529 Essentials Seminar 2016 - PLANSPONSORww2.plansponsor.com/events/529Essentials.pdf · 529...

529 Essentials Seminar 2016:Opening RemarksSeptember 12, 2016JW Marriott Grande Lakes, Florida

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Paul Curley, CFADirector of College Savings ResearchEditor of 529 DashStrategic [email protected]@PaulCurleyBC

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Essentials Seminar Topics

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- The 529 Landscape- Federal Regulatory Framework- Federal & State Income Tax Benefits- Gift & Estate Tax Planning- Plan Governance & Administration Best Practices- Structuring & Evaluating the Investment Line-up- Lifecycle of Planning, Saving and Paying for College- Fundamentals of College Savings Plan Operations- Comparing College Savings Vehicles: How do 529s Stack Up?

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The 529 LandscapeBy

Chris Stack, Esq.Managing Consultant, Savingforcollege.com

September 12, 2016

The 529 Landscape is diverse, changing and expanding!

AGENDA1. Background and Beginning of 529 Plans2. Types of plans and features3. Select Historical Milestones4. Where Are We Today?5. Are 529 Plans a Success?

Background & Beginning of 529 Plans1. High Inflation of the 1980s 2. Significant tuition increases at all colleges 3. MI Education Trust prepaid tuition agency enacted 19864. IRS to tax MET as a taxable entity (IRS letter 3/29/88) 5. Dispute/Litigation IRS wins case (8/3/92)MI appeals

6. 6th Circuit Court victory for Michigan Argued 8/6/93; Decided 11/8/94; Rehearing/Request for Rehearing EnBanc Denied 2/2/95 =MET is exempt as a state instrumentality; as an

extension of the State

Background & Beginning of 529 Plans7. 6th Circuit Court = MI, KY, OH, TN

8. Other states/programs left exposed to IRS challenges

9. FL outside 6th Circuit ; KYs plan not a prepaid plan

10. Senators Bob Graham (D-FL) & Mitch McConnell (R-KY) co-sponsor 529 of the IRC as SBJPA bill rider Pres. Clinton signs into law August 20, 1996

529 (b)(1): A qualified tuition program shall be exempt from taxation1 and means a program established and maintained by a State or agency or instrumentality thereof or by 1 or more eligible educational institutions under which a person may purchase tuition credits or certificates on behalf of a designated beneficiary which entitle the beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary,

or

in the case of a program established and maintained by a State or agency or instrumentality thereof, may make contributions to an account which is established for the purpose of meeting the qualified higher education expenses of the designated beneficiary of the account2,

and

meets the other requirements of this section3.

1 - 529(a); 2-529(b)(1)(A); 3- 529(b)(1)(B); italics = 2001 EGTRRA

IRC529 creates/ clarifies 2 types of plans

Other Requirements Cash contributions/purchases only accepted

Separate accounting for each beneficiary Contributor may not directly or indirectly direct the investment, except 2x a year

Accounts cannot be pledged as security of a loan

Plan must impose safeguards against contributions in excess of what is needed for qualified expenses

What is NOT Required by IRC529? No time or age limitations

No limit on account growth

No income limitations

No account ownership change limitations

No limit on who can be Designated Beneficiary

No Designated Beneficiary change limitation

No limit on # of accounts 1 owner may have

4 types of Prepaid Plans: 1. State Contract Plans: state plans that allow you to purchase a contract

covering from 1 to 5 years of tuition either on a lump sum or installment basis. FL, IL, MD, MI, MS, NV, VA: open to new accounts WV, TX, KY, AL, SC: closed to new accounts

2. State Unit/Guaranteed Savings Plans: state plans that allow you to buy 'units' of tuition which may equate to credits or hours. PA & TX*: open to new accounts CO, OH, TN, WA & WI: closed to new accounts

3. Massachusetts U Plan*: not a 529 plan; but the plan invests in MA general obligation tax-free municipal bonds.

4. Private College 529 Plan*: > 270 private participating colleges and universities* - liability for honoring the value of the contract is with the institutions, not the program itself

Types of 529 Plans Today

4 types of Investment or Saving Plans: 1. Privately Managed -Directly Offered Investment Plans: offered directly to the consumer by a state or private entity with whom the state contracts most day-to-day operation responsibility in return for program and investment management fees based on assets under management. Primarily an investment company such as TIAA or a third party administrator such as Ascensus. Mostly low cost index mutual funds.2. Advisor-sold Investment Plans: distributed by manager through brokerage firms to clients mostly actively managed mutual funds and includes the advisors compensation in the products pricing such as a sales charge or commission.3. Bank CD Plan/Option Savings Plan: allows account owners to save in traditional FDIC-insured deposit accounts at participating banks or financial institutions and benefit from Section 529 tax advantages4. ETFs only: NV/State Street & AR/BlackRock/iShares favorite among RIAs

Types of 529 Plans Today

529 highlights of Federal legislative benefits Tax-free growth while within the program

Room & Board among such expenses

Contributions treated as completed gifts

Allows 5 years of tax-free gifting/funding at once

Tax-free distributions for qualified expenses

Tax-free rollovers with same DB 1x per 12 months

Tax-free distribution determination by taxpayer; not plan

Tax deduction/reduction of State taxable income for contributions 4 states (CO, NM, SC & VW) offer $ for $ deduction for year of investments into their plan Other states range from $1,000 total (aggregate/single) to $20,000 for joint filer to others with a

carry-forward (e.g., CT:$60K=$10K/6 yrs.) or unlimited # of years OH, VA, WI

5 states (AZ, KS, MO, MT, PA) offer tax parity, i.e., a deduction for the plan of your choice

Protection of accounts from claims by creditors or judgements Some states offer generous protection and some carve out child support or require time

period from account opening to be effective

Exclusion of account value when awarding state-funded financial aid

Other such as scholarship programs, match funding programs etc.

State Specific Benefits

Selected Milestones of 529 Savings/Investment Plans1998 -Fidelity first major firm to roll out investment plan (NH)

Introduces concept of program manager revenue sharing with states

1999 -Fidelity/NH announces plan will be marketed nationallyMarketing focus beyond in-state with no residency requirement unlike pre-paid plans

2000 -Alliance/RI & Putnam/OH roll out first advisor-sold plans

2000 -Total AUM $2.5B at year-end (vs. $6B in prepaid plans)

2002 -American Funds/VA rolls out CollegeAmerica Introduces single fund options; first advisor plan with no age-based options

Tax law amended making administration easier for managers

2002 - Total y/e AUM reaches $19B (vs. $8B in prepaid plans)*

68% of net sales through intermediaries vs. 32% through direct plans

2003 - NY selects Upromise as new program manager first major conversion ($1.9B; November 2003)

Its the states plan; an institutional mandate of retail accounts

Oregon replaces Strong as program manager; NV & WI follow suit

2004 - First advisor plan closes (NC) at year-end (HI & PA follow)

2005 - Ohio launches FDIC-insured option (following AZ & MT) & followed by > 12 other states

Today, there are 49 states (& DC) offering at least 1 plan

Where are we today? Today: 49 states (& DC & a college consortium) offer either/ both savings/prepaid plans for a total of over 100 plans/products

WY offers no plan; all other states except WA offer 1 or more investment plans/products (WA hoping to launch plan soon); NV offers 5 different 529 plans

9 states: FL, IA, LA, NC, OH, PA, TN, UT, VA manage most of their own investment plans

41 states & DC use private firms as program managers under contract terms ranging from 2 years to 35+ years

Today, there are 27 plans offering advisors loads +/or commissions

>30 states have changed/added investment program managers since their start

Where Are We Today? 48 states (not WA or WY) & DC offer a 529 investment plan today

8 such programs hold >50% of AUM as of 6-30-16; VA alone has >22%* The landscape continues to evolve:

Few State pre-paid tuition plans continue operations (FL, IL, MD, MI, MS, NV, VA)*Investment Plans fees reduction continue (AZ, CA, CT, DE, ID, MA, MO, NE, NH, NV others)RI converts $6B from AB, after 15 years, to Invesco & Ascensus

Fees continue to go lower -are they at/near the bottom?Outside managers total fees fall to 17 -NY; 15 bps -SC

* the MA prepaid plan is not a 529 plan.

Where Are We Today? 48

Where Are We Today?15 Largest 529 Investment Plans by Assets

Where are we today? Of top 15 plans, totaling $147.3B, $76.4B (51.9%) are direct to

consumer type plans & $70.9B (48.1%) are advisor-sold plans. Of top 15 plans, 4 are plans with in-state marketing focus/more

in-state aum (direct CA, MI, NY & OH: $20.8B) and 11 plans have more out-of-state focus & non-resident assets ($126.5B).

Some states offer very similar options but at very different costs .

Question: Is it necessary for every State to offer a plan?

Where are we today?Legislation: Since its enactment in 1996, 529 amendments have all

been positive.Plan Structure: Plans have lowered their fees with a few exceptions. Plans have improved offerings - with a few exceptions.

Legal Evolution of 529 Plans All Positive 1996: Section 529, Small Business Protection Act - established IRC 529 1997: Taxpayer Relief Act substantially enhanced 529 added room & board; made contributions a gift 1998: IRS releases proposed regulations (still not finalized) 2001: EGTRA granted Qualified Withdrawals tax free status through 2010 2001: IRS allows annual investment change to 1x per calendar year from none previously 2005: Bankruptcy Act provides protection of 529 assets in account 2 years or longer with certain DBs 2006: DOE changes financial aid treatment of 529 plans 2006: Pension Protection Act made tax-free Qualified Withdrawals 2008: Treasury issues 529 Advanced Notice of Proposed Rule Making to address potential transfer abuse 2009: IRS allows investment changes 2x that year to address financial crisis needs 2014: ABLE Act amends IRC 529 to allow 2x investment changes per calendar year 2015: PATH Act adding laptops, printers, software as Qualified Expenses & allowed for refunds redeposited

Legal Evolution of 529 Plans All PositivePending Legislation:

S 2869 Boost Saving for College Act a game changer? Provides for TAX-FREE rollover/conversion to a Roth IRA for the 529 account owner

or beneficiary after the account has been in existence 10+ years. Provides up to $1,000 employer match of 529 contributions by employee as non-

taxable income to such employee. Allows low- and middle-income families to claim a nonrefundable tax credit of up

to $1,000 ($2,000 if filing jointly) as a match to their 529 savings plan contributions. Rollover a 529 account to a 529-A account or ABLE account tax-free.

Legal Evolution of 529 Plans All PositivePending Legislation:

HR 3170 Student Debt Repayment Fairness Act Allows penalty-free distributions from qualified tuition programs to pay student

loan indebtedness

Where are we today/Where Are We Going?

Are 529 Plans a Success?How Do we Define Success?

States: Number of Accounts? (especially in-state)Program Managers: $AUM?Participants/Investors: Return on/of Investment?

Where are we today?Are 529 Plans a success?

2005: 7.2 million accounts, including prepaid plans to ... 2015: 12.7 million accounts, including prepaid plans

2005: $68B investment/savings; $12B prepaid aum to 2015: $231B investment/savings; $23B+ prepaid aum

2005: average 529 investment plan expense ratio > 1% vs. 2015: several plans available for an average expense of 0.16%

Where are we today?Are 529 Plans a success?o $1,250,000,000,000 Student debt outstanding vs.

$253,000,000,000 total 529 savings/investment/prepaid aumo Average 4 year public university 1 year cost of attendance: $26,500 vs.

Average 529 investment/savings account size of $17,949o Have been criticized as utilized more by the wealthy (see Obama 1/15 stmt)o 72% of Americans dont know what a 529 Plan is (Edward Jones 5/16 survey)

= Weve come far but have a long way to go

Thank You !

Questions?

Federal Regulatory FrameworkErnesto A. Lanza | Clark Hill [email protected] | (202) 572-8672

Federal regulatory frameworkIn this session, we will walk through high-level review of: Origins of regulatory framework & basic program structure Federal tax laws shaping key program operations

Tax benefits to investors & beneficiaries covered in next 2 sessions Federal securities laws governing certain aspects of

investment management & program marketing Will highlight differences in application to State program & private

sector partners

State programs operate within a unique legal framework States establish own rules of operation, subject to:

Federal tax law, which shapes structure must be followed to maintain federal tax benefits for owners & beneficiaries Internal Revenue Code 529 & IRS regulations

Federal securities law, which shapes investment advisory & marketing activities must be followed to avoid legal liabilities Securities Act, Securities Exchange Act, Investment

Advisers Act & SEC/MSRB regulations

State program evolution as driver of federal regulatory structure States invented & drove initial structure of programs,

including ground rules and State tax & other benefits State structural decisions triggered federal tax &

securities law issues Strong public policy goals of programs facilitated

adaptive changes in federal tax & securities laws

Savings plan vs. prepaid plan 529 plans include prepaid tuition plans & college

savings plans Prepaid tuition plan purchase future college tuition

credits/units at current price, avoiding tuition inflation College savings plan invest funds to achieve potential

investment growth to make future tuition & related payments

Savings plan vs. prepaid plan The IRS treats them much the same

tuition cost increases avoided through prepaid tuition plan = investment earnings realized in college savings plan

Federal securities regulators treat them quite differently college savings plan investments = securities, prepaid tuition

plan units = contracts securitiesReview of regulatory framework that follows focuses on college savings plans

Savings plan structure Understanding regulatory framework requires

understanding basic college savings plan structure: State program created to receive contributions, to disburse

funds when withdrawn & to invest funds pending withdrawal account owner opens account with program, designates

account beneficiary, contributes cash to account & provides investment direction among options offered by program

beneficiary has college tuition & related expenses paid from funds withdrawn from program account

Savings plan structure basic visualAccount Owner

State Program

College

Beneficiary

$ contribution $

$ withdrawal $

education

Investment A

Investment B

Investment C

Investment D

Account

Plan structure & federal tax law Core federal tax requirements for savings plan:

qualified tuition program State program established & maintained by a State or its agency or instrumentality

account owner may contribute cash to account for purpose of qualified higher education expenses of account beneficiary such as tuition, fees, books, supplies, required equipment,

computer equipment , software, room and board State not required to police use of withdrawals


investments owner limited to original investment direction and no more than 2 changes per year, subject to rollover rules each beneficiary also permitted 1 rollover per year from one

529 program to another however, not considered a rollover if beneficiary changed to

member of family of original beneficiary


separate accounting for each beneficiary, although funds from multiple account owners for multiple beneficiaries may be commingled for investment purposes

prohibits contributions in excess of beneficiarys qualified higher education expenses, typical through a cap

prohibits use of account as security for loans requires annual Form 1099-Q reporting of gross distributions &

earnings portion of distributions to IRS and to beneficiaries

Plan structure & federal securities law Depending on plan structure, federal securities law may

apply to many operational aspects of plan are securities involved? who is taking action with respect to the securities? what type of activities are involved?

While many securities laws do not apply to savings plans, no savings plan is completely unaffected

Savings plan structure basic visualAccount Owner

State Program

College

Beneficiary

$ contribution $

$ withdrawal $

education

Investment A

Investment B

Investment C

Investment D

Account

Savings plan structure multi-userAccount Owner 1

State Program

College 1

Beneficiary 1

$ contribution $

$ withdrawal $

education

Investment A

Investment B

Investment C

Investment D

Account 1Account Owner 2

Account 2$ contribution $

College 2

Beneficiary 2

$ withdrawal $

education

Savings plan structure rule paradigmAccount Owner 1

State Program

College 1

Beneficiary 1

$ contribution $

$ withdrawal $

education

Investment A

Investment B

Investment C

Investment D



College 2

Beneficiary 2

$ withdrawal $

education

Investment Fund {


State Program

College 1

Beneficiary 1

$ contribution $

$ withdrawal $

education

Investment A

Investment B

Investment C

Investment D



College 2

Beneficiary 2

$ withdrawal $

education

Investment Fund {

Buying shares of Investment Fund

Selling shares of Investment Fund

Plan structure & federal securities law Collective investment fund typically known as investment

company or mutual fund outside of 529 plan context investing in mutual fund involves buying & selling shares of fund

fund regulated by Securities & Investment Company Acts investment adviser manages funds underlying investments

adviser regulated by Investment Advisers Act broker-dealer intermediates between buyer & seller of shares

broker regulated by Securities Exchange Act

Plan structure & federal securities law Special securities law treatment for State governments

State investment fund exempt from Investment Company Act underlying investments still regulated

State employee investment advice exempt from Investment Advisers Act private sector adviser still regulated

State employee sales exempt from Securities Exchange Act private sector broker-dealer still regulated

Plan structure & federal securities law Special securities law treatment for State governments

State employee structuring advice exempt from regulation private sector structuring advice regulated unless exempted

Notwithstanding States broad exemptions, States remain subject to anti-fraud prohibitions in Securities Act


State Program

College 1

Beneficiary 1

$ contribution $

$ withdrawal $

education

Investment A

Investment B

Investment C

Investment D



College 2

Beneficiary 2

$ withdrawal $

education

Investment Fund {

Broker-Dealer or State personnel

Broker-Dealer or State Personnel

Investment Adviser or State Personnel

Plan structure advisor

Municipal fund securities Shares in 529 plan known as municipal fund securities

distinct class of municipal securities other municipal securities are tax-exempt municipal bonds

broker sales of municipal fund securities subject to MSRB broker-dealer rules

advice on investments subject to SEC investment adviser rules advice on plan structuring may be subject to MSRB municipal

advisor rules

Municipal advisor regulation municipal advisor = provides advice on issuance of

municipal securities, including advice on structure, timing, terms & other similar matters does not require intent to be municipal advisor, contract to serve

in role, or payment for municipal advisory services professionals with other roles with program can become

municipal advisor if provide advice exemptions exist but are narrow in many cases

Municipal advisor regulation municipal advisor exemptions

underwriting exception limited to broker-dealer acting as primary distributor only when engaged in narrowly defined set of underwriting activities

investment adviser exception limited to SEC-registered investment advisers only when engaged in providing investment advice does not exempt advice on whether or how to issue or on

structure, timing and terms of issuance

Municipal advisor regulation municipal advisor must:

register with the SEC & MSRB qualify its professionals through MSRB qualification exam take actions consistent with fiduciary duty comply with MSRB rules on:

recordkeeping, fair practice, gifts, pay-to-play, duties of municipal advisors, and supervision

submit to SEC compliance examinations

Broker-dealer regulation broker-dealers can serve in role of primary distributor for

program or as part of financial adviser distribution chain primary distributor viewed as underwriter of municipal fund

securities subject to: SEC Rule 15c2-12 on receiving & reviewing State programs

plan disclosure document MSRB rules on submitting plan disclosure document and

periodic program data to MSRB


program or as part of financial adviser distribution chain any broker-dealer selling to customer must:

register with the SEC, MSRB & FINRA qualify its professionals through MSRB qualification exam,

including municipal fund security principal qualification comply with full array of MSRB broker-dealer rules submit to SEC & FINRA compliance examinations


program or as part of financial adviser distribution chain also must comply with specific municipal fund securities rules:

time-of-trade disclosures on tax benefits & out-of-state investments

mutual fund-like advertising rules physical delivery of plan disclosure documents to customers periodic transaction confirmations

Securities law impact on State program Most direct effect of securities laws on State programs is

felt in connection with plan disclosure document essentially no affirmative content requirements for plan disclosure

document, although anti-fraud prohibitions apply can be liable for untrue statement of material fact or omission

of material fact necessary to make statements made, in light of circumstances under which made, not misleading

anti-fraud prohibition applies even if State does not use broker-dealers to market program

Securities law impact on State program If State uses primary distributor, then need for broker-

dealer compliance with SEC & MSRB rules influences range of choices for State actions and structures

Applicability of securities laws to some programs creates pressure to minimize divergence in practices between such programs and wholly exempt programs

Federal Regulatory FrameworkErnesto A. Lanza | Clark Hill [email protected] | (202) 572-8672

Federal & State Income Tax Benefits

Presented by: James W. C. Canup, PartnerHirschler Fleischer

[email protected]

69

529 BASICS

Qualified Tuition Program means a program established and maintained by a state or agency or instrumentality, or by one or more eligible educational

institutions.

70

529 BASICSUnder which a person may purchase tuition credits or certificates on behalf of a

designated beneficiary for the waiver or payment of qualified higher education expenses, or

may make contributions to an account established for the purpose of meeting the qualified higher education expenses of the designated beneficiary.

71

Additional Requirements

Purchases and contributions may only be made in cash; Must provide separate accounting for each designated

beneficiary; A contributor or designated beneficiary may not,

directly or indirectly, direct the investment of any contributions to the program or any earnings thereon more than two (2) times in any calendar year.

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Additional Requirements (cont.) Must not allow any interest in the program to be used as security

for a loan; and Provide adequate safeguards to prevent contributions on behalf of

a designated beneficiary in excess of those necessary to provide for the qualified higher education expenses of the beneficiary.

Safe Harbor: Contributions may not exceed the amount necessary to pay tuition, fees, and room and board for five years of undergraduate enrollment at the highest cost institution allowed by a program.

73

DEFINITIONSDesignated Beneficiary the individual designated at the commencement of the qualified tuition program as the beneficiary of amounts paid to the program (includes the individual who is the new beneficiary when there is a change of beneficiary).

74

DefinitionsMember of the family means with respect to a designated beneficiary:

child or descendant brother, sister, stepbrother or stepsister (and half and adopted) father, mother, or ancestor stepfather or stepmother niece or nephew aunt or uncle son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law

or sister-in-law a spouse or the spouse of any of the foregoing first cousin

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DefinitionsQualified Higher Education Expenses: Tuition, Fees, Books, Supplies, and Equipment

required for enrollment or attendance of the designated beneficiary at an eligible educational institution

Special needs services for a special needs beneficiary Computers

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DefinitionsQualified Higher Education Expenses (cont.)

Room and Board if the designated beneficiary is at least a half time student

Not to exceed - the allowance for room and board included in cost of attendance by the

eligible educational institution, or the actual invoice charged by the eligible educational institution, if greater.

77

Definitions

Eligible Educational Institution means

an institution described in the Higher Education Act, and

that is eligible to participate in programs under title IV of that Act., i.e., those institutions that are eligible to participate in federal financial aid programs

78

Income Tax Treatment

No amount is includible in gross income if the distribution is used for qualified higher education expenses. In essence, income recognition is deferred while

funds are in the 529 account, and No tax on the earnings when used for QHEE

79

10% Penalty TaxThe earnings portion of a distribution that is not used for qualified higher education expenses is not only includible in income but is also subject to an additional 10% penalty tax.

Income and penalty tax are reportable and paid by the distributee; e.g., either the account owner or beneficiary.

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10% Penalty Tax Exceptions Made to the estate of the beneficiary Due to the designated beneficiary being disabled Made on account of a scholarship to the extent of the

scholarship Made on account of attendance at a U.S. service

academy to the extent of the cost of attendance at such academy

Taxable distribution used to claim American Opportunity and Lifetime Learning Credits

81

RolloversA rollover within 60 days of a distribution to another program for the benefit of the same designated beneficiary is not a taxable event if the rollover occurs more than 12 months after the date of any previous rollover.Rollovers can be full or partial rollovers.Rollovers can be trustee to trustee or accomplished in multi-steps so long as completed within 60 days (caution).

82

Rollovers

Transfers to a designated beneficiary who is member of the family of the previous designated beneficiary are not includible in income.

Not subject to the 12-month limitation.83

Recontribution of RefundsA beneficiary who receives a refund of qualified higher education expenses from an eligible educational institution:

does not have a taxable event to the extent the refund is recontributed to a qualified tuition program for that

beneficiary if the recontribution is made within 60 days of the refund and it

does not exceed the amount of the refund.Transition Rule for 2015 refunds expired February 16, 2016.

84

FUNDING A 529 ACCOUNT Contributions, either lump-sum or through recurring

contributions Liquidation of non-529 assets or accounts Tax-free liquidation of a Coverdell ESA

Must have the same beneficiary as the ESA beneficiary Tax-free redemption of certain Series EE and I bonds issues

after 1989 Income phase-outs apply Bond owner, spouse or dependent must be the beneficiary

85

No Income Tax Consequences From Rollover Change in account owner Change in beneficiary so long as the new

beneficiary is a member of the family of the old beneficiary

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DISTRIBUTIONS Distributions are typically made to:

The account owner The beneficiary The eligible educational institution

Distributions to the last two are reported by the beneficiary, if taxable

Distributions are reported on IRS form 1099-Q87

DISTRIBUTIONS (Contd) Only the earnings portion of a distribution is

included in income if the distribution is a non-qualified distribution

Recipient of the 1099-Q is responsible for any tax reporting

If the distribution equals or is less than QHEE for that year, no income tax

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DISTRIBUTIONS (Contd) If the distribution exceeds QHEE for that year

then a portion or all of the earnings will be taxable, plus 10% penalty tax will apply

Important to match expenses and withdrawals in the same tax year

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Coordinating Tax Benefits No Double Dipping cant claim exclusion for

QHEE from a 529 plan account withdrawal while also claiming the American Opportunity or Lifetime Learning credits

If eligible for the credits, use non-529 funds to pay for expenses to qualify for the credits and 529 funds to pay all other qualified expenses

90

State Tax Considerations

Most states conform to federal tax: Earnings grow free of state income tax Qualified withdrawals are not taxed Non-qualified withdrawals subject to state tax Some states exempt scholarship, death, disability

and other withdrawals

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State Tax Deduction or Credit There is no federal income tax deduction for

contributions to a 529 plan However, some states permit a state income tax

deduction or credit against state income tax for contributions to a 529 plan, typically only for contributions to that states plan

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State Tax Deduction or Credit Most states limit the amount of the deduction or credit Some states permit a carry forward of any unused

deduction or credit Some states permit any contributor to claim the state tax

deduction or credit, not just the account owner Caution Be aware of recapture of any state tax

deduction or credit when making a rollover to an out-of-state plan or a non-qualified withdrawal

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Guidance

Section 529 of the Code Proposed Regulations issued in 1998 IRS Notice 2001-55 and Notice 2001-81 Private Letter Rulings IRS Publication 970 IRS Form 1099-Q

94

Questions?

James W. C. CanupHirschler Fleischer, P.C.2100 East Cary StreetRichmond, VA 23223

T (804) 771-9518F (804) 644-0957

[email protected]

Thank You!

Gift and Estate Tax PlanningPresented by: James W.C. Canup

[email protected]

(804) 771.9518

Transfer Taxes - Background Taxes imposed on transfers of wealth other than to spouse

or charities Estate tax Gift tax Generation-skipping tax

Annual exclusion for qualified gifts: $14,000 per donor per donee

Lifetime exemption: $5.45 million ($10.9 million for married couple)

General Rule for Estate Tax

Interests in a 529 plan are not included in gross estate of any individual

Distributions made on account of the death of a beneficiary are includible in the gross estate

Unique benefit: Donor retains control

Estate Tax (con't.)

Exceptions: 5-year election throwback Self as beneficiary

Estate Tax (con't.)

In the case of a donor who makes an election totreat a contribution as being made over five years, if the donor diesbefore the close of the 5-year period any portion of the contributionattributable to years after the year of death are includible in the donorsgross estate.

No Basis Step-up

Earnings in 529 plan are not subject to step-up Not an issue if 529 earnings eventually come out

tax-free But if post-death distributions are non-qualified (i.e.

taxable), then step-up benefit is lost

General Rule for Gift Tax

Any contribution to a qualified tuition program on behalf of a designated beneficiary is treated as a completed gift to the beneficiary

IRS may seek to change treatment of contributions by non-owners Qualifies for $14K gift-tax annual exclusion

Remember to reduce allowance by other non-529 gifts 5-Year election to spread up to $70K in upfront contributions

Contributions exceeding annual exclusion are applied to $5.45 million lifetime exemption

Gift Tax (cont.)

A distribution from a qualified tuition program is not treatedas a taxable gift

unless the new beneficiary is assigned to a lowergeneration than the old beneficiary or is not a member ofthe family of the old beneficiary.

Gift Tax (cont.)

A donor can make an election to treat a contribution to a qualified tuition program that is in excess of the annual gift tax exclusion as being made ratably over a 5-year period beginning with the calendar year in

which the contribution is made.

Married Couples Combined annual exclusion: $28K

Spouses may consent to split their gifts (Form 709) Combined 5-Year election: $140K Combined lifetime exemption: $10.9 million

New portability provisions But 529 ownership is still important in event of separation or

divorce

General Rule for Generationskipping Transfer Tax

Contributions for a beneficiary more than one

generation below the donor are generation-

skipping transfers

5-year election applies here

Comparison of Gifting Vehicles 529 Plan UTMA Irrev. Trust Crummey Trust

Annual exclusion? Yes Yes No Yes

5-yr election? Yes No No No

Discounts? No No Maybe Maybe

Set-up cost None/low None/low Higher Higher

Income taxes None if qualified use

Possible kiddie tax

Compressed rates

Compressed rates

Revocable? Yes No No No

Control Retained Limited Limited Limited

What About 2503(e) Instead?

Direct payment of tuition is not a gift

2503(e) limited to tuition paid directly to an educational organization

Can still decide to do 2503(e) when 529 account has been set up

529 distributions will still be qualified if used for other QHEE other than tuition

Delayed Gifting Name yourself the beneficiary of 529 account

No gift with contributions Change beneficiary in later year

Gift occurs in year beneficiary is changed to lower-generation family member

Qualified for that years annual exclusion

5-year Election Applies to contributions totaling $14,001 to $70,000 in a

year ratably over five years

Elect on Form 709 Separately for spouses splitting gifts

Throwback for donor dying in year 1 through 4 Throwback does not include earnings

Using 5-Year Election

No partial election No spread on excess over $70,000 Joe Hurleys Year-End Power Funding

Wait until January to make the 5-year amount ($70K) Contribute $14,000 before end of the prior year Result is $84K into 529 by January of next year

Multiple 5-Year Elections Year 1 Year 2 Year 3 Total

Contribution $30,000 $25,000 $15,000 $70,000

Year 1 gift 6,000 6,000

Year 2 gift 6,000 5,000 11,000

Year 3 gift 6,000 5,000 3,000 14,000

Year 4 gift 6,000 5,000 3,000 14,000

Year 5 gift 6,000 5,000

Year 6 gift 5,000 3,000 8,000

Year 7 gift 3,000 3,000

3,000 14,000

Beneficiary Changes

Same generation = no gift Drop down generation = deemed gift

Former beneficiary to new beneficiary Five-year election available

Drop down 2 generations = GST In 2008 IRS proposed that gift be from account owner, not

former beneficiary

Successor Owner

Named successor assumes all rights Consider naming a trust

Ensures that wishes are carried out Failure to name consenting successor

Default to program rules or state law E.g. beneficiary becomes successor, if not a minor

Changing 529 Account Owner

Not all 529s permit a change No gift, estate or income tax impact, if not abusive Likely to be deemed abusive if change is followed by a

NON-qualified withdrawal

Should Grandparent Be the 529 Owner?

Alternative: Make a third party contribution to another persons (e.g., parent) 529 account (if permitted by the Plan)

Currently no difference in tax treatment But IRS proposal (2008) would have imposed tax on 100% of

any NQ distribution received by account owner1

1. Advance Notice of Proposed Rulemaking, 73 Fed. Reg. 3441 (Jan. 18, 2008).

Grandparent Considerations

1. Control and decision making2. Right to revoke3. Financial aid treatment4. Medicaid inclusion5. Creditors and divorce6. Coordinating withdrawals

Placing 529 Within a Trust Tax savings

Compressed tax brackets in trusts

Continuing 529 account management Donors death, disability or incompetence

Attorney and accountant involvement Prudent investor rules Fiduciary income tax rules GST tax issues

Cautions: financial aid, state income tax, penalty on funds withdrawn to pay trustee fees

10% Penalty Tax Exceptions

Made to the estate of the beneficiary

James W.C. Canup Hirschler Fleischer, PC

2100 E. Cary StreetRichmond, VA 23219-4058

T (804) 771.9518 F (804) 644.0957 [email protected]

September 12, 2016

Presented By

Andrea Feirstein, Managing Director, AKF Consulting Group

2

Todays Discussion Administration and Governance Disclosure

Advertising

Social Media

Questions and Answers

Appendix

3

Section 1.

Administration and Governance

Administration of 529 Plans

States, agencies or instrumentalities establish and maintain 529 plans

State legislation authorizes each States 529 plan

Models vary by the organization responsible for maintaining each plan:

4

Governance Management*

Education Authorities or Departments

Independent Authorities

Treasurers as Sole Trustee

Treasurer-run Boards

Third-party Managed

State Managed

12 13 10 14 84 7

*College Savings Plans only

Governance of 529 Plans

Boards and Trustees act as fiduciaries:

Exercise discretion or control over audits, investments and policies

related to account matters

Fundamentally, fiduciary duty is based upon:

Common law

State statutes

Internal Revenue Service overlay

By analogy, ERISA and 40 Act may also provide guidance

5

Common Law Fiduciary Duties Care

Act in good faith, in the best interest of the entity

Standard: ordinarily prudent person acting under similar circumstances

Loyalty

Put entitys interests ahead of personal interests

Act solely for the benefit of participants and beneficiaries

Obedience

Follow governing documents and the entitys mission

Comply with the law

Seek professional assistance where necessary

6

Internal Revenue Service Expectations

Exercise due diligence

Have accountability for actions

Meet standards for transparency and disclosure

Establish financial controls

Act independently

7

Federal Guidance on Fiduciaries ERISA:

Fiduciary status is based on the functions performed for the plan, not

just a persons title.

Fiduciaries are held to a prudent expert standard

Includes Trustee, investment advisers, municipal advisors and

any individuals exercising discretion in plan administration

Excludes attorneys, accountants and actuaries

40 Act Examples of Duties of Investment Company Directors:

Approve time of NAV calculations and procedures for valuation of

securities

Approve trading practices and procedures

Approve investment objectives and policies

Monitor credit quality and valuation of funds

8

9

CSPN on Governance and Plan Maintenance

Adopted in May 2010 in response to SEC and Morningstar concerns

about 529 plan oversight by State Administrators

Intended for State Administrators, not regulated entities

Guidance as adopted acknowledges that State structures all differ

Intent is to provide a framework for operating standards that:

Complement each plans enabling legislation

Provide transparency of performance

Facilitate oversight and monitoring

10

CSPN Guidance for Governance, contd

Matters State Administrators should consider in the operation of 529

plans

Structure and procedures should be appropriate to the size of the

Administrator

Governance should assure adequate oversight of operations

Procedures should assure compliance with legal and regulatory

requirements and oversee accounting and financial reporting

Structure should provide investment oversight

Demonstrating Good Governance

11

Selection of Program and Investment Managers

Open and fair solicitations

Selections should reflect weighted criteria that bidders understand

If sole source procurement, basis for closed process should be clear

Establishment of Performance Benchmarks

Administration and operations

Marketing costs and results

Investment policies and performance targets

Demonstrating Good Governance, contd

12

Investment Policy Statements

Establish roles, responsibilities and processes for fund selection and

investment option design

Detail monitoring procedures

Ramifications for underperformance should be clear

On-going Reviews

Monthly investment results from Investment Manager

Quarterly reports from Program Manager and Investment Manager

Independent quarterly review by an investment consultant or independent

advisor

13

Section 2.

Disclosure

14

Disclosure Overriding Fundamental

Content is always subject to anti-fraud prohibitions of securities laws

It is unlawful to make any untrue statement of a material fact or to

omit to state a material fact necessary in order to make the

statements made, in light of the circumstances under which they

were made, not misleading

Interpretation: You cannot lie about a material fact and you cant fail

to state a material fact IF that material fact would make the statement

not misleading In other words, if that material fact would have

caused the investor not to be misled

When is a fact material? Think like an investor.

15

Disclosure Best Practices No Set Standards Per Se

CSPN Guidelines are voluntary

Documents must be provided to investors, although they can opt for

electronic delivery of supplements and other communications

Access DOES NOT equal delivery (yet)

Direct-sold and State-managed 529 Plans

Determine extent to which applicable Rules and regulations provide

guidance

MSRB Rules apply to underwriters and primary distributors

Best practice would suggest submission of disclosure documents to

EMMA, along with 15c2-12 updates

16

MSRB on Disclosure

G-17 Content Requirements

Notice 2006-07 reiterates anti-fraud prohibition and the duty to deal

fairly

Out-of-state disclosure obligation

Home state tax treatment

State benefits are one of appropriately weighted factors

Contact home state or own advisors

Disclosure must appear in the document in a manner that is

reasonably likely to be noted by the investor

Dealers are responsible for determining sufficiency of information

provided

17

MSRB on Disclosure, contd

G-19 Suitability Requirements (Notices 2006-07 and 2009-42)

Applies to advisor plans

Recommendation is suitable based upon information available from

the issuer and the facts disclosed by or otherwise known about the

customer

Financial status, tax status and financial objectives

Information about the beneficiary

G-32 Delivery Requirements

Primary dealers must deliver offering documents to customers by

settlement and to EMMA within one business day of receipt

Access-equals-delivery does not apply to 529 offering documents

18

CSPN Disclosure Principles

2004 response to SEC and Congressional concerns about uniformity and

consistency of 529 disclosure

Adopted in 2004 and supplemented:

July 2005 to address SEC indications of concern (3B)

December 2008 to include anti-abuse tax avoidance language (3L)

December 2009 to encourage periodic reassessment of investments

(3H) and consistency of format (4)

May 2011 to establish performance reporting standards (3G)

DP6 under consideration ABLE-related matters

CSPN Disclosure Principles, contd Frequency of Updates (Section 2)

Summary of Key Features (Section 3B)

Prominent Statements (Section 3C)

Federal and State Tax Considerations (Sections 3D and 3E)

Fees and Expenses (Section 3F)

Performance (Section 3G)

Investment Options and Risks (Section 3H)

Principal Risk Factors of Plan (Section 3I)

Material Terms of Governance (Section 3J)

Contact Information (Section 3K)

Tax Advice (Section 3L)

Consistent Format (Section 4)

Exhibits A to C: Fee Charts and Performance Charts

19

20

CSPN Disclosure Principles Detailed

Frequency of Updates (Section 2)

Annually for at least performance

As needed for material changes

Note interplay with Rule 15c2-12

Summary of Key Features (Section 3B)

Investment options

Federal and State tax benefits

Participation limits, if any

Risk factors

Locator table with topics and pages

21

CSPN Disclosure Principles, contd Prominent Statements (Section 3C)

Any guarantees or lack of guarantees by State entities or otherwise

State tax treatment available only to State residents

Bold statement that other states may offer benefits to their taxpayers

that are not available with this plan

Consider tax or other benefits before making investment decision

Other 529 plans offered by this State issuer or another State entity

Those plans are not described in this material

There may be different investment options, benefits and fees

address the availability of Offering Materials describing such other

Plans.

22

CSPN Disclosure Principles, contd

Federal Tax Considerations (Section 3D)

Describe tax matters relevant to savings plans

Contributions and investment gains

Qualified and non-qualified distributions

Estate, gift and generation skipping transfer taxes

Material expiration dates, if any

State Tax Considerations (Section 3E)

Describe tax matters relevant to savings plans

Contributions and investment gains

Qualified and non-qualified distributions

Different tax treatment of residents and non-residents

23


Fees and Expenses (Section 3F)

Clear and concise description of initial and on-going fees

Who receives the fees and whether they are subject to change

How fees are determined (assets or fixed)

Specific fee tables are provided

Performance (Section 3G)

Conforming to requirements applicable to underlying investments

1-, 5- and 10-year results (or for life if shorter) net of all applicable fees

Past performance is not necessarily indicative of future results

Specific performance tables are provided

Increasingly important in light of MSRB Rule G-45

24

CSPN Disclosure Principles, contd Investment Options and Risks (Section 3H)

Discussion of associated risks, including loss of principal

State issuers right to change options or managers

A statement that account owners should periodically assess their

investment choices

and if appropriate, adjust their investment choices with their time

horizon, risk tolerance and investment objectives in mind.

Principal Risk Factors of Plan (Section 3I)

Investment losses

Federal or state tax law changes

Changes in fees

Adverse effect on financial aid or other benefit eligibility

25


Material Terms of Governance (Section 3J)

State issuer and relationship to the State

Identify trustee and custodian, if applicable

Whether any state fees will be used for non-Savings Plan purposes

Contact Information (Section 3K)

Include web addresses

26


Anti-Abuse and Tax Advice (Section 3L)

In a prominent location, a statement to the effect that programs are only

to be used for qualified higher education expenses

Not to be used to evade federal or state taxes or tax penalties

Taxpayers should seek tax advice from an independent tax advisor

are intended to be used only to save for qualified higher education

expenses. These Programs are not intended to be used, nor should

they be used, by any taxpayer for the purpose of evading federal or

state taxes or tax penalties. Taxpayers may wish to seek tax advice

from an independent tax advisor based on their own particular

circumstances.

27


Consistent Format (Section 4)

Distribution on-line, hard copy, or through other electronic means

If information is distributed in multiple formats, all materials must be

consistent at all times

Message: update everything at the same time!

Exhibit A Fee Charts

Exhibit B Performance Charts for Direct Plans

Exhibit C Performance Charts for Advisor Plans

28

Section 3.

Advertising

29

Advertising Best Practices Almost without exception, basic disclosures should be considered, e.g.:

Consider investment objectives, risks, charges and expenses, before

investing

Read the offering document

Unless an advertisements reach can absolutely be limited to an in-state

audience, home state language should be considered, e.g.:

Investors should consider whether their or the beneficiarys state

offers particular benefits

Performance information always requires a not-a predictor-of-future-

results clause

30

Advertising Best Practices, contd If guaranteed products are included, the limits or extent of the guarantees

must be clear, e.g.:

FDIC guarantees a bank savings option but no other options are

guaranteed

Disclosure type face must be as prominent as the text of the advertisement

In media advertisements, disclosure should be given the same emphasis as

that used in the advertisement, e.g.:

If the advertisement delivers the message visually, then the disclosure

language can be superimposed

If the message is delivered orally, then the disclosure needs to be heard

as well

31

MSRB Rule G-21: Product Advertisements

Concerns one or more specific securities or issues of securities or the

issuers or features of municipal securities:

The State X Savings Plan a tax advantaged way to save

Basic disclosures:

Consider investment objectives, risks, charges and expenses before

investing

More information is available in offering document

If the advertisement identifies a source from which to obtain the

offering document, and the dealer publishing the ad is the

underwriter, then the dealer must be identified

Offering document should be read carefully

32

MSRB Rule G-21: Identified Products

Refers by name to any municipal fund security, the issuer or the state or

governmental entity that sponsors the securities

The State X Plan, administered by State X Board includes the

Age-Based Portfolio

Additional disclosures:

Source from which to obtain an offering document

Investor should consider whether his or beneficiarys home state

plan offers any state tax or other benefits

This is not required IF advertisement is likely to be seen only in-

state

No guarantees (re money market options) or guarantees (FDIC-

insured options), as applicable

33

MSRB Rule G-21: Performance and Professional

Performance Information - Additional Disclosures:

Past performance does not guarantee future results

Investment return and the value of the investment will fluctuate so

that shares may be worth less at redemption than the original cost

Toll-free number for current total return information

Sales load information

Professional Advertisements No Requirements

Refers to broad categories of securities for which the dealer provides

services

Contact BD XYZ, your complete college savings advisor

If no references to specific 529 securities, then not subject to

required disclosures

34

MSRB Rule G-21: Disclosure Format

Print Advertisements

Type face must be same size as but a different style from and as

prominent as the disclosures type face

Must be in close proximity to disclosures if performance-related

Sales load information related to performance must be in a

prominent text box containing only that Information

Electronic Advertisements

Statements must draw investors attention to them

Disclosures must be given equal emphasis to that used in the

advertisement (visual versus oral)

35

G-21 Exceptions

Generic Advertisements (State X Plan, logo and dealer)

No references to specific investment options or portfolios

Identifies the dealer sponsoring the ad

Provides explanatory information about 529s

If the dealer is the underwriter, it must be disclosed

Blind Advertisements (State X Plan and logo)

Does not identify the dealer or any affiliate of the dealer

Includes the issuers name

Contact information for the issuer or its agent but if the agent is the

underwriter, then no orders can be initiated by the agent when the

customer calls

36

G-21 Exceptions, contd

Blind Advertisements, contd

Logo or graphic design of the municipal fund security as long as it

does not identify the dealer

Service mark or trademark of the issuers general objectives that

does not create a call to invest in the municipal fund securities

Form Letters to Existing Customers

Form letters distributed solely to the dealers existing customers to

whom the dealer has already sent an offering document

37

G-21 Interpretation, June 2007

Time-Limited Broadcasts

Context is important in determining if information is effectively

conveyed

Disclosures should be provided in a manner that appropriately

balances the message and the disclosure

Source and contact information can be visual while other disclosure

is oral

Blind Advertisements

If the dealer is the contact source, no orders can be initiated by the

dealer need a distinct barrier

Dealer cannot be identified in the ad phone or website must be

generic reference

FINRA on Advertising Content Standards:

Communications must be fair and balanced

Advertisement must provide a basis for evaluating the facts regarding

any security or service

Advertisements must not omit material information

False, exaggerated, unwarranted, promissory or misleading

statements are prohibited

Content is viewed for clarity and context

Involvement in Enforcement:

FINRA enforces MSRB Rule G-21

Also enforces applicable SEC and SIPC rules (anti-fraud standards

apply)

38

FINRA on 529 Advertising, contd

Past Concerns with 529 Communications:

Not including required basic disclosures

Format of disclosure for print ads and electronic communications

Lack of market risk disclosure

Promissory claims regarding 529 plan success

Lack of disclosure of home state tax benefits where applicable

39

Foreign Language Advertising

MSRB has not issued Rules or guidance for 529 materials:

SEC previously addressed foreign language materials for mutual

funds (e.g., sales literature leads to foreign language disclosures)

Mutual fund rules generally do not apply to 529s

Mutual fund rules might apply to 529 advertisements if materials include:

Objectives of underlying funds

Underlying fund performance

Fees and expenses of underlying funds

Benefits or risks of investing in underlying funds

40

Foreign Language Advertising, contd

Determining whether an advertisement then requires foreign language

disclosure:

Would the advertisement require delivery of a prospectus?

Would the advertisement in context be misleading without further

foreign language disclosure?

Other considerations for regulated entities:

Are all parties dealt with fairly in accordance with G-17?

Would investment satisfy suitability standards under G-19?

Do the foreign language materials comply with G-21?

Have materials been reviewed in accordance with G-27?

41

42

Section 4.

Social Media

43

Social Media Initiatives FINRA

Interpretive Letter on Hyperlinks (November 11, 1997)

Guidance on Blogs and Social Networking Websites Notice 10-06

(January 2010)

Social Media Websites Notice 11-39 (August 2011)

Spot Check of Social Media Communications (June 2013)

Social Media Sweep of 23 broker dealers (2014)

SEC

Natl Examination Risk Alert on Investment Advisor Use of Social

Media (January 2012)

IM Guidance on Testimonial Rule and Social Media (March 2014)

Federal Financial Institutions Examination Council

Social Media: Consumer Compliance Risk Management Guidance

(December 2013)

44

Social Media Initiatives, contd

Overall Goals:

To protect investors from false or misleading claims

Ensure effective and appropriate supervision of associated persons

Generally, rules only apply if content constitutes business communication

FINRA seems more likely to begin or enforce actions now:

October 2014 securities analyst fined for tweets about securities

without disclosing ownership of them

Outcome of 2014 social media sweep:

Reps claimed more knowledge than they had

Recordkeeping was insufficient

45

Types of Social Media Communications as per FINRA

Static

Treated as advertisements under Rule 2210

Blogs or comments that do not change

Registered principal must review and approve in advance of

publication

Interactive

Treated as public appearances under Rule 2210

Electronic forum or chat rooms, on-line seminars

Firms may adopt risk-based supervisory procedures; post-use

review

Must be sure that interactive communication does not violate SEC or

FINRA (and thus MSRB) rules

46

Issues in Social Media Communications

Recordkeeping: Retention policies

Supervision: Principal sign-off

Suitability: Is there an inherent recommendation?

Links to Third Party Sites: Adoption and entanglement

Data Feeds: Confidence in accuracy

47

Social Media Issues

Recordkeeping

Content is determinative (business as such)

3 years

Supervision

If the communication is for business, then the associated person

must be supervised

A registered principal must review prior to use any social media site

that an associated person will use for a business purpose

48

Social Media Issues, contd

Suitability

If communication = a recommendation, broker dealer must

determine the suitability for every investor

Prohibit any links to recommendations unless approved in advance

by a principal

Links to Third Party Sites

Firm is responsible for third party content if it has adopted it or

become entangled with it (it has endorsed the content or worked on

its development)

Disclaimers about the third party posts would be a factor in

determining whether the firm adopted or became entangled with a

posting

49

Social Media Issues, contd

Data Feeds

Firms must have procedures to manage accuracy of data feeds into

their websites

Statistical data is an advertisement and is subject to approval and

recordkeeping requirements

Templates established for data presentation are subject to approval

but data fed into the templates is not subject to recordkeeping

Firm must be able to verify that data is accurate and timely

Must also be able to correct inaccurate data when posted or

over time

50

Social Media Suggested Best Practices

Set policies for use of social media ensuring compliance with regulatory

requirements and reporting to senior management

Establish and implement strict recordkeeping standards for all social

media channels

Supervise all employees business posts and third party posts

Educate and provide ongoing training for all employees

Implement on-going audits for compliance with policies

51

Questions and Answers

Andrea Feirstein, Managing Director

AKF Consulting Group

757 Third Avenue, 12th Floor (AIM)

New York, NY 10017

[email protected]

646-218-9864 office

212-595-1492 fax

917-865-2169 cell

mailto:[email protected]

Appendix

52

53

529 Industry Websites

MSRB Electronic Municipal Market Access System (EMMA)

Primary distributors must file offering documents

Includes direct- and advisor-sold plans available through dealers

As a best practice, issuers of State-managed plans should submit

disclosure documents, too

emma.msrb.org

Emma.msrb.org

54

529 Industry Websites, contd

College Savings Plans Network (CSPN)

Managed by CSPN, an affiliated network of the National Association

of State Treasurers

Provides free access to plan information, feature comparisons and

some performance data

Supported by member dues (states and private sector entities)

collegesavings.org

55


College Savings Foundation

Managed by an industry association that includes program

managers, investment managers, and state administrators

Website provides access to Strategic Insight industry research and

data

Supported by membership dues and contributions

collegesavingsfoundation.org

56


Saving For College

Privately-managed, commercial website for college savings

information

Premium subscription provides access to extensive information about

every 529 plan offered, including investment options and fees

Supported by subscriptions, ad revenues and other fees

savingforcollege.com

57

Additional Sources for 529 Guidance

SEC Investor Publications An Introduction to 529s

sec.gov/investor/pubs/intro529.htm

FINRA Investor Information College Savings Center

finra.org/investor_Information/Smart/529/000100.asp

MSRB -- Municipal Fund Securities

msrb.org/MSRB1/mfs/default.asp

Investment Company Institute A Guide to Understanding 529 Plans

ici.org/statements/inv/bro_529_plans.html

Lifecycle of Planning, Saving, and Paying for College

Key Messages

Overview of the college savings landscape

Lifecycle of planning, saving, and paying for college

College savings and federal financial aid A comprehensive approach to paying for college Resources

National College Savings Landscape

66% of families currently have a plan in place to reach their college savings goals

73% are saving monthly, putting aside a median amount of $250

41% of parents report opening a 529 plan account

Among parents who graduated with student loan debt, 42% are still paying it off

Source: 10th Annual MEFA and Fidelity Investments College Savings Indicator Study, August 2016

The Importance of 529 Plans

A 529 Plan is a tax-advantaged education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the

Internal Revenue Code, which created these types of savings plans in 1996.

The Significance of 529 Plans

With current and next generation savers amassing over $266 billion in their college savings plans, and past savers funding over $110 billion toward higher education over the last 15 years, 529 plans have already enabled families to save over $376 billion toward the cost of college. 529 plans remain the one financial vehicle enabling families to save with tax-exempt earnings.

Over 15 years, 12.9 million 529 accounts with parents, grandparents, and friends contributing to these accounts

5.4 million 529 college savings plans have made distributions Assets in 529 college savings plans have grown 214 percent in the past 10 years

Source: Strategic Insight

Growth of Assets in 529 Plans

As of June 2016, the average size of a 529 plan was $17,949Source: Strategic Insight 529 Data Update Quarterly 2Q 2016

Lifecycle of Planning, Saving, and Paying for College

The Rising Cost of College

Myths About Saving for College

Saving for college means no financial aid.

Its not worth saving for college if I cant savethe entire cost.

The TRUTH: Income is the biggest factor in determining financial aid eligibility, not savings. Your savings will help you when it comes time to pay for college.

The TRUTH: Every little bit saved toward college will help. Even saving a small amount over time can add up and help cover costs such as books.

135

Financial Aid BreakdownUndergraduate Student Aid 2014-15 ($183.9 Billion)

FederalStudent Loans34%

Federal Work-Study

Federal Financial Aid Process

Basic philosophy The family has the primary responsibility to pay for college

(philosophical foundation) Federal and state governments and colleges step in to provide

assistance to offset those college costs

The formula and process A standardized formula is applied to all applicants seeking federal

financial assistance

The treatment of college savings-Up to 5.6% of parent assets are assessed in the process of financial aid awarding

The FAFSA and Other Financial Aid ApplicationsFree Application for Federal Student Aid (FAFSA)

Required by all colleges for federal and state aid Open Oct. 1: FAFSA.gov Sign with an FSA ID: FSAID.ed.gov IRS Data Retrieval Tool to pull in tax data Requires data from all parents who live together,

married or notCSS/Financial Aid PROFILE

Some colleges require for institutional aid $25 for 1st school, $16 for each additional Online application required: CollegeBoard.org Noncustodial Parent PROFILE required when

applicableCollege Financial Aid Application

Required by some colleges Usually part of the admissions packet

Dont wait until youre accepted to

apply!

Must be completed every year!

Expected Family Contribution (EFC) example

Source: ifap.ed.gov/efcguideThe EFC formula above is used within federal methodology.

$$ $ $+ + + = $EFCParental assetsParental income

0% to 47% ofadjusted grossincome minusall taxes andallowances

Student income

50% over $6,420

Student assets

20% of all assets

3% to 5.6% of nonretirementassets

529 College Savings Plans

Brokerage and/ormutual funds

Coverdell Education SavingsAccounts

Prepaid Tuition Programs

UGMA/UTMAaccounts

Other savings

Financial Aid Formula

Cost of Attendance (COA) - Expected Family Contribution (EFC)

= Financial Aid Eligibility

Colleges fill in Financial Aid Eligibility with financial aid from all sources

Luis wants to go to a four-year public school to study business. The full annual cost of the school is $22,500.

Luis Financial Aid AwardGrants & Scholarships $13,000

Federal Work-Study $2,000

Federal Loan $5,500

Total Aid $20,500

Luis family will need to pay $2,000 out of pocket for his first year of school.

Lets Look at an Example

141

Katie wants to go to a four-year private school to study nursing. The full annual cost of the school is $60,000.

Katies Financial Aid AwardGrants & Scholarships $30,000

Federal Work-Study $2,000

Federal Loan $5,500

Total Aid: $37,500

Katies family will need to pay $22,500 out of pocket for her first year of school.

Another Example

142

Paying College Costs Over Time

Families that maximize college savings during the 18 years prior to enrollment will effectively lower their overall cost of education by reducing the amount of education loan indebtedness

MEFAs Approach

Most cant save it all, and no one should borrow it all, but we can all work to provide the information to empower families to achieve the

college dream.

Helpful Resources

Net price calculators on college websites

Federal Student Aid website, StudentAid.gov, for student loan repayment information & calculators

MEFA.org email, social media, blogs:Sign up and follow to stay up to date on information on planning, saving, and paying for college

Contact information

Martha SaveryDirector of Public Affairs, MEFA

[email protected]

mailto:[email protected]://www.mefa.org/

Fundamentals of College Savings Plan Operations

George Betzios & Kaprel Ozsolak

Components of College

Savings Operations

Accounting

Administration

Custody

Record-keeping

149

AccountingRecord all investment related activityInvestment purchases and salesInterest and dividend accrualsDiscount and premium amortization (if applicable)Calculation of gains/losses upon sales

Record plan expensesAccrue plan expensesProcess expense payments

Record all participant capital activityMaintain plans capital accountsRecord participant contributions and withdrawals

150

Accounting (contd)Calculation of daily Net Asset Value (NAV) per shareMark-to-market of assets and liabilities, primarily the investment portfolioDaily calculation of unit values

Key operational controlsTrade and position reconciliation with the investment adviser/middle officeCustody to accounting reconciliation of cash and securitiesReconciliation of receivables/payables to third partiesReconciliation of participant activity and share balances to the transfer agent

ReportingGenerate key accounting reports such as trial balances, general ledgers, transaction journals, NAV calculation reports

151

Administration

Annual and semi-annual financial statements, as applicable Assist with Program description statement/documents Provide data for marketing and other collateral Regulatory filings Analyze and monitor plan expenses Set accruals Process bill payments Calculate and report plan performance

152

Custody

Hold custody of investment securities as well as cash balances Collect dividends and interest on investments Reflect corporate actions within custody records (mergers, splits, stock dividends) Fund participant withdrawals

153

Participant Record-keepingWhat is a Transfer Agent?

A transfer agent is a trust company, bank or similar financial institution assigned to maintain records of investor information and account balances, paying distributions, sending confirmation statements, and issuing and redeeming shares.

A transfer agent is typically registered with either the Securities and Exchange Commission (SEC), Federal Reserve Board (FRB) or the Office of the Comptroller of the Currency (OCC). The type of entity determines with whom the transfer agent is registered. Non Bank entities are registered with the SEC while Banks and Trust companies will register with the FRB or the OCC based on their characteristics and charters. A state member bank of the Federal Reserve System will register with the FRB and a national bank or a bank operating under the District of Columbia Code of Law will register with the OCC.

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Transfer Agent

Interactions

Custodian: Daily settlement of portfolio units

Accounting: Daily NAVs, unit and service fee reconciliation.

NSCC: Automated trading and settlement with brokerage firms

Account owners / advisors: Account openings, maintenance, inquiries and transaction processing

State regulators: State specific reporting (escheatment, etc.)

IRS: Federal tax reporting

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Transfer Agency Core FunctionsInfrastructure

Record-keeping platform

Telephone/VRU Web portal access Technology support Mail room services Document

Management Print/Mail services

Client Servicing

Account inquiries Account set up Account

maintenance Research Correspondence Trade processing Process fulfillment

requests

Transaction Processing

Receive & review documents from Imaging/Document Management for legal compliance

Account set up Account maintenances Transaction Processing

Dealer Servicing

NSCC support Advisor inquiries Commissions

support Gain/Loss tracking

& invoicing for as-of transactions

Oversee Omnibus Sub-accounting conversions

Financial Control

Provides accounting with daily net availability

Performs daily settlement

Reconcile daily Demand Deposit Accounts (DDA) Researches all DDA discrepancies

Receive/disburse funds (checks and wires)

Tax & Compliance

Comply with SEC regulations

Comply with IRS requirements

Comply with state laws (escheatment. blue sky, etc..)

1099Q Reporting

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National Securities Clearing CorporationNSCC is a subsidiary of the Depository Trust & Clearing Corporation (DTCC) that provides centralized clearing, risk management, information and settlement services to the fund industry. As a result of rapid growth in the mutual fund industry in the early 80s many challenges had to be overcome. The mutual fund industry was overwhelmed with increases in processing times, errors, extended operating hours and costs. The ICI and the National Association of Securities Dealers (NASD) formed a joint task force to solve these problems. NSCC was selected to develop an industry standard platform for automating many of the mutual fund back office functions.

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NSCC - Fund/SERV In 1986 Fund/SERV was launched automating the trade processing life cycle It became the Industry standard for processing and settling pooled investment

product transactions between fund companies and brokerage firms

Order Submission

Confirmation

Registration

Mutual FundBrokerage

Firm

Order Submission

Confirmation

Settlement

Registration

NSCC Fund/SERVSettlement

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NSCC - NetworkingNew account setup

Account maintenance

Account transfers

Year-end processing

CDSC share lot transfers

Activity reporting

Position reporting

Networking Functions During development of Fund/SERV a need was

identified for exchanging customer information between brokerage firms and fund companies resulting in the development of Networking in 1987

Networking became the industry standard for account reconciliation and dividend processing. Networking allows for all customer account level information to be exchanged and reconciled between fund companies and brokerage firms

Evolved to support many functions including 529 plans

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NSCC - Networking (Contd) - LevelsLevel 0Is used to identify underlying customer accounts that are held directly at a fund company. This level allows both the fund company and the brokerage firm to share information while the fund company maintains fiduciary responsibility for these accounts.

Level 3Brokerage firms maintain full customer account control, handling all orders, customer statements and reporting. The underlying customers have no direct privileges with the fund company.

Level 4The underlying customers have full account owner privileges directly with the fund or can manage transactions through a brokerage firm. The fund company handles all underlying customer communications and informs the brokerage firm of all customer account record changes.

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NSCC Omnibus Processing & Omni/SERVSince the late 1990s and early 2000s mutual funds have experienced a growing trend toward omnibus accounting, which means that brokerage firms have taken on more investor accounting functions. This was accomplished by leveraging the functionality of their brokerage systems to provide these services by consolidating client positions into a single omnibus account with the mutual fund. As a result, there was a need for greater transparency and reconciliation between mutual funds and brokerage firms which led to the development of NSCCs Omni/SERV.

Omni/SERV provides a streamlined communication platform for the transmission of Activity and Position files for accounts held in Omnibus, enabling participating trading partners to share sub-account information and creating transparency for Omnibus relationships.

Omnibus Activity File allows firms to transmit detailed trade and sub-accounting client activity Omnibus Position File allows firms to transmit sub-accounting client positions Omnibus 529 Aggregation File - streamlines the reporting process and allow program managers to monitor

and report cost-basis and earnings-to-date amounts, contribution limits and investment election changes

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Service Provider Oversight Overriding theme: Can delegate but cannot abdicate. Even if fully outsourced, the state agency that sponsors the plan has a fiduciary responsibility to

participants and an oversight role for all aspects of the plan including: Investment management Portfolio valuation Performance calculations Participant record-keeping Disclosure and collateral documents

Oversight must cover all third party entities, including other state agencies through which the plan sponsor may be receiving shared services.

It is highly recommended that the plan sponsor have a formal and documented vendor oversight plan. A successful oversight plan starts at the contract stage, and extends itself to service level agreements,

site visits, initial and ongoing due diligence, reliance on independent auditors reports on internal controls, and where necessary implementing compensating controls.

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Service Provider Oversight Selected Key Actions Initial and ongoing due diligence

Assess adequacy of staffing at the vendor Perform periodic site visits as part of ongoing due diligence plan Gain an understanding of compliance programs and culture at the service providers Receive and review business continuity plans for adequacy

Review of Service Organization Controls (SOC) reports. Assess user controls If necessary, design and perform testing of relevant controls

Identify potential risks at the service providers that are not mitigated Design and implement compensating controls to manage risk

Establish and communicate desired/acceptable minimum service levels Design and implement ongoing vendor oversight utilizing various tools, including:

review of standard and customized management reports as well as incident/exception reports periodic performance and management reporting meetings remediation of sub-par performance

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Oversight ToolkitIdentify Potential Risks

Incorrect Net Asset Value calculation Portfolio valuation Income (dividend & interest) and expense

(program fees) accruals Corporate actions (splits & mergers)

Incorrect portfolio investments transacted or settled. Incorrect performance calculations Inaccurate static data capture and maintenance Non-compliance with PDS guidelines/regulatory

requirements Incorrect trade processing and settlement Incorrect client communications (confirms, statements,

tax forms) Deteriorating client experience

Annual site visits Periodic in-person meetings Periodic scheduled calls Exceptions reports Metric

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