March 21, 2002
����������������������� Montana Board of Regents
FROM:������������� Rod Sundsted
����������������������� Associate Commissioner for Fiscal Affairs
SUBJECT:������� Explanation of Amendment Relating to Investment Direction � Montana Family Education Savings Program � Item 114-105-R0302
Section 529 of the Internal Revenue Code states that a program shall not be treated as a qualified tuition program unless it provides that a contributor to, or designated beneficiary under, the program may not directly or indirectly direct the investment of any contributions to the program or any earnings thereon.� In response to this provision, Board Policy #950.2, III(D)(3), states in pertinent part:
In accordance with 15-62-201(10), MCA, no contributor to, owner of, or designated beneficiary of an account may directly or indirectly direct the investment of any contributions to an account or any earnings thereon.� One or more types of accounts may be opened with respect to a designated beneficiary, but neither the account owner nor the designated beneficiary may move funds or direct that funds be moved from one type of account to another type. � A depository shall not permit an owner to move funds, once deposited, that in any way would result in investment direction under � section 529(b)(6) of the Code � .
In a notice issued in September 2001, the IRS indicated its intent to liberalize its interpretation of the rule prohibiting investment direction.� In Notice 2001-55, Internal Revenue Bulletin 2001-39, the IRS stated:
The Internal Revenue Service and the Treasury Department 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 Internal Revenue Service and the Treasury Department expect that the final regulations under �529 will provide that a program does not violate �529(b)(5) 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. It is expected that the final regulations will also provide that, to qualify under this special rule, a program must (1) allow participants to select only from among broad-based investment strategies designed exclusively by the program; and (2) 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 authorizes section 529 plans and their participants to rely on the notice until final regulations are issued.�
The notice permits section 529 plan participants to change investment strategies once per year, but this is now prohibited by the second sentence of Montana�s investment direction prohibition quoted above.� This amendment deletes the specific prohibition on moving funds or directing that funds be moved from one type of an account to another type.� This will enable plan participants to move funds to the extent permitted by the IRS�s interpretation of the no investment direction rule.� The last sentence of Montana�s no investment direction rule continues to prohibit movement of funds that in any way would result in investment direction prohibited by Federal tax law.