By LEN WEISER-VARON
The IRS recently issued a private letter ruling, PLR 201310043 (released on March 8, 2013), of interest to Section 529 plans and their program managers. The ruling relates to the tax treatment of incentive contributions to 529 accounts and was issued in response to a ruling request by a financial services complex described as including a bank and broker. The firm requested guidance on tax reporting of incentive payments credited by the firm to 529 accounts established through the firm. The firm credited the incentive payments directly to the owner’s account when a 529 account owner funded a specified minimum to the account within 30 days of opening the account and maintained that balance for a minimum of 90 days.
The ruling concluded that such incentive payments are properly characterized as a payment by the financial services firm to its client, followed by a contribution by the client to its 529 account. This recharacterization of the transaction from one to two steps avoided the potential applicability of Section 529(c)(2) of the Code, which treats “any contribution to a qualified tuition program on behalf of a designated beneficiary … as a completed gift to such beneficiary…”, and the ruling emphasized that the payment constituted “non-gift funding.” Accordingly, the IRS ruled that the payment was income received by account owner and that, if such income exceeded $600 in one year, the firm was required to report the payment to the IRS and the recipient.
The ruling declined to characterize the incentive payment as non-reportable income on a 529 account, stating that the payment “is paid by you of your own accord as a bank and brokerage, and not by or on behalf of [the] State as an establisher and maintainer of a [qualified tuition program.]” Accordingly, the ruling does not address state matching or incentive programs in which money is contributed to an account by the 529 program sponsor rather than by its program manager or another third party entity. The ruling also does not address contributions of credit card “rewards” to 529 accounts; such “rewards” typically are treated as discounts on the purchase price of the charged item, rather than as income.