Maryland College Savings Plans: Prepaid vs. Investment Options Compared

ABLE Task Force June 29, 2015

Overview The College Savings Plans of Maryland is an independent, non-profit Maryland State Agency that offers two Section 529 college savings plans to help families prepare for the future cost of college and reduce future debt. Maryland Prepaid College Trust Maryland College Investment Plan Allows you to lock-in tomorrow s college tuition based on today s prices and helps to hedge against future tuition increases Managed by T. Rowe Price, offers investors a variety of investment options Both plans can be used at nearly any federally accredited college in the country. 2

Comparing the Plans PrepaidCollegeTrust College Investment Plan Choose a variety of payment and tuition options Minimum investment: $250 by check; or $25 a month Affordability Change tuition/payment option nearly at any time Choose from a variety of investment options Flexibility 4 yr Colleges/Universities In-State Out-of-State 2 yr Community Colleges 4 yr Colleges/Universities In-State Out-of-State 2 yr Community Colleges Trade / Technical Schools Eligible Institutions Semester by Semester Any dollar amount available in your account Benefits Paid/Distributions Tuition and Mandatory Fees at a Maryland public college Up to the Weighted Average Tuition everywhere else Room and Board eligible when the beneficiary receives a scholarship Any qualified expense defined by IRS Publication 970 Eligible Expenses 3

Unique Tax Benefits Deduct up to $2,500 from your Maryland adjusted gross income per account each year. Deduct up to $2,500 from your Maryland adjusted gross income per beneficiary each year. 4

Unique Tax Benefits Participants in the MD529 plans are not limited to contributing $2500 a year Contributions over $2500 can be carried forward Maryland Prepaid College Trust - payments in excess of $2,500 per account can be carried forward and deducted in future years until the full amount has been deducted. Maryland College Investment Plan - Contributions in excess of $2,500 per beneficiary can be carried forward and deducted for up to the next 10 years. Only the Account Holder is eligible for the Maryland income deduction and only on contributions he or she makes REFERENCE SOURCE: Maryland Comptroller s Administrative Release 32 5

Qualified Education Expenses Maryland College Investment Plan (MCIP) Qualified Education Expenses Outlined in IRS Publication 970 as expenses related to enrollment or attendance at an eligible institution. Eligible Educational Institution This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit- making) postsecondary institutions. Confirm that institutions are eligible by identifying their Federal School Code at the Department of Educations website. It is the taxpayer s responsibility to maintain receipts and determine whether distributions are qualified. The Account Holder will receive a 1099-Q tax document for any year a distribution is made. 6

Taxes on Distributions/Refunds Income Tax on the earnings 10% Penalty on earnings No penalty for disability or death Recapture MD income deduction on principal See MPCT Specific information below Income Tax on the earnings if equivalent amount is withdrawn Recapture MD income deduction on the principal Student Receives Scholarship, Grant or Tuition Remission Student Doesn t Attend School MPCT Specific If the child does not receive a scholarship, grant or tuition remission and does not have a qualified exception (death or disability), the account holder may choose to receive a Reduced Refund as follows: Your actual payments, less any administrative fees and benefits used, plus or minus: 50% of the earnings/losses on those payments if enrolled < 3 years 90% of the earnings/losses on those payments if enrolled 3 years 7

529A vs. 529 ABLE Act 529 Statute Beneficiary Limit (1) per beneficiary None None Annual Contribution Limit $14,000 per beneficiary Maximum Account Balance State limit for Section 529 accounts MD $350,000 Income Limitations Social Security Income eligibility limit None Beneficiary Change Blood or Marriage Siblings and step-siblings Certification YES. Signed by a doctor NO Distribution Frequency Frequent Less Frequent Recapture (Back to the state) Medicaid recapture requirement NO Reporting ABLE Reporting requirement MSRB Reporting of Account YES NO Monthly Report Monthly electronic report NO 8

529A vs. 529 (cont.) ABLE Act 529 Statute Yearly Eligibility YES NO NO Home State Requirement YES or contracting state. Expenses Qualified Disability Qualified Tuition Tax Penalty on Non-Qualified Expenses 10% Exceptions: Death Contribution growth is returned to the account before the federal tax filing deadline. 10% Exception: Death Disability preventing beneficiary from attending college Verification of Qualified Expenses TBD Taxpayer 9

Qualified Expenses 529 Plans ABLE Accounts Dictated by IRS Publication 970 Education Housing Assistive technology and personal support services Transportation Employment training and support Health Prevention and wellness Financial management and administrative services Legal fees Expenses for oversight and monitoring Funeral and burial expenses Other expenses approved by the Treasury Secretary Generally: Tuition Books and Supplies (as required by the university) Room and Board (student must be enrolled at least half-time) Expenses of a special-needs beneficiary necessary for enrollment at an eligible institution 10

ABLE ACT (cont.) Considerations for locating ABLE with CSPM: Board Currently 10 people/ ABLE would add 10 more How would the Board address the diverse issues governing both plans? Staffing and funding CSPM is funded by the program fees generated from the Plans Start up costs for ABLE? Who would fund them? Who would take on the administrative costs to add additional staff ? Contractual Obligations T. Rowe Price Program manager would they be willing to amend their contract? Future RFP in 2016 What role should Community Development Financial Institutions play? Verification of Disability Who will do it? Who will take on the administrative burden? Medical Information Privacy Issue Increase administrative costs 11

ABLE ACT (cont.) Other Considerations: ABLE Home state requirement prevents national program Difficult to build economies to scale to keep costs down Questions about contracting state provisions (accounts not universal) Qualified beneficiary as mandated Account Owner What if representative payee, guardianship, POA, parent (loco parentis)? Divergence between eligibility and verification of contributions Burdensome to verify eligibility prior to contributions Passage of ( 529A) shifted to the states for implementation Absent federal guidance or regulations except: the statute 529A Treasury Notice 2015-18 12

Andrew Friedson Interim Executive Director afriedson@collegesavingsmd.org 443.769.1024 Lauren Shipley Director of Marketing lshipley@collegesavingsmd.org 443.769.1035 13