The provisions described below are effective beginning in tax year 2002, EXCEPT that the exclusion from gross income for certain distributions from a qualified tuition program established and maintained by an entity other than a State is effective beginning in tax year 2004.

The new tax law expands the definition of a "qualified tuition program" to include certain prepaid tuition programs established and maintained by one or more eligible educational institutions (which may be private institutions) that satisfy the requirements under IRC Section 529. In the case of a qualified tuition program maintained by one or more private eligible educational institutions, persons are able to purchase tuition credits or certificates on behalf of a designated beneficiary, but would NOT be able to make contributions to a savings account plan.

The tax act modifies the definition of "qualified higher education expenses" to include expenses of a special needs beneficiary that are necessary in connection with his or her enrollment or attendance at the eligible education institution.

Under the new act, an exclusion from gross income is provided for distributions from qualified tuition programs to the extent that the distribution is used to pay for qualified higher education expenses.

The new tax law allows a taxpayer to claim a Hope Credit or Lifetime Learning Credit for a taxable year AND to exclude from gross income amounts distributed (both the principal and the earnings portions) from a qualified tuition program on behalf of the same student as long as the distribution is NOT used for the same expenses for which a credit was claimed.

The act also provides that a transfer of credits (or other amounts) from one qualified tuition program for the benefit of a designated beneficiary to another qualified tuition program for the benefit of the same beneficiary is NOT considered a distribution. This rollover treatment does NOT apply to more than one transfer within any 12-month period with respect to the same beneficiary.

The new law also eliminates the penalty on distributions NOT used for higher education expenses and instead applies the same additional tax that applies to education IRAs. The new law provides that assets of qualified tuition plans of private institutions must be held in trust.

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