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SECTION 1. SHORT TITLE.

This Act may be cited as the ''529 and ABLE Account Improvement Act
of 2016''.

SEC. 2. EMPLOYER CONTRIBUTIONS TO QUALIFIED TUITION PROGRAMS AND
QUALIFIED ABLE PROGRAMS.

(a) In General.--Subsection (a) of section 132 of the Internal
Revenue Code of 1986 is amended by striking ''or'' at the end of
paragraph (7), by striking the period at the end of paragraph (8) and
inserting '', or'', and by adding at the end the following new
paragraph:
''(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'
means contributions (including matching contributions) made by
an employer directly to a qualified tuition program (as
described in section 529) or qualified ABLE program (as
described in section 529A) designated by an employee if--
''(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' means a program established by
an employer--
''(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'
for 'calendar year 1992' in subparagraph (B)
thereof.
''(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.

SEC. 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 of the Internal Revenue Code of 1986
is amended by adding at the end the following new subsection:
''(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' for '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.

SEC. 4. EXEMPTIONS FROM ADDITIONAL TAX FOR CERTAIN DISTRIBUTIONS FROM
QUALIFIED TUITION PROGRAMS.

(a) In General.--Section 529(c)(6) of the Internal Revenue Code of
1986 is amended by striking the last sentence and inserting the
following: ''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.

SEC. 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) of the Internal Revenue Code of 1986 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 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.

SEC. 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) of the Internal Revenue
Code of 1986 is amended by striking ''or'' at the end of subclause (I),
by striking the period at the end of subclause (II) and inserting '',
or'', and by adding at the end the following new subclause:
''(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'' and inserting ''such payment or distribution--
''(I) into another'';
(2) by striking the period at the end and inserting '',
or'', and
(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.
Output:
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.