Tax Free Education Act of 2021
Bill: S.3081 | Sponsor: Sen. Paul, Rand (R-KY)
Policy area: Taxation

Summary:
Tax Free Education Act of 2021
This bill permits tax-free distributions of up to $5,250 from 401(k) plans for qualified higher and elementary and secondary education expenses and penalty-free withdrawals from individual retirement accounts (IRAs) for student loan expenses.
The bill also excludes from gross income, for income tax purposes, distributions up to $5,250 from employer-sponsored student loan and tuition payment plans. It repeals the limitation on the deduction of interest on student loans and increases from $15,000 to $25,000 (adjusted for inflation) the maximum contribution amounts for certain tax-preferred retirement plans.
The bill allows employees an election to treat contributions to a 401(k) plan as Roth contributions (thus exempting withdrawals from such plans from tax at retirement).
Finally, the bill allows individual taxpayers a new tax deduction for their qualified higher and elementary and secondary education expenses.

To amend the Internal Revenue Code of 1986 to permit withdrawals from 
 certain retirement plans for repayment of student loan debt, and for 
                            other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Tax Free Education Act of 2021''.

SEC. 2. WITHDRAWALS FOR HIGHER EDUCATION EXPENSES.

    (a) 401(k) Plans.--Paragraph (14) of section 401(k) of the Internal 
Revenue Code of 1986 is amended by adding at the end the following new 
subparagraph:
                    ``(C) Distributions for qualified education 
                expenses.--
                            ``(i) In general.--A distribution shall be 
                        treated as made upon hardship of the employee 
                        to the extent that the aggregate amount of such 
                        distributions during the taxable year does not 
                        exceed the lesser of--
                                    ``(I) the amount paid by the 
                                taxpayer for qualified education 
                                expenses for any individual during such 
                                taxable year, or
                                    ``(II) $5,250.
                            ``(ii) Distribution must be otherwise 
                        disallowed.--Clause (i) shall not apply to any 
                        distribution which is permissible under 
                        paragraph (2)(B)(i) (including distributions 
                        which would be treated as made upon hardship of 
                        the employee without regard to this 
                        subparagraph).
                            ``(iii) No requirement to demonstrate 
                        hardship.--Clause (i) shall apply without 
                        regard to any requirement to demonstrate 
                        financial need or hardship, or to demonstrate 
                        that other assets are not available to pay the 
                        qualified education expenses.
                            ``(iv) Additional tax under section 72(t) 
                        not to apply.--No tax shall be imposed under 
                        section 72(t) on any amount treated as a 
                        hardship distribution by reason of clause (i).
                            ``(v) Qualified education expenses.--For 
                        purposes of this subparagraph, the term 
                        `qualified education expenses' has the meaning 
                        given such term by section 530(b)(2)(A), 
                        applied without regard to subparagraph (B) of 
                        section 530(b)(2).''.
    (b) 403(b) Plans.--Paragraph (11) of section 403(b) of the Internal 
Revenue Code of 1986 is amended by adding at the end the following: 
``Under rules similar to the rules of section 401(k)(14)(C), a 
distribution shall be treated as made upon hardship of the employee to 
the extent that the aggregate amount of such distributions during the 
taxable year does not exceed the lesser of the amount paid by the 
taxpayer for qualified education expenses during such taxable year, or 
$5,250.''.
    (c) 457 Plans.--Paragraph (1) of section 457(d) of the Internal 
Revenue Code of 1986 is amended by adding at the end the following: 
``Under rules similar to the rules of section 401(k)(14)(C) (and 
without regard to whether the expenses are unforeseen), a distribution 
shall be treated as made by reason of unforeseen emergency to the 
extent that the aggregate amount of such distributions during the 
taxable year does not exceed the lesser of the amount paid by the 
taxpayer for qualified education expenses during such taxable year, or 
$5,250.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to distributions made after December 31, 2021.

SEC. 3. WITHDRAWALS FOR STUDENT LOAN EXPENSES.

    (a) IRAs.--Paragraph (7) of section 72(t) of the Internal Revenue 
Code of 1986 is amended by adding at the end the following new 
subparagraph:
                    ``(C) Student loans.--Such term shall include 
                amounts paid in repayment of any loan made to an 
                individual described in subparagraph (A) to assist the 
                individual in attending an educational organization 
                described in section 170(b)(1)(A)(ii).''.
    (b) 401(k)s.--Clause (v) of section 401(k)(14)(C), as added by 
section 2, is amended--
            (1) by striking ``applied without regard'' and inserting 
        ``applied--
                                    ``(I) without regard'';
            (2) by striking the period at the end and inserting ``, 
        and''; and
            (3) by adding at the end the following new subclause:
                                    ``(II) by treating amounts 
                                described in section 72(t)(7)(C) as 
                                qualified higher education expenses.''.
    (c) Effective Date.--The amendment made by this section shall apply 
to distributions made after December 31, 2021.

SEC. 4. EXCLUSION OF DISTRIBUTIONS FOR EDUCATIONAL EXPENSES.

    (a) In General.--Section 402 of the Internal Revenue Code of 1986 
is amended by adding at the end the following new subsection:
    ``(m) Distributions for Qualified Education Expenses.--
            ``(1) In general.--Gross income for the taxable year does 
        not include--
                    ``(A) any distribution from a qualified cash or 
                deferred arrangement (as defined in section 401(k)(2)), 
                an annuity contract described in section 403(b), or an 
                eligible deferred compensation plan described in 
                section 457(b) which is maintained by an eligible 
                employer described in section 457(e)(1)(A), which is 
                treated as made upon hardship of the employee by reason 
                of section 401(k)(14)(C), the last sentence of section 
                403(b)(11), or the last sentence of section 457(d)(1), 
                or
                    ``(B) any distribution from an individual 
                retirement account (as defined in section 408(a)) to 
                which section 72(t)(2)(E) applies.
            ``(2) Distributions must otherwise be includible.--
                    ``(A) In general.--An amount shall be treated as 
                described in paragraph (1) only to the extent that such 
                amount would be includible in gross income without 
                regard to such paragraph.
                    ``(B) Application of section 72.--In determining 
                whether a distribution would be includible in gross 
                income but for this subsection, rules similar to the 
                rules of subsection (l)(3)(B) shall apply (by taking 
                into account all retirement plans in which the taxpayer 
                is a participant).''.
    (b) Coordination With Deductions and Credits.--
            (1) Coordination with american opportunity and lifetime 
        learning credits.--
                    (A) In general.--Paragraph (2) of section 25A(g) of 
                the Internal Revenue Code of 1986 is amended by 
                redesignating subparagraph (C) as subparagraph (D), by 
                striking ``and'' at the end of subparagraph (B), and by 
                inserting after subparagraph (B) the following new 
                subparagraph:
                    ``(C) a distribution from a qualified cash or 
                deferred arrangement (as defined in section 401(k)(2)), 
                an annuity contract described in section 403(b), an 
                eligible deferred compensation plan described in 
                section 457(b) which is maintained by an eligible 
                employer described in section 457(e)(1)(A), or an 
                individual retirement account (as defined in section 
                408(a)) which is excluded from gross income of the 
                distributee under section 402(m) (other than any 
                portion of such a distribution which is attributable to 
                the repayment of a loan described in section 
                72(t)(7)(C)), and''.
                    (B) Coordination with waiver of penalty.--
                Subparagraph (B) of section 72(t)(7) is amended by 
                inserting ``(without regard to subparagraph (C) 
                thereof)'' before the period.
            (2) Deduction for interest on education loans.--The first 
        sentence of paragraph (1) of section 221(e) of such Code is 
        amended--
                    (A) by striking ``or''; and
                    (B) by inserting before the period at the end the 
                following: ``, or for any amount paid with a 
                distribution which is excluded from gross income under 
                section 402(m)''.
    (c) Effective Date.--The amendment made by this section shall apply 
to distributions made after December 31, 2021.

SEC. 5. MODIFICATION OF INCLUSION OF EMPLOYER STUDENT LOAN PAYMENTS IN 
              EDUCATIONAL ASSISTANCE PROGRAMS.

    (a) In General.--Subparagraph (B) of section 127(c)(1) of the 
Internal Revenue Code of 1986 is amended to read as follows:
                    ``(B) the payment, by an employer, of amounts in 
                repayment of any loan made to the employee to assist 
                the employee in attending an educational organization 
                described in section 170(b)(1)(A)(ii), and''.
    (b) Denial of Double Benefit.--Paragraph (1) of section 221(e) of 
the Internal Revenue Code of 1986, as amended by section 4, is further 
amended by striking ``any indebtedness on a qualified education loan of 
the taxpayer'' and inserting ``amounts in repayment of any loan 
described in section 127(c)(1)(B)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2021.

SEC. 6. REPEAL OF CAP ON DEDUCTION FOR INTEREST ON EDUCATION LOANS.

    (a) In General.--Section 221 of the Internal Revenue Code of 1986 
is amended by striking subsections (b) and (f).
    (b) Carryover of Excess Interest.--Section 221 of the Internal 
Revenue Code of 1986, as so amended, is amended by inserting after 
subsection (a) the following new subsection:
    ``(b) Carryover.--If the amount of the deduction allowable under 
subsection (a) exceeds the taxable income of the taxpayer for the 
taxable year (determined without regard to this section), then an 
amount equal to such excess shall be treated as interest paid by the 
taxpayer in the succeeding taxable year on a qualified education 
loan.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 7. EMPLOYER ROTH CONTRIBUTIONS.

    (a) In General.--Subsection (a) of section 402A of the Internal 
Revenue Code of 1986 is amended--
            (1) by striking ``and'' at the end of paragraph (1);
            (2) by redesignating paragraph (2) as paragraph (3); and
            (3) by inserting after paragraph (1) the following new 
        paragraph:
            ``(2) in the case of a qualified cash or deferred 
        arrangement (as defined in section 401(k)(2)), any designated 
        Roth employer contribution made pursuant to the arrangement 
        shall be treated for purposes of this chapter in the same 
        manner as contributions described in section 401(k)(3)(D)(ii), 
        except that such contribution shall not be excludable from 
        gross income, and''.
    (b) Conforming Amendments.--
            (1) Paragraph (1) of section 402A(b) of the Internal 
        Revenue Code of 1986 is amended--
                    (A) by striking ``may elect to make'' and inserting 
                ``may elect--
                    ``(A) to make'';
                    (B) by striking the period at the end and inserting 
                ``, and''; and
                    (C) by adding at the end the following new 
                subparagraph:
                    ``(B) in the case of a qualified cash or deferred 
                arrangement (as defined in section 401(k)(2)), to have 
                the employee's employer make designated Roth employer 
                contributions in lieu of all or a portion of the 
                matching or nonelective contributions the employee is 
                otherwise eligible to receive under the arrangement.''.
            (2) Paragraph (2)(A) of section 402A(b) of such Code is 
        amended by striking ``of each employee'' and inserting ``and 
        designated Roth employer contributions with respect to each 
        employee''.
            (3) Subparagraph (B) of section 402A(d)(2) of such Code is 
        amended by inserting ``, or elected to have made a designated 
        Roth employer contribution,'' after ``designated Roth 
        contribution'' both places it appears in clauses (i) and (ii).
    (c) Designated Roth Employer Contribution.--Subsection (c) of 
section 402A of the Internal Revenue Code of 1986 is amended--
            (1) by inserting ``and Designated Roth Employer 
        Contributions'' after ``Designated Roth Contributions'' in the 
        heading, and
            (2) by adding at the end the following new paragraph:
            ``(5) Designated roth employer contribution.--
                    ``(A) In general.--The term `designated Roth 
                employer contribution' means any contribution described 
                in subparagraph (B) made under a qualified cash or 
                deferred arrangement (as defined in section 401(k)(2)) 
                which--
                            ``(i) is excludable from gross income of an 
                        employee without regard to this section, and
                            ``(ii) the employee designates (at such 
                        time and in such manner as the Secretary may 
                        prescribe) as not being so excludable.
                    ``(B) Contributions described.--The contributions 
                described in this subparagraph are--
                            ``(i) matching contributions (as defined in 
                        section 401(m)(4)(A)) which meet the 
                        requirements of subparagraphs (B) and (C) of 
                        section 401(k)(2), and
                            ``(ii) qualified nonelective contributions 
                        (within the meaning of section 401(m)(4)(C)).
                    ``(C) Designation limits.--The amount of matching 
                contributions and qualified nonelective contributions 
                which an employee may designate under subparagraph (A) 
                shall not exceed the excess (if any) of--
                            ``(i) the maximum amount of such 
                        contributions excludable from gross income of 
                        the employee for the taxable year (without 
                        regard to this section), over
                            ``(ii) the aggregate amount of such 
                        contributions with respect to the employee for 
                        the taxable year which the employee does not 
                        designate under subparagraph (A).''.
    (d) Effective Date.--The amendments made by this section shall 
apply to contributions made in taxable years beginning after December 
31, 2021.

SEC. 8. MAXIMUM CONTRIBUTIONS.

    (a) Elective Deferrals.--
            (1) In general.--Subparagraph (B) of section 402(g)(1) of 
        the Internal Revenue Code of 1986 is amended by striking 
        ``$15,000'' and inserting ``$25,000''.
            (2) Cost-of-living adjustment.--Paragraph (4) of section 
        402(g) of such Code is amended--
                    (A) by striking ``$15,000'' and inserting 
                ``$25,000'';
                    (B) by striking ``December 31, 2006'' and inserting 
                ``December 31, 2022''; and
                    (C) by striking ``July 1, 2005'' and inserting 
                ``July 1, 2021''.
            (3) Conforming amendment.--Clause (ii) of section 
        402(g)(7)(A) of such Code is amended by striking ``$15,000'' 
        and inserting ``$25,000''.
    (b) 457 Plans.--
            (1) In general.--Subparagraph (A) of section 457(e)(15) of 
        the Internal Revenue Code of 1986 is amended by striking 
        ``$15,000'' and inserting ``$25,000''.
            (2) Cost-of-living adjustment.--Subparagraph (B) of section 
        457(e)(15) of such Code is amended--
                    (A) by striking ``$15,000'' and inserting 
                ``$25,000'';
                    (B) by striking ``December 31, 2006'' and inserting 
                ``December 31, 2022''; and
                    (C) by striking ``July 1, 2005'' and inserting 
                ``July 1, 2021''.
    (c) Employed Individual 401(k)s.--Subsection (k) of section 401 of 
the Internal Revenue Code of 1986 is amended by adding at the end the 
following new paragraph:
            ``(16) Employed individual arrangement.--
                    ``(A) In general.--A cash or deferred arrangement 
                shall not be treated as failing to meet any requirement 
                of this subsection solely because, under the 
                arrangement, an employee may elect to make additional 
                elective deferrals which are not subject to, and are 
                not taken into account under, paragraph (3) to a 
                separate account from other contributions made on 
                behalf of the employee under the arrangement, if--
                            ``(i) all employees eligible to participate 
                        in the arrangement are eligible to make such 
                        election,
                            ``(ii) the aggregate of all elective 
                        deferrals made by the employee under the 
                        arrangement does not exceed the limitation of 
                        section 402(g), and
                            ``(iii) no matching or nonelective 
                        contributions may be made to such account or 
                        with respect to elective deferrals contributed 
                        to such account.
                    ``(B) Distribution, etc. rules to apply.--The rules 
                of this subsection, other than paragraph (3), shall 
                apply to any account established under subparagraph 
                (A).
                    ``(C) Elective deferral.--For purposes of this 
                paragraph, the term `elective deferral' means any 
                employer contribution under a qualified cash or 
                deferred arrangement to the extent not includible in 
                gross income for the taxable year under section 
                402(e)(3) (determined without regard to section 
                402(g)).''.
    (d) Effective Date.--The amendments made by this section shall 
apply to contributions made in taxable years beginning after December 
31, 2021.

SEC. 9. DEDUCTION FOR QUALIFIED EDUCATION EXPENSES.

    (a) In General.--Part VII of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 is amended--
            (1) by redesignating section 224 as section 225; and
            (2) by inserting after section 223 the following new 
        section:

``SEC. 224. QUALIFIED EDUCATION EXPENSES.

    ``(a) Deduction Allowed.--In the case of an individual, there shall 
be allowed as a deduction for the taxable year an amount equal to the 
qualified education expenses paid or incurred during such taxable year 
for the taxpayer or any other individual.
    ``(b) Qualified Education Expenses.--For purposes of this section, 
the term `qualified education expenses' means--
            ``(1) qualified education expenses as defined in section 
        530(b)(2)(A), applied without regard to subparagraph (B) of 
        section 530(b)(2), and
            ``(2) amounts paid in repayment of any loan made to an 
        individual to assist the individual in attending an educational 
        organization described in section 170(b)(1)(A)(ii).
    ``(c) Denial of Double Benefit.--For purposes of subsection (a), 
the qualified education expenses with respect to any taxpayer shall be 
reduced by--
            ``(1) the amount of any distribution from a qualified cash 
        or deferred arrangement (as defined in section 401(k)(2)), an 
        annuity contract described in section 403(b), an eligible 
        deferred compensation plan described in section 457(b) which is 
        maintained by an eligible employer described in section 
        457(e)(1)(A), or an individual retirement account (as defined 
        in section 408(a)) which is excluded from gross income of the 
        taxpayer under section 402(m) (other than any portion of such a 
        distribution which is attributable to the repayment of a loan 
        described in section 72(t)(7)(C)), and
            ``(2) the amount of any such expenses taken into account in 
        determining any credit or any other deduction under any other 
        provision of this chapter.
    ``(d) Carryforward of Unused Amount.--If any portion of the 
deduction allowed by subsection (a) for the taxable year is disallowed 
by reason of any limitation (including the amount of income of the 
taxpayer), such portion shall be treated as a deduction allowable under 
subsection (a) in the succeeding taxable year.''.
    (b) Deduction Allowed Above the Line.--Subsection (a) of section 62 
of the Internal Revenue Code of 1986 is amended by inserting after 
paragraph 21 the following new paragraph:
            ``(22) Qualified education expenses.--The deduction allowed 
        by section 224.''.
    (c) Clerical Amendment.--The table of sections for part VII of 
subchapter B of chapter 1 of the Internal Revenue Code of 1986 is 
amended by striking the item relating to section 224 and by inserting 
after the item relating to section 223 the following new items:

``Sec. 224. Qualified education expenses.
``Sec. 225. Cross reference.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2021.
                                 <all>