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.[1] 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."[2] 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.[3]
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.[4]
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,[5]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.[6]
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[7]:
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[8], 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)."[9] 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.[10]
Additionally, federal policymakers should consider pre-empting state rules by
uniformly excluding 529s from TANF and Medicaid.
Appendix: Sample
State Legislative
Language[11]
Arkansas Act 597 (2007)[12]: 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.
[1] 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
[2]
http://www.retirementsecurityproject.org/pubs/File/ResearchonAssetTestsandSavings.final.pdf
[3] O’Brien, Rourke (2008).
"Ineligible to Save? Asset Limits and the Saving Behavior of Welfare
Recipients." Journal of Community
Practice, 16(2), 183-199.
[4] For a more detailed
discussion of asset limits and specific recommendations for reform, see Advancing Mobility Through Savings.
2009. Pew Economic Mobility Project.
[5] Resource Guide: Lifting Asset
Limits in Public Benefit Programs. 2009. CFED.
http://scorecard.cfed.org/downloads/pdfs/resource_guides/rg_AssetLimits.pdf
[6] 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.
[7] ibid. http://scorecard.cfed.org/downloads/pdfs/resource_guides/rg_AssetLimits.pdf
[8] If applicant/recipient
of Medicaid assistance is designated beneficiary.
[9] A New Era of Responsibility: Renewing America’s
Promise (Washington DC: Office of Management and Budget,
Executive Office of the President, 2009), 18.
[10] 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.
[11] 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
[12] ftp://www.arkleg.state.ar.us/acts/2007/public/Act597.pdf
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