Good News for 529 Plans May Lead to Lower Fees

This post originally appeared on Forbes.


The Protecting Americans from Tax Hikes (PATH) Act provided an important update to 529 plans, retroactive to the beginning of 2015. However, since Congress didn’t get around to passing the legislation until the mid-December, 529 plan administrators were left in a bind to adjust their software to issue correct 1099-Qs that reflect the new rules. Fortunately for 529 plan administrators, the IRS has promised not to impose penalties for earnings computations that do not reflect the new law.

In theory, by eliminating the distribution aggregation requirements, the PATH Act makes accounting for the plans less cumbersome for plan administrators, which in turn makes them cheaper to operate and those savings can be passed on to families in the form of lower fees.

However, even though the proposed legislation to eliminate distribution aggregation requirements first popped up in January of 2015 with H.R. 529, a bipartisan piece of legislation drafted by Rep. Lynne Jenkins (R-KS) and Rep. Ron Kind (D-WI) in response to President Obama’s short-lived proposal to eliminate the federal tax benefit of 529 plans, i

The timing left 529 plan administrators scrambling to adjust their systems to retroactively accommodate the new method of calculating the earnings portion of a distribution on Form 1099-Q.

Not only that, but 2015 also brought about increased – and enforced – penalties for late filing of 1099 forms. In June 2015, Congress passed the Trade Preferences Extension Act, increasing penalties for failing to file timely, correct 1099-series informational returns from $100 per form to $250 per form. Because the increased penalties apply to both the copy of the form filed with the recipient and the copy filed with the IRS, the penalties are essentially $500 per form. The deadline to send 1099s to recipients was January 31st. In the past, late filing fees were generally waived by the IRS as long as the forms were filed, but the IRS has indicated they will start enforcing penalties.

Fortunately for 529 plan administrators, the IRS issued Notice 2016-13 on February 1st, providing transition relief. The IRS has announced it will not impose penalties solely because of a reported earnings computation that does not reflect the repeal of the distribution aggregation requirements. The deadline of January 1 still stands, but 529 plan administrators will not be penalized if the calculated earnings or basis reported on 1099-Qs do not reflect the new law.

If an account beneficiary receives a 1099-Q with aggregated distributions and would prefer to have their earnings computed for 2015 without aggregation, a corrected 1099-Q will have to be requested from the plan administrator.

(Photo credit: Pomp and Circumstance by Dave Herholz via Flickr)


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