The following article is provided courtesy of CCH, Inc.
The IRS has provided guidance with respect to recordkeeping and reporting requirements applicable to qualified tuition programs (QTPs) described in Code Sec. 529, in light of the amendments made to that statute by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (P.L. 107-16). The notice also addresses penalties, reporting requirements for distributions, calculation of earnings, rollover statements between QTPs, timing of earning calculations and aggregation of accounts.
EGTRRA repeals Code Sec. 529(b)(3), for tax years beginning after December 31, 2001, and replaces that penalty with an additional 10% tax on distributions that are includible in gross income. Thus, final regulations issued under Code Sec. 529 will provide that, with respect to distributions made after December 31, 2001, a QTP will no longer be required to verify how distributions are used or to collect a penalty.
Current reporting requirements continue in effect for distributions made in 2001. However, because QTPs have been expanded to include prepaid tuition programs established and maintained by one or more eligible educational institutions which may be private institutions, the IRS will issue Form 1099- Q, for tax years beginning after December 31, 2001.
Currently, for contributions to a QTP account that represents a rollover, the recipient QTP must determine the basis and earnings portions of the amounts contributed. The requirement was not changed by EGTRRA. However, the IRS anticipates that final regulations will clarify that, when accepting a contribution, a QTP must ask whether the contribution is a rollover contribution from a Coverdell education savings account, a qualified U.S. Savings Bond, or another QTP.
For rollover statements that result from a direct transfer, a trustee-to- trustee rollover, between QTPs, the distributing program must provide to the receiving program a statement setting forth the earnings portion of the rollover distribution within 30 days after the distribution or by January 10 of the year following the calendar year in which the rollover occurred, whichever is earlier. This rule is effective for direct transfers between QTPs that occur on or after January 1, 2002.
In response to comments received on the proposed regulations, the IRS has stated that it expects that final regulations will provide that, for distributions made after December 31, 2002, QTPs will be required to determine the earnings portion of each distribution as of the date of distribution.
The proposed regulations provide that all accounts maintained by a QTP for the benefit of a designated beneficiary shall be treated as a single account for purposes of calculating the earnings portion of any distribution. The IRS has indicated that it expects that the final regulations will provide that only accounts maintained by a QTP having the same account owner and the same designated beneficiary must be aggregated for purposes of computing the earnings portion of any distribution.
Comments have been requested on the matter and on other Code Sec. 529 issues. Written comments should be submitted by March 25, 2002, to: CC:ITA:RU (Notice 2001-81), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to CC:ITA:RU (Notice 2001-81), Courier's Desk, IRS, 1111 Constitution Avenue, NW., Washington, D.C. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the Tax Regs option on the IRS Home Page, or by submitting comments directly to the IRS Internet site.