n-16-13.pdf

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Transition Relief for Certain Section 529 Qualified Tuition Programs Required to File
Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and
530)

Notice 2016-13

SECTION 1. PURPOSE
This notice provides transition relief for section 529 qualified tuition programs that
timely file a 2015 Form 1099-Q, Payments From Qualified Education Programs (Under
Sections 529 and 530), that does not reflect the repeal of the aggregation requirement
under section 529(c)(3)(D) of the Internal Revenue Code (Code) applicable to
distributions from qualified tuition programs. Section 302(b) of the Protecting Americans
from Tax Hikes Act of 2015 (the PATH Act), enacted on December 18, 2015, as part of
the Consolidated Appropriations Act, 2016 (Pub. L. 114-113), repealed section
529(c)(3)(D) effective for distributions made after December 31, 2014.
In response to concerns expressed by section 529 qualified tuition programs
about their inability to adjust their systems to retroactively accommodate the new
method of calculating the earnings portion of a distribution before the due date of the
2015 Form 1099-Q, the Internal Revenue Service (IRS) will not impose penalties under
section 6693 solely because of a reported earnings computation that does not reflect
the repeal of section 529(c)(3)(D). This notice is limited to 2015 Forms 1099-Q required
to be filed by February 29, 2016 (or March 31, 2016, if filed electronically). This notice
does not provide penalty relief for any other failure that would cause a program to be
subject to penalties under section 6693 or any other penalty under any provision of the
Code.

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This notice also provides information regarding the other changes made to
section 529 by the PATH Act.
SECTION 2. BACKGROUND AND STATUTORY CHANGES
Under section 529, a State or its agency or instrumentality may establish or
maintain a program that permits a person to prepay or contribute to an account for a
designated beneficiary’s qualified higher education expenses. In addition, an eligible
educational institution may establish or maintain a program that permits a person to
prepay a designated beneficiary’s qualified higher education expenses. These
programs are collectively referred to as “section 529 qualified tuition programs.” If a
distribution is used solely for qualified higher education expenses, the distribution
(including any attributable earnings) is not subject to income tax. The PATH Act made
three changes with regard to section 529 qualified tuition programs.
Expansion of definition of qualified higher education expenses. Under section
529(e)(3)(A), “qualified higher education expenses” include tuition, fees, books,
supplies, and equipment required for the enrollment or attendance of a designated
beneficiary at an eligible educational institution, and, in the case of a special needs
beneficiary, expenses for special needs services that are incurred in connection with
such enrollment or attendance. Qualified higher education expenses also include
reasonable costs for room and board for students who are enrolled at least half-time.
Effective beginning in 2015, the PATH Act amended section 529(e)(3)(A)(iii) to provide
that qualified higher education expenses also include expenses for the purchase of
computer or peripheral equipment (as defined in section 168(i)(2)(B)), computer
software (as defined in section 197(e)(3)(B)), and Internet access and related services,

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if such equipment, software, or services are to be used primarily by the beneficiary
during any of the years the beneficiary is enrolled at an eligible educational institution.
Computer software designed for sports, games, or hobbies is qualified only when the
software is predominantly educational in nature.
Computation of earnings. Under section 529(c)(3), to the extent distributions
from a section 529 qualified tuition program exceed a designated beneficiary’s qualified
higher education expenses, the earnings portion of the excess is includible in the gross
income of the distributee in the manner provided under section 72. Prior to the repeal of
section 529(c)(3)(D) by the PATH Act, section 529(c)(3)(D)(i) provided that, for
purposes of applying section 72, all section 529 qualified tuition programs of which an
individual is a designated beneficiary are treated as one program. Proposed regulations
issued under section 529 provided that all accounts maintained by a section 529
qualified tuition program for the benefit of a designated beneficiary would be treated as
a single account for purposes of calculating the earnings portion of any distribution.
See Prop. Reg. section 1.529-3(d). In response to comments received regarding the
proposed regulations, however, Notice 2001-81, 2001-2 C.B. 617, provided an interim
rule that only accounts maintained within the same section 529 qualified tuition program
and having the same account owner and the same designated beneficiary are
aggregated for purposes of calculating the earnings portion of any distribution. The
PATH Act repealed section 529(c)(3)(D) for distributions after December 31, 2014,
eliminating the aggregation requirement.
Prior to their repeal, section 529(c)(3)(D)(ii) and (iii) provided that, for purposes of
applying § 72, except as otherwise provided by the Secretary, all distributions during a

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taxable year are treated as one distribution and the value of the contract, earnings, and
basis are computed as of the close of the calendar year in which the taxable year
begins. Notice 2001-81 provided a modified rule that the earnings portion of each
distribution is determined as of the date of distribution. This rule continues to apply.
Section 529(d) requires section 529 qualified tuition programs to make annual
reports regarding contributions, distributions, and such other matters as the IRS may
require. Notice 2001-81 instructs section 529 qualified tuition programs to use Form
1099-Q for reporting under section 529(d). These programs must report the amount of
the gross distribution and the portion of the gross distribution attributable to earnings on
Form 1099-Q. These programs also must furnish a Form 1099-Q to distributees on or
before January 31
st
of the year following the calendar year in which the distribution is
made (February 1, 2016, in the case of 2015 Forms 1099-Q) and file the Form 1099-Q
with the IRS on or before February 28 (February 29, 2016, in the case of 2015 Forms
1099-Q), or March 31 if filed electronically, of that same year. If a section 529 qualified
tuition program required to file a Form 1099-Q fails to timely file the form, such program
is subject to a $50 penalty under section 6693 for each failure unless the failure is due
to reasonable cause.
Recontribution of funds. The PATH Act also added new section 529(c)(3)(D) to
address situations in which section 529 qualified tuition program funds are distributed
for a beneficiary’s qualified higher education expenses, but some portion of those
expenses subsequently are refunded to the beneficiary. This could occur, for example,
if the beneficiary dropped a class mid-semester. Section 529(c)(3)(D) now provides that
the portion of a distribution refunded to the beneficiary of a section 529 qualified tuition

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program by an eligible educational institution is not subject to income tax to the extent
that the refund is recontributed to a section 529 qualified tuition program of which the
individual is a beneficiary not later than 60 days after the date of such refund. New
section 529(c)(3)(D) applies to refunds received after December 31, 2014. The PATH
Act included a transition rule, however, applicable to refunds received after 2014 but
before the date of enactment. Specifically, those refunded distributions are exempt
from income tax if they are recontributed to the beneficiary’s section 529 qualified tuition
program account not later than 60 days after the date of enactment of the PATH Act.
Thus, amounts refunded in 2015 before December 18, 2015, must be recontributed no
later than February 16, 2016.
SECTION 3. TRANSITION RELIEF
Due to concerns expressed by section 529 qualified tuition programs about their
inability to adjust their systems to comply with the retroactive repeal of the aggregation
requirement of section 529(c)(3)(D) and still timely satisfy their reporting requirement for
the 2015 calendar year, the Treasury Department and the IRS are providing transition
relief to enable these programs to timely file 2015 Forms 1099-Q and to furnish them to
distributees without reflecting the repeal of section 529(c)(3)(D). Specifically, the IRS
will not impose any penalty under section 6693 for Forms 1099-Q timely filed for the
2015 calendar year if, due solely to the aggregation rule change resulting from the
repeal of section 529(c)(3)(D), the earnings are incorrectly reported in Box 2 or basis is
incorrectly reported in Box 3 of a 2015 Form 1099-Q.
If a distributee with multiple accounts that were aggregated for purposes of
calculating earnings for 2015 pursuant to this grant of transition relief for section 529

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qualified tuition programs would prefer to have earnings computed for 2015 without
aggregation, the distributee may request a corrected 2015 Form 1099-Q from the
section 529 qualified tuition program that computes earnings for 2015 without
aggregation. The program must furnish to the distributee, and file with the IRS, a
corrected 2015 Form 1099-Q, if so requested, as soon as possible. See 2015 General
Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922,
5498, and W-2G). For this purpose, the beneficiary’s funds invested in different
investment options under the program do not constitute separate “accounts”.
A request for a corrected 2015 Form 1099-Q does not extend the due date for
filing individual income tax returns for 2015. Taxpayers generally must file their income
tax returns or request an extension by April 18, 2016 (April 19, 2016, for taxpayers living
in Maine or Massachusetts).
SECTION 4. DRAFTING INFORMATION
The principal author of this notice is Peter A. Holiat of the Office of the Associate
Chief Counsel (TEGE). For further information regarding this notice contact Mr. Holiat
at 202-317-4541 (not a toll-free call).