Withdrawal from START College Savings Plan for K-12 Education Available Until End of Year

By Rebecca Hinton
Taylor Porter; Tax and Estate Planning Attorney
rebecca.hinton@taylorporter.com; 225.381.0233

Parents of K-12 students have three months remaining to withdraw up to $10,000 from their START (college) ESA accounts to pay tuition at an elementary or secondary school (i.e., K-12 tuition), as designated by Act 56 (SB 78), effective August 1, 2020, authorized by the Louisiana Legislative Regular Session and Governor John Bel Edwards. Under default Louisiana laws, funds within a START (college) program generally cannot be used to pay for elementary and secondary education barring grants allowing such distributions. Act 56 of the 2020 Regular Session of the Louisiana Legislature grants an exception to this general rule, allowing distributions from a START (college) ESA to fund K-12 tuition in 2020.

If a party chooses to take advantage of this allowance, disbursements from START (college) ESA accounts for this purpose are capped at $10,000 with respect to a beneficiary, and the disbursements cannot include earnings enhancements or interest thereon. Funds must be withdrawn from a START (college) ESA account by December 31, 2020, in order to take advantage of this opportunity.

Origin of the START K-12 Program

START K-12 (Student Tuition Assistance and Revenue Trust Kindergarten Through Grade Twelve) allows parents, grandparents, and other loved ones of public and private school students to set up a 529 plan to pay for elementary and high school education. Amounts contributed and earned in an Education Savings Account established under the START K-12 Program can be used to pay for “qualified education expenses,” which include tuition owed in connection with enrollment or attendance at a public or approved nonpublic elementary or secondary school in Louisiana that includes any grades kindergarten through 12th grade. 

Announced originally in August 2018, the START K-12 Program is intended to implement the expansion of state 529 programs to cover elementary and secondary education, in addition to the benefits previously allowed for postsecondary institutions, as authorized by the Federal Tax Cuts and Jobs Act of 2017. In the past, 529 plans could only be used for postsecondary (college) expenses, but federal law recently expanded 529 plans to cover private school elementary and high school tuition, and Louisiana has now followed suit with the enactment of this new law. Though federal law now allows use of funds within 529 programs to cover elementary and secondary education expenses, Louisiana has chosen to operate its START K-12 Program separately from its existing START (college) program, and this segregation of funds generally prohibits the use of funds within a START (college) program for K-12 tuition purposes. For 2020, Act 56 (SB 78) provides an exception to this general prohibition, allowing the use of funds otherwise set aside for college purposes to instead fund private school elementary and high school tuition.

Basics of the START K-12 and START Programs

The START K-12 Program shares similarities with Louisiana’s existing START Program that establishes education savings accounts for expenses associated with enrolling in college or other postsecondary education institutions. Both the START Program and the START K-12 Program are implemented under and consistent with federal guidelines applicable to state 529, education savings programs. As with the START Program, the Louisiana Tuition Trust Authority oversees the administration and operation of the START K-12 Program.

There are tax and financial benefits associated with an ESA established under the START or START K-12 Programs, but these benefits currently differ depending on whether you are investing in the START Program as opposed to the START K-12 Program. A brief overview of the primary benefits, and key differences between the START and START K-12 Programs, includes:

  • Amounts contributed to a START (college) ESA are eligible for an “earnings enhancement,” which is a percentage match by the State of Louisiana on amounts contributed to these START (college) ESAs. The amount of the earnings enhancement available depends on the ESA owner’s income, and ranges from 14% for owners who have adjusted gross income (“AGI”) below $30,000 to 2% for owners who have AGI in excess of $100,000, and also the ESA owner’s relationship to the beneficiary. In typical scenarios, ESA account owners who are family members of the account beneficiary are eligible for the earnings enhancement. Earnings enhancements are earned on an annual basis, and posted into the ESA on December 31 each year. Earnings enhancements are not available for amounts contributed to START K-12 ESAs under the current law.
  • Income earned on amounts invested in both START and START K-12 ESAs is not subject to federal or state income tax as long as the income is distributed to pay for “qualified education expenses” for the beneficiary of the ESA.
  • Amounts deposited into a START (college) ESA can be excluded from Louisiana taxable income, up to $2,400.00 for individual taxpayer ESA owners, and up to $4,800.00 for married taxpayer ESA owners filing jointly, per beneficiary. This same income exclusion is not presently available for contributions to START K-12 ESAs.
  • While the START Program and the START K-12 Program offer a variety of saving funds, the amounts contributed to the Louisiana Principal Protection Fund (Fixed Earnings), if this fund is selected by the ESA owner, are guaranteed by the State of Louisiana.
  • Amounts held within START and START K-12 ESAs can be protected from claims of creditors of ESA account owners, contributors and participants.
  • Funds within a START (college) ESA cannot be used to fund elementary and secondary education tuition without specific authorization by the Louisiana Legislature (e.g., through Act 56 (SB 78)). Nevertheless, if an individual establishes a START K-12 ESA and has funds remaining after the beneficiary of the ESA graduates high school, such excess funds can be rolled into a START (college) ESA to fund qualified higher education expenses of the beneficiary.

About Rebecca Hinton: Practicing law since 2006, Taylor Porter Special Counsel Rebecca Hinton represents individuals and businesses in the areas of federal, state and local taxation; tax controversies; estate planning; numerous business matters; successions; and trusts. Rebecca is ranked by her peers among Best Lawyers® in tax law, and is rated Martindale-Hubbell AV-Preeminent. Rebecca is an adjunct professor at Louisiana State University Paul M. Hebert Law Center, and frequently presents at CLE and other seminars on the topics of federal estate and gift taxation, estate planning, and federal taxation. Rebecca serves as vice president of the Estate & Business Planning Council of Baton Rouge.

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