OVERVIEW OF SECTION 529 PLANS
In the knowledge-based economy of the 21st century, pursuing some kind of post-secondary education, whether in a traditional college setting or at a technical, business, or vocational school, will be essential. Affording the costs of such education, however, will remain a challenge for families at almost all income levels, since the costs of higher education have consistently risen faster than inflation and family income.
Responding to this situation, Congress added Section 529 to the Internal Revenue Code, which now grants tax-exempt status to three types of savings plans. For many families Section 529 Plans will become the preferred method of providing for their children’s and grandchildren’s higher education.
BASIC REQUIREMENTS OF SECTION 529 PLANS
The three types of Section 529 Plans now available are:
 | State-sponsored Education Savings Plans |
| State-sponsored Prepaid Tuition Plans |
| Private College 529 Plan, sponsored by a consortium of private colleges and universities. |
Each of these three plans is discussed in detail in the section below entitled Setting Up A Section 529 Account.
The purpose of each type of Section 529 Plan is to provide for the:
| "Qualified Higher Education Expenses" of a |
| "Designated Beneficiary" at an |
| "Eligible Educational Institution." |
These terms are defined below.
| QUALIFIED HIGHER EDUCATION EXPENSES includes: |
Tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution.
Special Needs Services. "Qualified higher education expenses" includes expenses for special needs services in the case of a special needs beneficiary that are incurred in connection with such enrollment or attendance.
Room and Board Costs. "Qualified higher education expenses" also includes reasonable costs incurred by the designated beneficiary for room and board while attending an eligible educational institution as at least a half-time student.
Such costs cannot exceed (1) the allowance applicable to students residing off-campus for room and board included in the "cost of attendance," as determined by the eligible educational institution for such period, or (2) if greater, the actual invoice amount for room and board that students are charged for such period by the eligible educational institution when they are residing on campus or in other housing owned or operated by such institution.
| DESIGNATED BENEFICIARY means: |
● The initial individual designated at the time participation begins in the Section 529 Plan.
● If the beneficiary is later changed, the individual who is designated as the new beneficiary.
● The individual receiving the benefits accumulated in the account as a scholarship in the case of certain Section 529 Plan accounts.
| ELIGIBLE EDUCATIONAL INSTITUTION |
The third requirement for Section 529 qualification is that the designated beneficiary must be enrolled at or attending an "eligible educational institution," which is defined as an accredited post-secondary educational institution offering credit toward a bachelor's degree, an associate's degree, a graduate level or professional degree, or another recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational institutions also are eligible institutions. (Generally, the institution must be eligible to participate in Department of Education student aid programs.)
To determine if a particular institution is an "eligible educational institution," check the U. S. Department of Education's web site at --
https://fafsa.ed.gov/FAFSA/app/schoolSearch?locale=en_EN
Elementary and Secondary Education Not Covered. From the above discussion, it is clear that Section 529 Plans cannot be used to pay for the costs of a student’s elementary or secondary (high school) education. As an alternative, parents or others wanting to invest funds for purposes of covering the costs of a student's elementary or secondary education can create a Coverdell Education Savings Account.
OTHER REQUIREMENTS OF SECTION 529 PLANS
Section 529 imposes several other requirements that are applicable to all three Plans. The two most important are the following:
| ONLY CASH CONTRIBUTIONS ARE PERMITTED |
A Section 529 Plan can accept contributions only in the form of cash. Some state programs have expanded the definition of "cash" to allow payment by check, money order, credit card, or similar methods; other states also permit contributions to be made by payroll deductions or automatic withdrawals from a bank account.
Some Section 529 Plans also permit certain U.S. Savings Bonds to be redeemed and deposited tax-free into the account, subject to compliance with certain education tax exclusion rules.
| NO INVESTMENT DIRECTION |
A Section 529 Plan must provide that any contributor to, or designated beneficiary under, the Section 529 Plan may not directly or indirectly direct the investment of any contributions to the program, or any earnings thereon. However, a program may permit a person who establishes an account to select among different investment strategies designed exclusively by the program.
