By Pension and Benefits Editorial Staff
The SECURE Act, which was enacted as part of the Further Consolidated Appropriations Act, 2020 (P.L. 116-94), contains a provision that expands Code Sec. 529 qualified tuition plans. The SECURE Act modifies Code Sec. 529 qualified tuition plans to allow tax-free distributions for expenses associated with registered apprenticeship programs. Plans also can allow tax-free distributions of certain amounts used to make payments on principal or interest of a qualified education loan. The amendments apply to distributions made after December 31, 2018.
Background. A qualified tuition program (commonly referred to as a QTP, qualified tuition plan, or 529 plan) is exempt from all federal income tax, except the tax on the unrelated business income of a charitable organization. There are two basic types of QTPs: prepaid tuition programs and college savings programs. Distributions can be made for qualified higher education expenses, which are defined as:
- the tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution;
- the expenses incurred for special needs services for a special needs beneficiary in connection with enrollment or attendance at an eligible educational institution;
- the expenses for the purchase of computer or peripheral equipment, computer software, or Internet access and related services, if such equipment, software, or services are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution; and
- room and board incurred by a designated beneficiary who is enrolled at least half time at an eligible educational institution.
For distributions made after December 31, 2017, a designated beneficiary may, on an annual basis, receive up to $10,000 in aggregate Code Sec. 529 distributions to be used in connection with expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.
Certain individuals who have paid interest on qualified education loans may claim an above-the-line deduction for such interest expenses, subject to a maximum annual deduction limit of $2,500.
Distributions allowed for expenses associated with registered apprenticeship programs. The SECURE Act modifies qualified tuition plans to allow tax-free treatment for distributions for higher education expenses to apply to expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program. The apprenticeship program must be registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act.
Distributions allowed for qualified education loan repayments. Qualified tuition plans are modified to allow tax-free treatment to apply to distributions of certain amounts used to make payments on principal or interest of a qualified education loan. No individual may receive more than $10,000 of such distributions, in aggregate, over the course of the individual’s lifetime.
A special rule allows such amounts to be distributed to a sibling of a designated beneficiary (i.e., a brother, sister, stepbrother, or stepsister). This rule allows a Code Sec. 529 account holder to make a student loan distribution to a sibling of the designated beneficiary without changing the designated beneficiary of the account.
For purposes of the $10,000 lifetime limit on student loan distributions, a distribution to a sibling of a designated beneficiary is applied towards the sibling’s lifetime limit, and not the designated beneficiary’s lifetime limit.
Coordination with deduction for student loan interest. The deduction available for interest paid by the taxpayer during the taxable year on any qualified education loan is disallowed to the extent such interest was paid from a tax-free distribution from a Code Sec. 529 plan.
SOURCE: Division O, Act Sec. 302(b)(1) of the SECURE Act.
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