TN 59 (02-10)

SI 01130.460 Coverdell Education Savings Accounts (ESAs)

A. What is a Coverdell ESA?

A Coverdell Education Savings Account (ESA), referred to as a Section 530 Plan and formerly known as an Educational Individual Retirement Account, is an account(s) established to pay the educational expenses (i.e., elementary, secondary, and postsecondary school) of an individual who is the designated beneficiary and is under age 18 or a special needs beneficiary.

B. Limits for Coverdell ESAs

1. Limit for annual contributions

  • Total annual contributions for the designated beneficiary, excluding any rollover contributions, cannot exceed $2,000 in any year.

  • An individual or organization cannot contribute more than $2,000 for any one designated beneficiary for a year.

  • No contributions can be made after the designated beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary.

2. Limit for number of Coverdell ESAs

There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary.

C. Defining terms for Coverdell ESAs

1. Contributor

A contributor is any individual or organization, including the designated beneficiary, who contributes to a Coverdell ESA. Generally, the Internal Revenue Service (IRS) allows any individual to fund a Coverdell ESA as long as the person’s income is within a certain limit.

2. Gift

The “contributions” meet the definition of a gift if:

  • They are not repayment for goods or services provided by the designated beneficiary;

  • They are not given because of a legal obligation on the contributor’s part; and

  • They are given irrevocably (i.e., the contributor relinquishes all control). For additional information on gifts, see SI 00830.520.

3. Designated beneficiary

A designated beneficiary is the individual (i.e., a student or future student) who is to receive the benefit of the funds in the account. The designated beneficiary can be changed to a member of the beneficiary’s family.

4. Member of beneficiary’s family

The designated beneficiary’s family includes the beneficiary’s spouse and the following other relatives of the beneficiary:

  • son, daughter, stepchild, foster child, adopted child, or a descendant of any of them;

  • brother, sister, stepbrother, or stepsister;

  • father, mother, or ancestor of either;

  • stepfather or stepmother;

  • son or daughter of a brother or sister;

  • brother or sister of father or mother;

  • son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law;

  • the spouse of any individual listed above; or

  • first cousin.

5. Special needs beneficiary

Regulations defining a “special needs beneficiary” have not been released by the Internal Revenue Service (IRS). Assume an individual who is age 18 or older and eligible for Supplemental Security Income (SSI) due to blindness or disability is a “special needs beneficiary.”

6. Rollover contribution

Any amount “rolled over” or transferred to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary’s family.

7. Withdrawals or distributions

Withdrawals or distributions are the issuance of funds from the account. Funds in a Coverdell ESA should be withdrawn or distributed within 30 days when the designated beneficiary:

  • reaches age 30, unless the beneficiary is a special needs beneficiary; or

  • dies (before age 30).

8. Educational expenses

Educational expenses are tuition, fees, and other necessary educational expenses at any educational institution. Examples of educational expenses include:

  • tuition and fees;

  • books;

  • laboratory fees;

  • student activity fees;

  • transportation;

  • stationary supplies;

  • technology fees; and

  • impairment-related expenses necessary to attend school or perform schoolwork (e.g., special prosthetic devices necessary to operate school machines or equipment).

D. Excluding Coverdell ESA funds from resources

1. Designated beneficiary

Exclude funds in a Coverdell ESA from the resources of the designated beneficiary.

2. Contributor

a. Contributor is not the designated beneficiary

Any donations to the Coverdell ESA are no longer the resources of the contributor beginning with the month after the month the cash is transferred into the account by a contributor who is not the designated beneficiary.

See Details

EXAMPLE 1:

A disabled child is the designated beneficiary of a Coverdell ESA. On July 13, the child’s aunt deposits $1,500 into the account. The aunt is not applying for or eligible for SSI. The FO determines that the amount of $1,500 is no longer the resource of the aunt as of August 1. The FO also determines that the amount of $1,500 is an excluded resource to the child as of August 1.

EXAMPLE 2:

On September 30, an aged individual deposits $1,200 into a Coverdell ESA for a relative who is not applying for or eligible for SSI. The FO determines that the amount of $1,200 is no longer the resource of the aged individual as of October 1. The FO must further evaluate the transfer to determine whether the aged individual received fair market value for the resource and whether the transfer was for the purpose of remaining eligible for SSI.

b. Contributor is the designated beneficiary

Any donations to the Coverdell ESA are a conversion of a resource (i.e., a resource in a different form) beginning with the month after the month the cash is transferred into the account by the designated beneficiary.

Exclude funds in a Coverdell ESA from the resources of the designated beneficiary beginning with the month after the month of conversion.

See Details

EXAMPLE:

A Supplemental Security Income (SSI) recipient is the designated beneficiary of a Coverdell ESA. On September 17, the SSI recipient transfers $200 from his savings account into his Coverdell ESA. The field office (FO) determines that the funds deposited into the account are excluded from the resources of the designated beneficiary as of October 1.

E. Rules for withdrawals or distributions from a Coverdell ESA

1. Contributor is not the designated beneficiary

Assume that any distribution the designated beneficiary receives from a Coverdell ESA is a gift, unless there is evidence to the contrary (e.g., there is an allegation that contributions to the account are mandated by a court). Distributions that meet the definition of a gift and are used for educational expenses of the designated beneficiary are excluded as income in the month of receipt.

If an excluded distribution is retained into the month following the month of receipt, it is an excluded resource of the designated beneficiary for 9 months beginning with the month after the month of receipt. Any funds retained after the 9-month exclusion period are countable resources of the designated beneficiary beginning with the month following the end of the 9-month exclusion period. For information on educational gifts, see SI 00830.455 and SI 01130.455.

If the designated beneficiary spends any portion of a Coverdell ESA distribution for a purpose other than his or her educational expenses or no longer intends to use the funds for his or her educational expenses, the non-educational portion of the funds is income at the earlier of two points:

  • in the months the funds are spent; or

  • in the month the individual no longer intends to use the funds for educational expenses.

If a countable distribution is retained into the month following the month of receipt, it is a countable resource of the designated beneficiary.

EXAMPLE 1: Distribution excluded as income and resources

A disabled adult, age 19, is the designated special needs beneficiary of a Coverdell ESA with a balance of $1,200 as of the first of the month. The disabled adult’s grandfather contributes to the account. On August 15, the individual receives $800 from the account. The disabled adult spends $600 on student activity fees and stationary supplies in August. As of September 1, $200 of the distribution remains. The disabled adult tells the field office (FO) that he will use the rest of the money for future educational expenses. The FO determines:

  • The Coverdell ESA is an excluded resource of the disabled adult.

  • The distribution meets the definition of a gift for educational purposes and is excluded from income in the month of August.

  • The remaining amount of $200 is excluded from resources for the months of September through May. As of June 1, any portion that remains is a countable resource of the disabled adult.

EXAMPLE 2: Distributions counted as income and resources

A disabled child is the designated beneficiary of a Coverdell ESA with a balance of $700 as of the first of the month. The disabled child’s aunt and uncle contribute to the account. On September 30, the child’s mother, who acts as an agent on behalf of the child, receives $150 from the account. The child’s mother spends $80 on a non-educational software game for the child. As of October 1, $70 of the distribution remains. The child’s mother tells the FO that she intends to spend the rest of the money during an upcoming vacation. The FO determines:

  • The Coverdell ESA is an excluded resource of the disabled child.

  • The distribution of $150 is countable income to the child for the month of September because $80 was spent on non-educational expenses and $70 is intended for non-educational expenses. As of October 1, the $70 that remains is a countable resource of the disabled child.

2. Sole contributor is the designated beneficiary

When a designated beneficiary receives a distribution from a Coverdell ESA in which he or she is the sole contributor, the distribution is a conversion of a resource (i.e., a resource in a different form). Any portion of the converted resource that the designated beneficiary retains into the month following the month of receipt is a countable resource.

EXAMPLE

A disabled adult, age 20, is the designated special needs beneficiary of a Coverdell ESA with a balance of $900 as of the first of the month. The disabled adult is the only contributor to the account. On June 10, the individual receives $500 from the account. He spends $325 on tuition and fees. As of July 1, $175 of the distribution remains. The FO determines:

  • The Coverdell ESA is an excluded resource of the disabled adult.

  • The distribution of $500 is a conversion of a resource (i.e., a resource in a different form).

  • That, as of July 1, any portion of the distribution that remains (i.e., $175) is a countable resource of the disabled adult.

3. Contributors are the designated beneficiary and at least one other contributor

When a Coverdell ESA contains funds contributed by the designated beneficiary and at least one other contributor, assume that the funds deposited by the other contributor(s) are distributed first from the account.

EXAMPLE

A disabled adult, age 21, is the designated special needs beneficiary of a Coverdell ESA with a balance of $1,200 as of the first of the month. The disabled adult contributed $300 to the account and her grandparents contributed $900. On October 15, the individual receives $500 from the account. She spends $400 on transportation and stationary supplies. As of November 1, $100 of the distribution remains. The FO determines:

  • The Coverdell ESA is an excluded resource of the disabled adult.

  • The distribution of $500 meets the definition of a gift for educational purposes and is excluded from income in the month of October.

  • The remaining amount of $100 is excluded from resources for the months of November through July. As of August 1, any portion that remains is a countable resource of the disabled adult.

F. Rule for rollover and transfer of Coverdell ESA funds

Funds in a Coverdell ESA may be transferred or “rolled over” to a member of the beneficiary’s family. When a designated beneficiary “rolls over” funds in a Coverdell ESA to a family member, the rollover is a transfer of a resource for SSI purposes.

See Details

G. Determining the value of a Coverdell ESA

The value of a Coverdell ESA is its equity value as of the first moment of a calendar month. There are penalties and tax implications if withdrawals are made for non-educational expenses. The value of the ESA is the current market value (CMV) minus any applicable penalties, but not taxes.

See Details

H. Excluding dividends and interest earned on a Coverdell ESA

Dividends and interest are returns on capital investments such as stocks, bonds, or savings accounts. Exclude dividends and interest earned on Coverdell ESA funds from income.

See Details

I. Verifying Coverdell ESA balances for Initial Claims and Posteligibility

1. Obtain evidence of Coverdell ESA balances

a. Evidence must show

  • the name of the designated beneficiary,

  • the amount, date, and type of transaction (i.e., deposit, withdrawal or transfer),

  • a first-of-the-month (FOM) account balance, or

  • sufficient information to derive the designated beneficiary and a complete account transaction history.

b. Types of evidence to obtain

  • If there is an allegation that an account contains funds deposited by the designated beneficiary and at least one other contributor, accept the allegation of the designated beneficiary or the agent acting on his or her behalf as to which deposits were made by the designated beneficiary if it agrees with the evidence in file.

  • Obtain a copy of any evidence in the individual’s possession (e.g., an account statement). Use the individual’s records if they appear to be unaltered and you may derive a complete transaction history; or

  • Obtain any account information (e.g., account statements or notices) provided by the IRS-approved entity (e.g., a financial institution) which administers the Coverdell ESA; or

  • Obtain a completed form SSA-4641 Authorization for the Social Security Administration to Obtain Account Records from a Financial Institution. For states that use the e4641 or the Access to Financial Institutions (AFI) process, see SI 01140.206; or

  • If you are conducting an in office interview with the designated beneficiary or an agent acting on his or her behalf, you may listen to the account transaction history on an automated telephone customer service line. You may only use an automated customer service line to obtain account balances if it provides a complete transaction history (i.e., deposits, withdrawals, and transfers) with transaction dates.

    NOTE: The interviewer should dial the customer service line and enter the account number. However, for privacy purposes have the individual enter his or her own personal identification number (PIN) or pass code when prompted. Do not ask the individual to provide you with the PIN or pass code.

2. Documenting the evidence

  • Record any allegations on a form SSA-5002 Report of Contact (RC) or the Report of Contact (DROC) screen.

  • Record on an RC or the DROC screen the amount of funds deposited by the designated beneficiary and the amount that remains after any withdrawals or distributions.

  • For any information obtained through an automated telephone customer service line, record the evidence on an RC or the DROC screen.

  • Fax any paper documentation to the electronic folder (EF) or the Non-disability Repository for Evidentiary Documents (NDReD). For information on the retention of paper material after faxing into either the EF or NDReD, see GN 00301.322.

J. Verifying educational expenses

1. When to develop

Verify the costs of educational expenses when:

  • the designated beneficiary or an agent acting on behalf of the designated beneficiary alleges withdrawing funds from an excluded Coverdell ESA, or

  • evidence submitted to verify the balance of the excluded account indicates a withdrawal was made.

2. Obtaining and documenting evidence of educational expenses

a. Evidence must show

  • the type of educational expense (e.g., tuition),

  • cost, and

  • date the expense was due or paid.

An individual’s statement either signed or recorded on the DROC screen is acceptable evidence of expenses when it is unreasonable to obtain other evidence (e.g., daily bus fare or a small expendable item). Do not apply this tolerance to major expenses such as tuition, fees, and books.

b. Using individual’s record as evidence

  • Obtain a copy of any evidence an individual has in his or her possession (e.g., receipt or bill with a cancelled check).

  • Fax any paper documentation to the electronic folder (EF) or the Non-disability Repository for Evidentiary Documents (NDReD). For retention of paper material after faxing into either the EF or NDReD, see GN 00301.322.

c. Using evidence from source

If an individual cannot provide evidence that suffices for a determination,

  • Obtain the necessary information via telephone, if possible, from a knowledgeable source (e.g., school or college, tutor, bookstore, etc.).

  • Record any information that is provided by telephone on a form SSA-5002 Report of Contact or DROC screen.

  • Fax any paper documentation to the EF or NDReD. For retention of paper material after faxing into either the EF or NDReD, see GN 00301.322.

K. Systems input and manual notices

Follow these instructions to make the systems input and issue a manual notice if applicable.

L. References

  • GN 00301.322, Retention of Paper Material after Faxing into Either eDib Folder or Claims Folder using NDReD

  • SI 00810.410, Infrequ