A Cross Platform Conundrum

Since 1998, individual states have been able to offer Qualified Tuition Plans to their constituents. Also known as College Savings or 529 Plans, (after the section of the IRS code) these programs provide a tax-deferred and generally tax-free way to save for college education. While 529 programs have been a boon to those saving for college, they have presented the program’s administrators with some management challenges. The recent proliferation of Investment Company distribution channels within many state mandates has only added complexity to this task. In many cases, each additional distribution channel is choosing to service their customer base on one of their existing recordkeeping platforms. As a result, states who elect to have many distribution partners are now looking at cross-platform data aggregation issues that they had not previously had to face. The dispersion of customer accounts across multiple platforms has also started to warrant attention at the IRS. In particular, compliance with requirements set in two specific subsections of section 529 have attracted additional scrutiny.

CONTRIBUTIONS:

Subsection (b) (6) focuses on excess contributions. It states “A program shall not be treated as a qualified tuition program unless it provides adequate safeguards to prevent contributions on behalf of a designated beneficiary in excess of those necessary to provide for the qualified higher education expenses of the beneficiary.” Pursuant to this subsection, states are required to insure that the aggregate value of all 529 accounts opened for any individual beneficiary within their state mandate does not exceed the program’s stated cap.

DISTRIBUTIONS:

Subsection (c) (3) (D) focuses on disbursements. This section reads “For purposes of applying section 72-- (i) to the extent provided by the Secretary, all qualified tuition programs of which an individual is a designated beneficiary shall be treated as one program, (ii) except to the extent provided by the Secretary, all distributions during a taxable year shall be treated as one distribution, and (iii) except to the extent provided by the Secretary, the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins.” The IRS’ interpretation here is that all accounts that a customer might open for an individual beneficiary within a particular state mandate will be treated as a single account for distribution purposes. As such, any request for distribution should actually be prorated across each account that a customer holds for the beneficiary in question.

Example:

John Smith has opened three 529 accounts for his son Jack Smith. Each account was opened within the State of Nevada, but with three different distributors. Each of these accounts has a value of $10,000 ($30,000 in aggregate). Any disbursement request that John submits should be prorated amongst these three accounts as they are considered a single account under the state mandate (the IRS has made it clear that customers should not have the ability to direct distributions from any investment option, and as such all distributions should be done on a prorated basis).

The question remains - - - how can the 529 program administrator take full advantage of the benefits that additional distribution brings to the table, while at the same time, clearing the new administrative hurdles that arise as a result ?

Here is where MDP Associates, Inc. can help . . .

As a consultant in the College Savings arena since l999, MDP Associates has gained a unique perspective on the challenges facing program administrators. Our experience in designing, implementing and integrating college savings recordkeeping solutions, coupled with our 529 consulting experience has afforded us a great deal of practical knowledge where college savings plan administration is concerned. We have carefully considered the data aggregation issues raised by the presence of multiple distribution partners, and have come up with three methods to meet this challenge. They range from a stop gap measure designed to help identify possible problems, to a cost effective 529 recordkeeping platform designed to support both retail and advisor sold business simultaneously.