Institute Comments on Recordkeeping Requirements for Section 529 Programs, March 2002

Washington, DC, March 22, 2002 - The Institute recently submitted a letter to the Internal Revenue Service on Notice 2001-81, which provides guidance on recordkeeping and reporting requirements for 529 programs.

The letter, which principally addresses the rollover rules set forth in Notice 2001-81, provides comments with regard to several issues, including:

The duty imposed on 529 programs to inquire into the rollover status of contributions. The letter recommends that in lieu of the duty to ask whether each contribution is attributable to a rollover, the receiving 529 program should be required, at the time the 529 account is opened, to ask whether the initial contribution is a rollover contribution and to advise the account owner to notify the program if any subsequent contribution is a rollover. In addition, the 529 program should be required periodically thereafter to provide notice to account owners reminding them of their notification obligations with respect to rollover contributions.
The default "earnings treatment" rule. The letter recommends that the scope of the default "earnings treatment" rule should be clarified to specify that the rule applies only where a 529 program knows that the contribution is a rollover contribution.
The definition of "appropriate documentation" in Coverdell rollovers. The letter recommends that the definition of "appropriate documentation" with regard to rollovers from Coverdell Education Savings Accounts should be modified to allow taxpayer certification of the earnings portion of a rollover.
Negative earnings in rollovers. The letter requests that in cases where a rollover amount would be less than the basis in the distributing 529 program because of net investment losses, the basis in the distributing program should carry over to the receiving program.
Earnings calculations as of the time of distribution. The letter requests clarification that 529 programs, at their option, may make contemporaneous earnings calculations for all distributions (rather than for just direct transfers) in advance of the delayed effective date provided in the notice.