Federal lawmakers ask IRS to waive penalties for families in troubled college savings plan
Maryland families who had to make multiple withdrawals from tax-free college savings accounts shouldn’t face a tax penalty because of errors plaguing the now-discontinued state Prepaid College Trust program, federal lawmakers said Wednesday.
Access to the principal balance in more than 30,000 trust accounts was frozen for more than a year after the former Maryland 529 board discovered a widespread accounting error in early 2022.
Now families may need to make multiple rollovers to catch up with college expenses, which could lead to a 10% penalty the lawmakers want waived.
“Owners of 529 accounts may initiate a single 529 plan rollover per beneficiary within a 12-month period. Executing more than one rollover within this period would make the additional rollovers taxable and potentially subject to a 10% penalty. Due to unique and unexpected circumstances, many Marylanders have already executed a rollover but need an additional opportunity to roll over their 529 PCT accounts. We ask you to help alleviate this situation facing many of our constituents,” the lawmakers wrote in a letter to IRS Commissioner Daniel Werfel.
Signatories to the letter were Sen. Chris Van Hollen (D-Md.) and Reps. Jamie Raskin (D-8th), Dutch Ruppersberger (D-2nd), John Sarbanes (D-3rd) and David Trone (D-6th).
“This is a matter of basic fairness for thousands of our constituents,” Raskin said in a statement. “We hope the IRS can act.”
During the 2023 General Assembly session, lawmakers passed bills that abolished the Maryland 529 board that previously oversaw the state’s college savings program and transferred those responsibilities to the state treasurer’s office. The legislation also phased out the Prepaid College Trust Program.
Only College Investment Plans, which function similar to a 401k and were not affected by the accounting error, will be available in the future.
In his new role managing the Maryland 529 plans, Treasurer Dereck E. Davis (D) announced Wednesday that a claims portal for holders of Maryland Prepaid College Trust plans opened.
Account holders who had an open and existing account as of Nov. 1, 2021, are eligible to submit a claim. The deadline is Dec. 31.
The opening of the portal represents the third phase of a four-phase plan Davis announced when his office was tasked with taking over management of the college savings programs.
“Throughout this process, our office has prioritized the financial integrity and solvency of the trust for all account holders, and I am pleased to have reached this point in the process,” Davis said in a statement. “It is my hope that with each step we continue to restore faith and confidence in this worthy public program.”
Danielle E. Gaines
Contributor
Danielle Gaines worked for Maryland Matters from September 2018 to January 2024. She covered government and politics for Maryland Matters for two years before moving into an editing position, ultimately serving as editor-in-chief for nearly three years. Previously, she spent six years at The Frederick News-Post ― as the paper’s principal government and politics reporter for half that time, covering courts and legal affairs before that. She also reported for the now-defunct The Gazette of Politics and Business in Maryland and previously worked as a county government and education reporter at The Merced Sun-Star in California’s Central Valley.
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