accounts (as defined in section 
529A) during such taxable year. 
‘‘(b) LIMITATION.—The amount allowed as a deduc-
tion by subsection (a) for a taxable year shall not exceed 
$5,000.’’. 
(2) CLERICAL AMENDMENT.—The table of sec-
tions for part VII of subchapter B of chapter 1 of 
such Code is amended by redesignating the item re-
lating to section 224 as an item relating to section 
225 and by inserting after the item relating to sec-
tion 223 the following new item: 
‘‘Sec. 224. Contributions to 529 plans and ABLE accounts.’’. 
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(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to contributions made during tax-
able years beginning after the date of the enactment of 
this Act. 
SEC. 3. ADDITIONAL TAX FOR DISTRIBUTIONS NOT USED 
FOR QUALIFIED PURPOSES. 
(a) QUALIFIED TUITION PROGRAMS.— 
(1) IN GENERAL.—The first sentence of section 
529(c)(6) of the Internal Revenue Code of 1986 is 
amended by striking the period at the end and in-
serting ‘‘, except that the rate of such tax shall be 
determined under subparagraph (B) of this para-
graph.’’. 
(2) RATE.—Paragraph (6) of section 529(c) of 
such Code, as amended by subsection (a), is amend-
ed— 
(A) by striking ‘‘The tax’’ and inserting 
‘‘(A) IN GENERAL.—The tax’’, and 
(B) by adding at the end the following: 
‘‘(B) RATE.—For purposes of subpara-
graph (A), the tax rate determined under this 
subparagraph is the greater of— 
‘‘(i) 10 percent, and 
‘‘(ii) the highest rate of income tax 
applicable to such person under this title.’’. 
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