WASHINGTON, DC – Today, Congressman Jamie Raskin (MD-08), Senator Chris Van Hollen (D-MD), Congressman Dutch Ruppersberger (MD-02), Congressman John Sarbanes (MD-03) and Congressman David Trone (MD-06) sent a letter to the Internal Revenue Service (IRS) urging the agency to allow Maryland taxpayers with Prepaid College Trust accounts to execute additional rollovers during this calendar year without incurring a 10 percent penalty in order to alleviate adverse financial consequences caused by a previous system error in the accounts.
In early 2022, the independent state agency administering Maryland’s college savings plans discovered a significant system error affecting Prepaid College Trust (PCT) accounts. The state agency froze access to earnings on all 31,000 PCT accounts upon discovering the error, which prevented account holders from accessing their full account balances. Due to the unexpected freezes on account earnings that lasted for over a year, many Marylanders were unable to access or roll over their full account balances. Through no fault of their own, these individuals could now be subject to tax consequences for performing rollovers they were unable to make while access to earnings was frozen. Rep. Raskin decided to ask the IRS to provide penalty relief to PCT account holders after receiving outreach from families in Maryland’s Eighth District who were affected by the freeze.
“Like many states, Maryland offers a 529 Savings Plan to help families save and pay for their children’s college tuitions,” wrote the lawmakers. “Maryland also offers under Section 529 a prepaid college plan known as the Prepaid College Trust (PCT), which allows beneficiaries to lock in future in-state tuition rates when they open the account. In early 2022, Maryland 529, the state agency administering 529 plans, identified an accounting error in the PCT accounts. In order to safeguard trust assets, the state agency in its role as fiduciary froze access to account earnings in April of 2022. State data indicates that as many as 31,000 PCT accounts were affected.”
The lawmakers continued, “As you know, pursuant to 26 U.S.C. § 529(c)(3)(C)(iii), 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 IRS has previously provided penalty relief to taxpayers in extenuating circumstances. Following calls from bipartisan lawmakers urging the IRS to provide penalty relief amid pandemic-related processing backlogs, the IRS later announced that it would provide nearly 1.6 million taxpayers with penalty relief.
“This is a matter of basic fairness for thousands of our constituents,” said Rep. Raskin. “We hope the IRS can act.”