New Federal Tax Bill Is At Odds With Vermont College Savings Plans

Jan 16, 2018

With the recent passage of a federal tax bill, the college savings plans — called 529 plans — many people use to pay for their child's education are changing.

529 plans allow people to put away money for college and the contributions grow tax free. People who use them can avoid paying taxes when the money is withdrawn for qualified college education expenses.

But the tax bill signed into law by President Donald Trump in December also allows money in 529s to be used for private school and home-schooling expenses for K-12 education.

Some states, including Vermont, offer additional credit on state income taxes for contributions made to 529s.

Congress amended the federal IRS code to add expenses for tuition in connection with attendance at an elementary or secondary school, public, private or religious. But the statute in Vermont that sets up the state's 529 plan, (the Vermont Higher Education Investment Plan or VHEIP,) is focused on using money in the plans for post-secondary education.

"What we have is a conflict we believe between the internal revenue code provision and the Vermont statute that sets up the Vermont college savings plan," said Tom Little, general counsel for the Vermont Student Assistant Corporation (VSAC, which manages VHEIP.)

Little testified before the House Ways and Means Committee last week, as lawmakers and VSAC work through that conflict and what public policy choices the legislature may have this session.

"The committee wanted to know if the legislature could legally provide that the Vermont plan may not be used for K-12 expenditures. And we are studying that legal question," Little said.

The concern is that if there is a bump in contributions there will be increased use of the income tax credit associated with the plan which could be a drain on state revenues. Little said there's no way to project increased usage of the plans and credit. 

"From one perspective this is somewhat of a mission creep situation where the original purpose for these accounts was to save long-term for college education and not short-term for primary or secondary education."

"The committee wanted to know if the legislature could legally provide that the Vermont plan may not be used for K-12 expenditures. And we are studying that legal question." — Tom Little, VSAC

Little said the leverage the Vermont statute has, and the legislature has at it's disposal if it wants to make a policy change, is that someone who takes money out of 529 plan and uses it for K-12 education might be at risk of having to re-pay the state tax credit they received when the money was put into the plan.   

But Vermonters can also opt for an out-of-state 529 plan, and there are some Vermonters who already chose to do so. "We haven't been able to assess whether people would stop contributing to an existing Vermont plan and opt for another plan in another state in order to help fund their K-12 education for their students," Little said. " We have heard from some people inquiring about this and we're telling people that it's not clear and for the time being we can't tell people in fact that they can use their 529 plan in Vermont to pay for K-12 education without some potential consequences."

VEHIP has $350 million accumulated in the plan and students are have already used money in the plan for higher education. Little says nearly a half a billion dollars worked through the plan and the tax credit is intended as an incentive for people to save.

VSAC is hoping to have more answers for the House Ways and Means Committee by the end of the month.