QTP contributions by nonindividuals.

• Author: Westort, Peter J.
• Position: Qualified tuition programs

Sec. 529 qualified tuition programs (QTPs) provide a tax-favored way to invest for qualified higher education expenses (QHEEs). While contributions tend to be made by individuals on behalf of family members, it appears that nonindividuals may also make contributions. For example, employers may wish to make contributions to QTPs as fringe benefits for employees. (1) Employer contributions, however, raise a number of questions as to whether they are gross income to the employee and deductible by the employer, as well as other tax consequences.

Who Contributes?

Sec. 529(b)(1) refers to QTP contributions by a "person"; Sec. 7701(a)(1) defines that term to include a trust, estate, partnership, association, company or corporation, unless distinctly expressed to the contrary or manifestly inconsistent with intent. Because Sec. 529 does not define person, Sec. 7701(a) (1)'s definition can be used, which includes nonindividuals. Thus, it appears nonindividuals may make contributions to QTPs.

Why Contribute?

As there is no income limit for taxpayers making contributions, QTPs offer an opportunity to provide additional fringe benefits to employees, including owner-employees. Sec. 529(b)(6) limits a contribution to the amount necessary to provide for the QHEEs of a designated beneficiary, although some state programs provide for lesser dollar amounts.

The benefits of contributing to QTPs are that the earnings accrue tax free under Sec. 529(c)(1), and distributions are tax free under Sec. 529(c)(3)(B)(i) when used to pay for a designated beneficiary's QHEEs. Sec. 529(e)(1)(A) requires the beneficiary to be identified when QTP participation commences; thus, an employer must make arrangements with one or more QTPs and an employee must open one or more accounts to identify the designated beneficiary. These decisions can be postponed somewhat if vesting is not immediate (discussed below).

Tax Treatment

Gift tax consequences: When a person other than an employee is a QTP's designated beneficiary, plan contributions are deemed completed gifts from the employee to the beneficiary under Sec. 529(c) (2) (A) (i) and, thus, eligible for the Sec. 2503(b) annual gift tax exclusion ($11,000 for 2004). Contributions in excess of this limit can be averaged over five years, according to Sec. 529(c)(2)(B). Taking full advantage of averaging, however, bars the donor from making other tax-free gifts to the same donee during the five-year period.

Employer contributions: How...