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Educational Program Accounts

 

Image of man, as if in deep thought about paying for education, next to pink piggy bank on stack of books.There are two types of Educational Program Accounts that may affect an individual's Supplemental Security Income (SSI) eligibility, the Qualified Tuition Program (QTP or "529 Plan") and the Coverdell Education Savings Account (ESA). The Social Security Administration treats each account type differently. The two account types are briefly described below (each has a link to a topic that provides comprehensive information about them). The descriptions are followed by a discussion of eligibility implications for SSI recipients that may come into play when these accounts are established, funded, or funds are distributed from them.

You may read this topic in sequence or jump to a specific section:

              Qualified Tuition Program (QTP or "529 Plan")

              Coverdell Education Savings Account (ESA)

              Implications for Supplemental Security Income (SSI) Recipients

o                      Considerations - Qualified Tuition Program (QTP or "529 Plan")

o                      Considerations - Coverdell Education Savings Account (ESA)

Qualified Tuition Program (QTP or "529 Plan")

A Qualified Tuition Program (QTP), also called "529 Plan", formerly called a Qualified State Tuition Program (QSTP), is established and maintained to allow either prepaying, or contributing to an account established for paying a student's qualified higher education expenses at an eligible educational institution. States and eligible educational institutions can establish and maintain QTP(s).

An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education.

Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified higher education expenses of the beneficiary. Contributions made to a QTP are not deductible on your Federal tax return.

See the Qualified Tuition Program (QTP or "529 Plan") topic for comprehensive information.

Coverdell Education Savings Account (ESA)

A Coverdell ESA is a trust or custodial account set up in the United States solely for the purpose of paying qualified education expenses for the designated beneficiary of the account. The trustee or custodian must be a bank or an entity approved by the IRS. This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses.

In general, the designated beneficiary of a Coverdell ESA can receive tax free distributions to pay qualified education expenses. The distributions are tax free to the extent the amount of the distributions do not exceed the beneficiary's qualified education expenses. If a distribution does exceed the beneficiary's qualified education expenses, a portion of the distribution is taxable.

You may be able to contribute to a Coverdell Education Savings Account (ESA) to finance a beneficiary's qualified education expenses if your modified adjust gross income is below the established amount. There is no limit to the number of accounts that can be established for a beneficiary. The total contribution in any year cannot exceed $2,000.00. The contribution is NOT deductible. The designated beneficiary must be under the age of 18 years of age at the time the account is established.

See the Coverdell Education Savings Account (ESA) topic for comprehensive information.

Implications for Supplemental Security Income (SSI) Recipients

When a distribution is made from a Qualified Tuition Program (QTP) account defined under Section 529 of the Internal Revenue Code (IRC) or a Coverdell Education Savings Account (ESA) defined under Section 530 of the IRC, the Internal Revenue Service (IRS) may notify the Social Security Administration (SSA). For Supplemental Security Income (SSI) recipients, SSA will determine if the distribution affects either the eligibility or benefit amount of the recipient.

The distribution may be treated as:

              Income if distributed to the beneficiary of the Section 529 Qualified Tuition Program account.

              Not income if distributed to the individual who funded the Section 529 Qualified Tuition Program account or if distributed to the beneficiary of the Coverdell ESA.

              Conversion of a resource if distributed to the individual who funded the Section 529 Qualified Tuition Program account or if distributed to the beneficiary of the Coverdell ESA.

Considerations - Qualified Tuition Program (QTP or "529 Plan")

These accounts are also excluded by the SSI program through several different provisions. First of all, the accounts are held by the parent or other concerned adults who make the contributions. While the student is named as the beneficiary, these accounts are owned by others and thus would not count as either income or resources to the student. If the student is over the age of 18, the 529 Accounts held by parents or other concerned adults would have no bearing on the studentís SSI eligibility.

However, for youth under the age of 18, a 529 Account would be considered to be a countable parental resource during the deeming process. If the value of the 529 Account exceeded the parental couple's resource limit of $3,000, it would preclude SSI eligibility for the child.

When the student comes of age and the funds from the 529 plan are disbursed to pay for educational expenses, they still would not count as income. The SSI rules state that:

"Any portion of a grant, scholarship, fellowship, or gift used for paying tuition, fees, or other necessary educational expenses at any educational institution, including vocational or technical education, is excluded from income. Any portion of such educational assistance that is not used to pay current tuition, fees or other necessary educational expenses but will be used for paying this type of educational expense at a future date is excluded from income in the month of receipt."
(From SSA POMS SI 01130.455 - Grants, Scholarships, Fellowships, and Gifts)

Families and students need to be careful about how the funds are spent, however. Any portion of grants, scholarships, fellowships, or gifts that is not used or set aside for paying tuition, fees, or other necessary educational expenses would count as income in the month received and a resource the month after the month of receipt, if retained.

In the past there was a real problem with retaining funds received from grants, scholarships or gifts if they could not be spent for educational purposes right away. In the SSI program, if these funds were put in the bank, they would count as a resource which could potentially cause ineligibility for SSI. Fortunately, the Social Security Protection Act of 2004, Public Law 108-203, provided 9-month resource exclusion for grants, scholarships, fellowships, and gifts used to pay for tuition, fees, and other necessary educational expenses at any educational institution. This exclusion does not apply to any portion set aside or actually used for food or shelter -- only on funds spend for educational expenses. If funds are not spent after the 9th month, they are considered to be countable resources for SSI purposes as of the 10th month following the month of receipt.

Considerations - Coverdell Education Savings Account (ESA)

The downside to Coverdell Accounts is that unlike Section 529 Accounts, funds deposited in a Coverdell ESA are considered a resource to an SSI beneficiary after nine months. Based on SSAís interpretation of IRS policies, it appears control of the parent or other adult contributor is essentially lost once contributions are made. This means that once a contributor places funds into the Coverdell ESA, he or she can no longer withdraw those funds. Only the beneficiary, at that point, has access to the funds.

Section 435 of the Social Security Protection Act (PL 108-203) provides for an additional income and resource exclusion for gifts used to pay educational costs. Funds deposited into a Coverdell account are excluded from resources for 9 months, but become countable after the expiration of the nine-month period. Any additional deposits to the account would be subject to a new nine-month exclusion period (bearing in mind the $2,000 annual limit for contributions to a Coverdell ESA).

With a Coverdell ESA, the trustee or custodian must administer the account for the benefit of the child. Any withdrawals from the account are paid to the beneficiary and are not refunded to the parent or other person who establishes the account.

In some situations, the "responsible party" actually makes the withdrawals while the beneficiary is still a minor. The account would still be a resource to the child because the responsible party (generally a parent or legal guardian) would merely be acting as an agent for the child. This is unlike the Section 529 Account where the individual who established the account can withdraw any or all funds to use for his or her own benefit.

For SSA purposes, the value of the Coverdell ESA is its equity value at the time of the resource determination. There are penalties if withdrawals are made for non-educational expenses and, of course, specific tax implications. The value of the ESA is its available balance minus the penalty, but not the tax.

Also see:

Qualified Tuition Program (QTP or "529 Plan")

Coverdell Education Savings Account (ESA)

Source

IRS Tax Topic #313, Qualified Tuition Programs, at:
http://www.irs.gov/taxtopics/tc313.html

IRS Tax Topic #310, Coverdell Education Savings Accounts, at:
http://www.irs.gov/taxtopics/tc310.html

IRS Publication 970, Tax Benefits for Education, at:
http://www.irs.gov/publications/p970/

Personal Communication, WIPA National Training Center, Laura Richardson, 11/10/2008.

SSA POMS SI 01130.455, Grants, Scholarships, Fellowships, and Gifts, at:
https://secure.ssa.gov/apps10/poms.nsf/lnx/0501130455!opendocument

SSA POMS SI 02310.048, IRS Alert Development, at:
https://secure.ssa.gov/apps10/poms.nsf/lnx/0502310048!opendocument


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