Grassley 529 College Savings Plans Language in Budget Before the Senate
WASHINGTON – The proposed budget outline under consideration by the Senate this week includes language from Sen. Chuck Grassley to continue and offer more flexibility for the Section 529 college savings plans that are popular nationwide. Grassley, a senior member of the Budget Committee, succeeded in including his proposal in the committee’s budget package as a deficit-neutral reserve fund. His provision was accepted without opposition.
“Like much of the budget, this provision isn’t binding, but it expresses priorities for the committees that set the policy based on the budget document,” Grassley said. “My bipartisan reforms will make it even more appealing for parents to use 529 college savings plans. The additions give more flexibility for using the tax-free savings. The more flexibility, the more people use something like this. The provisions also send the message to families that Congress supports this program and will fight efforts to get rid of it.”
Last month, Grassley and a bipartisan group of senators introduced legislation to build on improvements to 529 college savings plans enacted in 2001 and 2006 under Grassley’s leadership on the Finance Committee and with broad bipartisan, bicameral support. The changes first made spending from the plans tax-free as long as the money was used for college and associated expenses and then made the tax-free provision permanent.
The new bill has three main provisions. The first provision recognizes the reality that in today’s world, a computer is just as much a necessary educational expense as a required class textbook. As such, this bill allows 529 funds to purchase a computer on the same tax-favorable basis as other required materials.
The second provision eliminates an outdated and unnecessary aggregation rule that increases paperwork and costs on plan administrators.
The third provision provides tax and penalty relief in instances where a student may have to withdraw from school for illness or other reasons. Under current law, any refunds from the college are subject to immediate taxation and a 10 percent tax penalty. This provision eliminates this tax and penalty if the refund is redeposited in a 529 account. This permits a family to set the refund aside to pay for the student’s education should he or she be able to return to college or to use it for another family member.
The 2001 and 2006 changes greatly increased the popularity of 529 plans, and the new bill has the potential to attract even more families, Grassley said.
Various studies and statistics suggest that 529 plans are largely held by middle income families, despite representations that the plans largely benefit high income taxpayers.
For College Savings Iowa, $17,878 is the average account balance, $133 is the average amount contributed via automatic payments, and $25 is the minimum to open an account or contribute.
Earlier this year, President Obama proposed scaling back 529 plans, then backed off after encountering significant opposition.
Grassley is a senior member of the Finance Committee, with jurisdiction over tax policy, and former chairman.
In addition to the 529 plans language, the budget outline before the Senate includes three health care provisions from Grassley: on rural hospitals, promoting independent living and integrated work for the disabled, and encouraging pharmacists to serve older Americans in communities lacking easy access to doctors or where pharmacists are more convenient to visit for certain services than doctors. The Finance Committee has jurisdiction over most federal health care programs.