IRS Permits Investment Changes in Section 529 Plan Accounts

Washington, DC, September 7, 2001 - The Internal Revenue Service has issued Notice 2001-55, which sets forth a special rule under which a 529 program may permit investments in a 529 account to be changed annually and upon a change in the designated beneficiary of the account.

In addition, the notice invites comments on the matter described in the notice and any other comments relating to 529 plans, including amendments made in the Economic Growth and Tax Relief Reconciliation Act of 2001. Comments are due by December 24, 2001.

Notice 2001-55 provides that the IRS and the Treasury "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 notice provides that the final regulations under Code section 529 will provide that a program does not violate section 529(b)(5) (restricting investment direction in a 529 account) 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.

Furthermore, the notice states that the final regulations will provide that "to qualify under this special rule, a program must:

• allow participants to select only from among broad-based investment strategies designed exclusively by the program; and
• 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 notice provides that this guidance may be relied upon pending the issuance of final regulations under section 529.