A group of senators have introduced legislation aimed at enhancing the tax breaks available in Section 529 college savings plans, only days after the Obama administration backed away from a proposal to tax new contributions to such plans.

Last week, President Obama abandoned a proposal to tax new contributions to college savings accounts (see Obama Said to Drop Proposal to Repeal 529 College Tax Break). On Monday, Senators Chuck Grassley, R-Iowa, Bob Casey, D-Penn., Richard Burr, R-N.C., Mark Warner, D-Va., Pat Roberts, R-Kan., and Ben Cardin, D-Md., introduced legislation to enhance 529 college savings plans.

The bill includes three main provisions.  The first provision allows 529 funds to be used to purchase a computer on the same tax-favorable basis as other required materials. The second provision eliminates an old aggregation rule that increases paperwork and costs on plan administrators.

The third provision provides tax and penalty relief in instances where a student may have to withdraw from school for illness or other reasons. Under current law, any refunds from the college are subject to immediate taxation and a 10 percent tax penalty. This provision eliminates this tax and penalty if the refund is redeposited in a 529 account, permitting a family to set the refund aside to pay for the student’s education in case he or she is able to return to college or to use it for another family member.

Changes introduced to the program in 2001 and 2006 greatly increased the popularity of 529 plans.  The changes first made spending from the plans tax-free as long as the money was used for college and associated expenses and then made the tax-free provision permanent. The new bill has the potential to attract even more families, according to the senators

“These reforms will make it even more appealing for parents to use 529 college savings plans,” Grassley said in a statement. “The additions give more flexibility for using the tax-free savings. The more flexibility, the more people use something like this. The bill also sends the message to families that Congress supports this program and will fight efforts to get rid of it.”

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