Nov. 10, 2009
529s are tax-advantaged accounts designed to help families save for post-secondary education. In recent years, state policymakers and 529 administrators have worked to expand access to 529 plans and increase the participation of lower-income families through outreach, advertising, and targeted incentives such as matching deposits and reducing or eliminating fees. Yet, as plan administrators and state and federal policymakers design new strategies for expanding the use of 529 plans to lower income families, they must also ensure that saving in 529s won't jeopardize a family's eligibility for vital public assistance such as TANF cash assistance or Medicaid. Families who proactively save for a child's or parent's post-secondary education should not be penalized with a reduction or loss of vital public benefits.
Asset limits present a real barrier to savings for both families currently receiving public assistance and low-income families who believe they may need to rely on assistance in the future. Most of the research and policy analysis detailing the effect of asset limits on economic behavior focuses on retirement. Before serving as Director of the Office of Management and Budget (OMB) for the Obama administration, Peter R. Orszag and colleagues at the Retirement Security Project noted that asset limits "represent perhaps the most substantial financial disincentive for many families to save in retirement accounts." The same financial disincentive to save applies to other long-term restricted savings products such as 529s. In addition, interviews with current TANF recipients reveal that these rules encourage families to avoid using formal financial institutions for fear that maintaining an account would make them ineligible for assistance. Given the emerging consensus that asset limits undermine saving, reforming these counterproductive rules is an important first step to encourage and empower low-income families to save for post-secondary education through 529 plans.
Below is a brief description of how "asset limits" govern eligibility for major public assistance programs as well as a detailed look at the specific treatment of 529 plans and opportunities for reform at the state and federal level.
What are asset limits?
To qualify for most public assistance programs-including cash assistance (TANF and SSI), food stamps (SNAP), or medical assistance (Medicaid/SCHIP) - families must demonstrate they are both income and asset poor. The limit placed on the amount of assets a family can own and still qualify for assistance is commonly known as an "asset limit" or "asset test." Asset limits vary across programs and can vary within programs as well, specifically in programs where states are authorized to set their own eligibility criteria (e.g. TANF, Medicaid). The asset limit in most major public assistance programs details specific rules for the treatment of all household assets in determining eligibility, including vehicles, "restricted" accounts such as retirement (401(k), 403(b), IRA) and education (529, Coverdell) savings accounts, and "unrestricted" assets including moneys in checking and savings and cash on hand.
529s and Asset Limits: A Detailed Look by Program
As asset limits vary across both programs and states, the treatment of 529 College Savings Plans is similarly varied:
Temporary Assistance for Needy Families (TANF): TANF, also known as welfare, provides cash assistance and work supports to very low-income families. TANF eligibility is set at the state level, so there is great variation in asset limits: many states restrict liquid assets to no more than $1,000 while two states-Virginia and Ohio-exclude all assets when determining eligibility. Whether moneys held in 529 College Savings Plans count toward the asset limit in TANF also varies by state.
Treatment of 529s: As of July 2009,fourteen states (and DC) have either eliminated the asset limit or explicitly excluded 529s when determining eligibility for assistance: Alabama, California, Colorado, Connecticut, District of Columbia, Kansas, Louisiana, Maryland, Michigan, Mississippi, Ohio, Pennsylvania, Texas, Virginia, West Virginia. While most of these states uniformly exclude 529 college savings plans, some states (notably Texas and Louisiana) only explicitly exclude moneys held in their own state's plan. Other states have more confusing rules: Wyoming only excludes higher education savings accounts if they are established from earnings of a dependent child under 18 who is a full-time high school student.
Supplemental Nutrition Assistance Program (SNAP): SNAP, formerly known as food stamps, provides additional resources for low-income families to buy basic groceries for home consumption. As a federal program, SNAP employs a nationwide asset limit on unrestricted assets of $2,000.
Treatment of 529s: As of the adoption of the Food, Conservation and Energy Act of 2008, also known as the 2008 Farm Bill, 529s are no longer counted in determining eligibility for SNAP. Saving in 529 college savings plans will therefore not jeopardize a family's eligibility for SNAP assistance.
Supplemental Security Income (SSI): SSI is designed to provide supplemental cash assistance to very low income elderly, blind, or disabled persons for the purpose of meeting basic expenses. Eligibility for SSI is set at the federal level and the asset limit on unrestricted assets is currently set at $2,000.
Treatment of 529s: Currently, any moneys held in 529 college savings plans count towards the program's asset limit of $2,000.
Medicaid (for parents): Medicaid provides public health insurance coverage for low to moderate income families. The program is funded by state and federal governments and states retain broad flexibility in determining eligibility. The asset limit used in determining a parent's eligibility for assistance therefore varies by state.
Treatment of 529s: As of July 2009: The following states have eliminated the asset test for parents: Alabama, Arizona, Colorado, Connecticut, Delaware, District of Columbia, Illinois, Kansas, Louisiana, Maryland, Massachusetts, Mississippi, Missouri, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, Virginia, Wisconsin, and Wyoming. The following states maintain an asset limit for parents but exclude 529 College Savings Plans: Georgia, Michigan, Oregon, and Texas.
Medicaid/CHIP (for children): Children who receive medical coverage through Medicaid or the state Children's Health Insurance Program are typically subject to less restrictive eligibility criteria than adults.
Treatment of 529s: Forty-Eight states and the District of Columbia have eliminated the asset test in determining eligibility for Medicaid/CHIP for children under 18. Only two states, Texas and Oregon, employ an asset limit in determining a child's eligibility for Medicaid/CHIP yet both states exclude 529 college savings plans. In no state will Moneys held in 529 college savings plans disqualify a child for Medicaid/CHIP.
Moving Forward: Excluding 529s from Asset Limits
The effort to reform asset limits is gaining momentum at both the state and federal levels. After more than a decade of reform activity at the state level, including increasing efforts to proactively exclude 529 college savings plans, federal lawmakers are finally following suit. The successful effort to reform asset limits in SNAP (food stamp program) as part of the 2008 farm bill has increased awareness of the issue to congressional leaders on both sides of the aisle. And in early 2009 President Obama signaled his intention to work with congress to reform these rules given how they undermine other anti-poverty efforts including the EITC and Child Tax Credit (CTC), noting in the first budget of his administration: "The intersection of the new credits and outdated asset rules may disqualify new and current individuals and families from Federal benefits, including Medicaid and the Supplemental Nutrition Assistance Program (formerly Food Stamps)." As we encourage more low-income families to invest in post-secondary education by saving in 529 college savings plans, policymakers must ensure that prudence will not be penalized by reforming asset limits in public assistance programs. The specific steps both states and the federal government should take to address this savings barrier are described below:
State Options: States currently have the option to exclude 529 college savings plans when determining eligibility in both the TANF and Medicaid programs. This change can typically be made administratively but may require authorizing legislation, depending on the state. Excluding 529 plans can reduce the administrative burden and streamline the application process between TANF/Medicaid and SNAP which already excludes 529s.
Federal Options: At the Federal level, policymakers should exclude 529 college savings plans from the SSI program to encourage persons with disabilities to use these accounts to save for future training and education needs and ensure that grandparents who open a 529 plan for a grandchild are not denied assistance. Additionally, federal policymakers should consider pre-empting state rules by uniformly excluding 529s from TANF and Medicaid.
Appendix: Sample State Legislative Language
Arkansas Act 597 (2007): A Tax-Deferred Tuition Savings Program account shall be exempt for purposes of determining eligibility for Transitional Employment Assistance, Medicaid, and food stamps, provided that the federal rules for these programs permit such an exemption.
Colorado SB 134 (2006): [...] (6) The following resources and assets designated to promote self-sufficiency shall be exempt from the fifteen thousand dollar resource limitation specified in paragraph (b) of subsection (2) of this section:
(a) Retirement savings accounts;
(b) Health care savings accounts;
(c) Individual development accounts;
(d) Education savings accounts, scholarships, and educational stipends;
(e) Earned income tax credit refunds received by the assistance unit;
(f) Any real estate asset that does not produce or provide income for the participant and is not a secondary residence of the participant;
(g) Burial plots and burial insurance plans;
(h) Life or disability insurance policies that may have a cash value; and
(i) Any additional resource or asset that the state board exempts by rule.
California AB 2466 (2006): SECTION 1. Section 11155.6 is added to the Welfare and Institutions Code, to read: 11155.6. (a) (1) The principal and interest in a 401(k) plan, 403 (b) plan, IRA, 457 plan, 529 college savings plan, or Coverdell ESA, shall be excluded from as property when redetermining eligibility and the amount of assistance for recipients of CalWORKs benefits.
California AB 1078 (2007): Under existing law, principal and interest in designated federally created retirement or college savings plans held by existing CalWORKs recipients, but not new applicants, are excluded as property for purposes of redetermining eligibility and the amount of assistance. This bill would delete the maximum amount of savings and interest that a CalWORKs recipient would be permitted to retain. The bill would extend the provisions excluding from income the principal and interest in the designated federal savings plans to CalWORKs applicants. SEC. 3. Section 11155.6 of the Welfare and Institutions Code is amended to read: 11155.6. (a) [...] (2) The principal and interest in a 401(k) plan, 403(b) plan, IRA, 457 plan, 529 college savings plan, or Coverdell ESA, shall be excluded from consideration as property when redetermining eligibility and the amount of assistance for recipients of CalWORKs benefits. (b) For purposes of this section, the following terms have the following meanings: (5) "529 college savings plan" means a qualified tuition program that satisfies the requirements of Section 529 of the Internal Revenue Code. [...] (D) That a CalWORKs recipient who receives the federal EITC may invest these funds in an individual development account, 401(k) plan, 403(b) plan, IRA, 457 plan, 529 college savings plan, Coverdell ESA, or restricted account, and that investments in these accounts will not make the recipient ineligible for CalWORKs benefits or reduce the recipient's CalWORKs benefits.
 For a more detailed discussion of the potential of 529 plans to serve as a progressive savings vehicle, see: The Basics of Progressive 529s & Toward Progressive 529 Plans: Key Points
 O'Brien, Rourke (2008). "Ineligible to Save? Asset Limits and the Saving Behavior of Welfare Recipients." Journal of Community Practice, 16(2), 183-199.
 For a more detailed discussion of asset limits and specific recommendations for reform, see Advancing Mobility Through Savings. 2009. Pew Economic Mobility Project.
 Resource Guide: Lifting Asset Limits in Public Benefit Programs. 2009. CFED. http://scorecard.cfed.org/downloads/pdfs/resource_guides/rg_AssetLimits.pdf
 States do have some flexibility in setting eligibility criteria, including streamlining the treatment of vehicles across programs and using categorical eligibility to waive or amend income and resource limits for SNAP applicants who already receive cash assistance or a TANF funded benefit.
 ibid. http://scorecard.cfed.org/downloads/pdfs/resource_guides/rg_AssetLimits.pdf
 If applicant/recipient of Medicaid assistance is designated beneficiary.
 A New Era of Responsibility: Renewing America's Promise (Washington DC: Office of Management and Budget, Executive Office of the President, 2009), 18.
 Some confusion may arise over the treatment of 529 accounts in eligibility determinations where the applicant for assistance is deemed the "owner" and not the "beneficiary" of the account. Further, it is not always clear how programs consider 529 accounts where a child is the designated beneficiary but the "owner" is someone outside of the immediate family (an aunt, grandparent, or family friend). In excluding 529s from asset limits, policymakers and administrators should make efforts to ensure that all 529 accounts are excluded, regardless of whether a member of the family is designated owner or beneficiary.
 From, Pursuing 529 College Savings Plan Exclusion from Oklahoma Asset Limit Tests. 2008. Center for Social Development. http://csd.wustl.edu/Publications/Documents/529_Exclusion_from_OK_Asset_Tests.pdf