The Section 529 college savings plan industry is trying to make sure that the Internal Revenue Service doesn't rain on its parade.
Ever since the Pension Protection Act of 2006 made federal tax breaks for such plans permanent, the industry has been on a roll, racking up an estimated $112 billion in assets by the end of 2007, according to the Boston-based Financial Research Corp. That's an increase of 23.4% from the previous year's $91 billion.
But the Pension Protection Act also required the Department of the Treasury to finalize tax rules for 529s. On March 18, the college savings plan industry must respond to the IRS' "advanced notice of proposed rulemaking" for 529 qualified-tuition programs.
The IRS wants to curb what it describes in the advanced notice as "potential abuses" in current 529 provisions. The agency cited the ability of individuals to avoid paying a gift tax under the special 529 transfer tax rules or using 529 accounts as a retirement account with tax benefits but without the restrictions and requirements of a qualified retirement account.
Program managers and state administrators for college savings plans, however, believe that those concerns are exaggerated and fear that in effect, the cure may be far worse than the disease.
State administrators want the IRS' proposed "anti-abuse" rule to be "narrowly applied to truly fraudulent transactions," said Cindy Comer, director of policy and legal affairs for the Richmond-based Virginia College Savings Plan.
States want to make sure that the new rules are not too broad or too complex, said Ms. Comer, who is drafting a response to the IRS advanced notice in her capacity as chairwoman of the legal and regulatory-affairs committee of the College Savings Plan Network, a Lexington, Ky.-based industry trade group.
"We do not want to see something come in that would have a chilling effect," she said.
Similarly, the College Savings Foundation, a Washington-based industry advocacy association, plans to ask the IRS to "urge restraint in enforcing such a [anti-abuse] rule" in its response to the tax agency, according to David Pearlman, senior vice president and deputy general counsel for Boston-based
Fidelity Investments.
Mr. Pearlman, chairman of the CSF's legal and regulatory committee, characterized the IRS' proposed rules as a "viable framework" with "open points" that need to be examined.
"The devil is in the details," he said.
Like others in the industry, Jacqueline "Jackie" Williams, executive director of the Columbus-based Ohio Tuition Trust Authority and chairwoman of the CSPN, said she is "encouraged" that the IRS notice means the process of finalizing 529 regulations has begun.
While state administrators don't want to see tax abuses of such plans, she added, they also "[do] not want the provisions drawn so broadly that they discourage legitimate use of the product."
If the public perceives 529 plans as being overregulated by the IRS, Ms. Williams said, she fears that the impact could "stifle growth" of the plans — similar to the slowdown in sales and asset growth the industry experienced as a result of the uncertainty over the plans' tax status before the Pension Protection Act was passed.
E-mail Charles Paikert at [email protected].
