n-01-55.pdf

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Exempt Organizations
Section 529 Programs

Notice 2001-55

This notice provides guidance to qualified tuition programs described in 529 of
the Internal Revenue Code and participants in 529 programs regarding the restriction
on investment direction described in 529(b)(5). This notice sets forth a special rule
under which a program may permit investments in a 529 account to be changed
annually and upon a change in the designated beneficiary of the account.

Section 529(b)(5) states that a program shall not be treated as a 529 program
unless it provides that any contributor to, or designated beneficiary under, such
program may not directly or indirectly direct the investment of any contributions to the
program (or any earnings thereon). The proposed regulations under 529, which were
published in the Federal Register on August 24, 1998 (63 F.R. 45019), provide that a
program does not violate this requirement if it permits a person who establishes a 529
account to select among different investment strategies designed exclusively by the
program, only at the time when the initial contribution is made establishing the account.
Prop. Treas. Reg. 1.529-2(g).

Several commenters on the proposed regulations suggested that permitting a
participant in a 529 program to select among various broad-based investment
strategies offered by a program, both at the time that contributions are made, and at
certain other times, would be consistent with 529(b)(5). For example, these
commenters suggested that it would be appropriate to allow a change in the investment

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strategy selected for an account where there has been a significant change in market
circumstances since the account was initially established, where there is a change in
the designated beneficiary of an account (as permitted under 529(c)(3)(C)) and the
new beneficiary has a different expected matriculation date, or where the program
establishes new investment options.

The Internal Revenue Service and the Treasury Department recognize that there
are a number of situations that might warrant a change in the investment strategy with
respect to a 529 account. Accordingly, the Internal Revenue Service and the
Treasury Department expect that the final regulations under 529 will provide that a
program does not violate 529(b)(5) if it permits a change in the investment strategy
selected for a 529 account once per calendar year and upon a change in the
designated beneficiary of the account. It is expected that the final regulations will also
provide that, to qualify under this special rule, a program must (1) allow participants to
select only from among broad-based investment strategies designed exclusively by the
program; and (2) establish procedures and maintain appropriate records to prevent a
change in investment options from occurring more frequently than once per calendar
year or upon a change in the designated beneficiary of the account. The Internal
Revenue Service and the Treasury Department believe that permitting a change in
investment options once per calendar year and upon a change in designated
beneficiary should provide sufficient flexibility to address concerns raised by
commenters.

Section 529 programs and their participants may rely on this notice pending the

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issuance of final regulations under 529.

The Internal Revenue Service invites comments on the matter described in this
notice and any other comments relating to 529, including the amendments made by
the Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. No. 107-16,
115 Stat. 38). Please send written comments by December 24, 2001, to: CC:ITA:RU
(Notice 2001-55), room 5226, Internal Revenue Service, POB 7604, Ben Franklin
Station, Washington DC 20044. Submission may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 5 p.m. to CC:ITA:RU (Notice 2001-55),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington
DC. Alternatively, taxpayers may submit comments electronically via the Internet by
selecting the Tax Regs option on the IRS Home Page, or by submitting comments
directly to the IRS Internet site at http://www.irs.gov/prod/tax regs/regslist.html.
Comments will be available for public inspection.

# DRAFTING INFORMATION

The principal author of this notice is Monice Rosenbaum of the office of Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further
information regarding this notice contact Ms. Rosenbaum at (202) 622-6070 (not a toll-
free number).