CUNA Comment Letter

Reporting Requirements for Coverdell Education Savings Accounts

October 17, 2003

CC:PA:RU (Notice 2003-53)
Courier’s Desk
Internal Revenue Service
1111 Constitution Avenue, NW
Washington DC 20044

Dear Sir or Madam:

On behalf of the Credit Union National Association (CUNA), we are pleased to provide comments to the Service on Notice 2003-53, on the reporting requirements for Coverdell Education Savings Accounts (ESAs). By way of background, CUNA is a trade association representing more than 90% of our nation’s 10,000 state and federal credit unions.

Although the current transition rules in Notice 2003-53 help credit unions meet the reporting requirements, it is only a temporary fix. Coverdell ESA trustees, including credit unions, would need permanent changes to the reporting requirements to accurately and expeditiously comply.

The current instructions for Form 1099-Q require financial institutions, including credit unions, to compute and report the basis and earnings portions of Coverdell ESA distributions. In many cases credit unions do not have all of the necessary information to calculate the basis and earnings. This is because they have not been historically required to do so, or the Coverdell ESA was opened and maintained at another financial institution.

CUNA urges that the Service maintain current reporting requirements, where basis and earnings calculations are the responsibility of each ESA account holder. This is consistent with the Service earlier decision that IRA owners be required to keep tax basis information and is consistent with other rules for tax basis reporting. By changing the reporting requirements at this time, the Service is shifting the burden for keeping tax basis information from the account holder to the credit union.

If new reporting requirements are imposed, CUNA requests an effective date for the new requirements of at least one year after they are issued. This will give credit unions enough time to develop and implement their recordkeeping systems so that they can accurately keep track of the new information.

Calculating Basis Information

The new information reporting requirements imposed on Coverdell ESA trustees in some cases will make it difficult, if not impossible, to comply. Because the Education IRA reporting rules, consistent with the IRA reporting rules, did not require financial institutions, including credit unions, to keep tax basis information, credit unions did not track basis. Credit unions will not be able to reconstruct the data necessary to do basis and earnings reporting on existing accounts. This is because in many cases, credit unions do not have the historical data to calculate basis and earnings, or the Coverdell ESA was opened and previously funded at another financial institution, which also was not required to keep tax basis information.

Credit unions would not be able to calculate the earnings and basis without getting information from the accountholder. As mentioned earlier, credit unions have not previously collected earnings and basis information because they were not required to do so. Therefore, credit unions would have to manually collect historical information on their existing accounts and try to reconstruct the information. This would require collecting relevant transaction histories and analyzing the transactions to determine what portions of the contributions reflect basis and earnings. In most cases, credit unions would need to contact the accountholder to make that determination, and based on past experiences, accountholders often ignore requests for additional information.

Inaccurate Basis Information

If credit unions are required to provide basis information, they will not be able to guaranty the accuracy of the basis information. For existing accounts, credit unions do not maintain this information because they have not been required to do so. Therefore, credit unions will have to analyze all previous contributions to determine which portions, if any, includes earnings from a Coverdell ESA from another financial institution. Rollover or direct transfer accounts will not have accurate basis information if the distributing financial institution does not provide it. The distributing financial institution has never been responsible for collecting the basis information so it will not be able to provide accurate basis information either.

The Service has already addressed this problem by providing guidance to the financial institution that is receiving the funds. In Section 2 or Notice 2001-81, the Service stated that until the receiving financial institution receives the required basis information, it must treat the entire amount as earnings. Although CUNA appreciates the Service’s attempt to provide guidance, it clearly shows that the information provided will be an assumption and therefore may be incorrect. This will create more problems as taxpayers change the accuracy of the information being provided by the financial institution.

Minimal Benefits

CUNA understands the getting accurate income information is necessary to compute the taxable income from the payment. However, the basis information collected from the credit union would have minimal benefits because the information would have to be used with many other facts to determine if any portion of the Coverdell ESA distribution is taxable income. In many cases, the only entity that has all of the necessary facts is the account holder. Requiring the financial institution to provide the information even though it may be inaccurate will only lead to additional incorrect reporting and generate unnecessary inquiries on the Services’ part.

Additionally, most accountholders are never going to need basis information because it is only relevant when a distribution is not applied to a qualified educational expense. Most Coverdell ESA balances will not exceed the cost of a college education. If the beneficiary will not enroll in college, funds can be spent during high school or on another family member going to college.

Substantial Increase in Cost

The expense attributable to providing basis information will increase substantially for credit unions. First, most existing data processing systems are not designed to capture the necessary information to report basis. Therefore, for existing accounts credit unions would be required to manually review their account records and attempt to reconstruct the share transaction histories to determine which Coverdell ESAs received rollover or direct transfer contributions. For new accounts, credit unions would have to analyze each contribution to determine what portion, if any, includes earnings from another ESA. In both these instances, credit unions will have to invest multiple staff hours to contact either the distributing financial institution or the accountholders directly for this information.

Furthermore, most credit unions use outside data processors to Coverdell ESA reporting and record maintenance. Any extreme changes, such as those released this year, are only going to cause third party administration to increase their costs to cover the additional enhancements required to meet the Services’ requirements.

Form Deadlines

CUNA requests that the April 30 deadline for sending Form 5498-ESA to the beneficiary be moved to May 31. This is because contributions made to the credit union for the previous year can be postmarked by April 15, which gives credit unions a short timeframe to furnish a correct form. There will be an increased error rate because credit unions will not have time to enter the contributions that are mailed just before the deadline. This would require credit unions to re-file a corrected form, increasing the time and expense to credit unions.

Reduction in Credit Unions Offering Coverdell ESAs

Currently, forty-nine percent of all credit unions are small credit unions with assets of less than ten million dollars. The additional burden placed on these small credit unions would require them to weigh the substantial additional administrative costs against the member service provided to their membership. Undoubtedly, many credit unions would choose to close these accounts and stop offering this service. This would be counterproductive and not in line with Congress’ intent to help people save for their children’s education.

Thank you for the opportunity to provide comments on this issue. Please feel free to contact me at (202)508-6739 if you would like any additional information regarding these comments.


Lilly Thomas
Federal Compliance Counsel