California Increases Conformity Provisions to IRC Section 529 Tuition Plans

OVERVIEW

Existing law, known as the Golden State Scholarshare Trust Act, establishes the Golden State Scholarshare College Savings Trust, under the administration of the Scholarshare Investment Board, to provide financial aid for postsecondary education costs of participating students. Existing law defines “qualified higher education expenses” for purposes of the Golden State Scholarshare Trust Act to mean the expenses of attendance at an institution of higher education, as specified.

Assembly Bill 340, which Governor Newsom signed into law on October 6, 2021, adds expenses associated with participation in a registered apprenticeship program and payment on the principal or interest of a qualified education loan to the definition of “qualified higher education expenses.”

HISTORY

Congress enacted IRC Section 529 in 1996, which provides for Qualified Tuition Plans (QTPs) that help taxpayers pay college tuition using tax-advantaged vehicles. QTPs are defined as follows:

A program established and maintained by a state, state agency or eligible educational institution;

For institutions that qualify, persons may:

• purchase tuition credits on behalf of a designated beneficiary that entitle the beneficiary to a waiver or payment of the beneficiary’s higher education expenses (Sec. 529(c)(7)), or
• make contributions to an account that is established for the sole purpose of meeting qualified higher education expenses of the designated beneficiary of the account (Sec. 529(b)(1)(A)(i)).

Sections 529(c)(7) and 529(e)(3)(A) define higher education expenses eligible for qualified tuition programs as including tuition expenses for elementary or secondary public, private or religious schools, subject to a $10,000 limit with respect to a beneficiary for any taxable year.

BENEFIT

Prior to AB 340’s enactment, California did not conform to federal law regarding QTPs. Effective January 1, 2022, the California Educational Code, for taxable years beginning on or after January 1, 2021, allows for partial conformity to the newly enacted federal legislation by expanding allowable withdrawals from a tax-advantaged 529 college savings plan to also include expenses associated with:

• the participation in a registered apprenticeship program, and
• repayment of student loans.

However, the new enactment also disallows the deduction available on qualified loan interest to the extent such interest is paid from a tax-free distribution from a qualified 529 plan.

Questions?

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