II
117th CONGRESS
1st Session
S. 3081
IN THE SENATE OF THE UNITED STATES
October 27, 2021
Mr. Paul introduced the following bill; which was read twice and referred to the Committee on Finance
A BILL
To amend the Internal Revenue Code of 1986 to permit withdrawals from certain retirement plans for repayment of student loan debt, and for other purposes.
Short title
This Act may be cited as the Tax Free Education Act of 2021
.
Withdrawals for higher education expenses
401(k) plans
Paragraph (14) of section 401(k) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:
Distributions for qualified education expenses
In general
A distribution shall be treated as made upon hardship of the employee to the extent that the aggregate amount of such distributions during the taxable year does not exceed the lesser of—
the amount paid by the taxpayer for qualified education expenses for any individual during such taxable year, or
$5,250.
Distribution must be otherwise disallowed
Clause (i) shall not apply to any distribution which is permissible under paragraph (2)(B)(i) (including distributions which would be treated as made upon hardship of the employee without regard to this subparagraph).
No requirement to demonstrate hardship
Clause (i) shall apply without regard to any requirement to demonstrate financial need or hardship, or to demonstrate that other assets are not available to pay the qualified education expenses.
Additional tax under section 72(t) not to apply
No tax shall be imposed under section 72(t) on any amount treated as a hardship distribution by reason of clause (i).
Qualified education expenses
For purposes of this subparagraph, the term qualified education expenses has the meaning given such term by section 530(b)(2)(A), applied without regard to subparagraph (B) of section 530(b)(2).
.
403(b) plans
Paragraph (11) of section 403(b) of the Internal Revenue Code of 1986 is amended by adding at the end the following: Under rules similar to the rules of section 401(k)(14)(C), a distribution shall be treated as made upon hardship of the employee to the extent that the aggregate amount of such distributions during the taxable year does not exceed the lesser of the amount paid by the taxpayer for qualified education expenses during such taxable year, or $5,250.
.
457 plans
Paragraph (1) of section 457(d) of the Internal Revenue Code of 1986 is amended by adding at the end the following: Under rules similar to the rules of section 401(k)(14)(C) (and without regard to whether the expenses are unforeseen), a distribution shall be treated as made by reason of unforeseen emergency to the extent that the aggregate amount of such distributions during the taxable year does not exceed the lesser of the amount paid by the taxpayer for qualified education expenses during such taxable year, or $5,250.
.
Effective date
The amendments made by this section shall apply to distributions made after December 31, 2021.
Withdrawals for student loan expenses
IRAs
Paragraph (7) of section 72(t) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:
Student loans
Such term shall include amounts paid in repayment of any loan made to an individual described in subparagraph (A) to assist the individual in attending an educational organization described in section 170(b)(1)(A)(ii).
.
401(k)s
Clause (v) of section 401(k)(14)(C), as added by section 2, is amended—
by striking applied without regard
and inserting
applied—
without regard
;
by striking the period at the end and inserting , and
; and
by adding at the end the following new subclause:
by treating amounts described in section 72(t)(7)(C) as qualified higher education expenses.
.
Effective date
The amendment made by this section shall apply to distributions made after December 31, 2021.
Exclusion of distributions for educational expenses
In general
Section 402 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:
Distributions for qualified education expenses
In general
Gross income for the taxable year does not include—
any distribution from a qualified cash or deferred arrangement (as defined in section 401(k)(2)), an annuity contract described in section 403(b), or an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A), which is treated as made upon hardship of the employee by reason of section 401(k)(14)(C), the last sentence of section 403(b)(11), or the last sentence of section 457(d)(1), or
any distribution from an individual retirement account (as defined in section 408(a)) to which section 72(t)(2)(E) applies.
Distributions must otherwise be includible
In general
An amount shall be treated as described in paragraph (1) only to the extent that such amount would be includible in gross income without regard to such paragraph.
Application of section 72
In determining whether a distribution would be includible in gross income but for this subsection, rules similar to the rules of subsection (l)(3)(B) shall apply (by taking into account all retirement plans in which the taxpayer is a participant).
.
Coordination with deductions and credits
Coordination with American Opportunity and Lifetime Learning credits
In general
Paragraph (2) of section 25A(g) of the Internal Revenue Code of 1986 is amended by redesignating subparagraph (C) as subparagraph (D), by striking and
at the end of subparagraph (B), and by inserting after subparagraph (B) the following new subparagraph:
a distribution from a qualified cash or deferred arrangement (as defined in section 401(k)(2)), an annuity contract described in section 403(b), an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A), or an individual retirement account (as defined in section 408(a)) which is excluded from gross income of the distributee under section 402(m) (other than any portion of such a distribution which is attributable to the repayment of a loan described in section 72(t)(7)(C)), and
.
Coordination with waiver of penalty
Subparagraph (B) of section 72(t)(7) is amended by inserting (without regard to subparagraph (C) thereof)
before the period.
Deduction for interest on education loans
The first sentence of paragraph (1) of section 221(e) of such Code is amended—
by striking or
; and
by inserting before the period at the end the following: , or for any amount paid with a distribution which is excluded from gross income under section 402(m)
.
Effective date
The amendment made by this section shall apply to distributions made after December 31, 2021.
Modification of inclusion of employer student loan payments in educational assistance programs
In general
Subparagraph (B) of section 127(c)(1) of the Internal Revenue Code of 1986 is amended to read as follows:
the payment, by an employer, of amounts in repayment of any loan made to the employee to assist the employee in attending an educational organization described in section 170(b)(1)(A)(ii), and
.
Denial of double benefit
Paragraph (1) of section 221(e) of the Internal Revenue Code of 1986, as amended by section 4, is further amended by striking any indebtedness on a qualified education loan of the taxpayer
and inserting amounts in repayment of any loan described in section 127(c)(1)(B)
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2021.
Repeal of cap on deduction for interest on education loans
In general
Section 221 of the Internal Revenue Code of 1986 is amended by striking subsections (b) and (f).
Carryover of excess interest
Section 221 of the Internal Revenue Code of 1986, as so amended, is amended by inserting after subsection (a) the following new subsection:
Carryover
If the amount of the deduction allowable under subsection (a) exceeds the taxable income of the taxpayer for the taxable year (determined without regard to this section), then an amount equal to such excess shall be treated as interest paid by the taxpayer in the succeeding taxable year on a qualified education loan.
.
Effective date
The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.
Employer Roth contributions
In general
Subsection (a) of section 402A of the Internal Revenue Code of 1986 is amended—
by striking and
at the end of paragraph (1);
by redesignating paragraph (2) as paragraph (3); and
by inserting after paragraph (1) the following new paragraph:
in the case of a qualified cash or deferred arrangement (as defined in section 401(k)(2)), any designated Roth employer contribution made pursuant to the arrangement shall be treated for purposes of this chapter in the same manner as contributions described in section 401(k)(3)(D)(ii), except that such contribution shall not be excludable from gross income, and
.
Conforming amendments
Paragraph (1) of section 402A(b) of the Internal Revenue Code of 1986 is amended—
by striking may elect to make
and inserting “may elect—
to make
;
by striking the period at the end and inserting , and
; and
by adding at the end the following new subparagraph:
in the case of a qualified cash or deferred arrangement (as defined in section 401(k)(2)), to have the employee's employer make designated Roth employer contributions in lieu of all or a portion of the matching or nonelective contributions the employee is otherwise eligible to receive under the arrangement.
.
Paragraph (2)(A) of section 402A(b) of such Code is amended by striking of each employee
and inserting and designated Roth employer contributions with respect to each employee
.
Subparagraph (B) of section 402A(d)(2) of such Code is amended by inserting , or elected to have made a designated Roth employer contribution,
after designated Roth contribution
both places it appears in clauses (i) and (ii).
Designated Roth employer contribution
Subsection (c) of section 402A of the Internal Revenue Code of 1986 is amended—
by inserting and designated Roth employer contributions
after designated Roth contributions
in the heading, and
by adding at the end the following new paragraph:
Designated Roth employer contribution
In general
The term designated Roth employer contribution means any contribution described in subparagraph (B) made under a qualified cash or deferred arrangement (as defined in section 401(k)(2)) which—
is excludable from gross income of an employee without regard to this section, and
the employee designates (at such time and in such manner as the Secretary may prescribe) as not being so excludable.
Contributions described
The contributions described in this subparagraph are—
matching contributions (as defined in section 401(m)(4)(A)) which meet the requirements of subparagraphs (B) and (C) of section 401(k)(2), and
qualified nonelective contributions (within the meaning of section 401(m)(4)(C)).
Designation limits
The amount of matching contributions and qualified nonelective contributions which an employee may designate under subparagraph (A) shall not exceed the excess (if any) of—
the maximum amount of such contributions excludable from gross income of the employee for the taxable year (without regard to this section), over
the aggregate amount of such contributions with respect to the employee for the taxable year which the employee does not designate under subparagraph (A).
.
Effective date
The amendments made by this section shall apply to contributions made in taxable years beginning after December 31, 2021.
Maximum contributions
Elective deferrals
In general
Subparagraph (B) of section 402(g)(1) of the Internal Revenue Code of 1986 is amended by striking $15,000
and inserting $25,000
.
Cost-of-living adjustment
Paragraph (4) of section 402(g) of such Code is amended—
by striking $15,000
and inserting $25,000
;
by striking December 31, 2006
and inserting December 31, 2022
; and
by striking July 1, 2005
and inserting July 1, 2021
.
Conforming amendment
Clause (ii) of section 402(g)(7)(A) of such Code is amended by striking $15,000
and inserting $25,000
.
457 plans
In general
Subparagraph (A) of section 457(e)(15) of the Internal Revenue Code of 1986 is amended by striking $15,000
and inserting $25,000
.
Cost-of-living adjustment
Subparagraph (B) of section 457(e)(15) of such Code is amended—
by striking $15,000
and inserting $25,000
;
by striking December 31, 2006
and inserting December 31, 2022
; and
by striking July 1, 2005
and inserting July 1, 2021
.
Employed individual 401(k)s
Subsection (k) of section 401 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:
Employed individual arrangement
In general
A cash or deferred arrangement shall not be treated as failing to meet any requirement of this subsection solely because, under the arrangement, an employee may elect to make additional elective deferrals which are not subject to, and are not taken into account under, paragraph (3) to a separate account from other contributions made on behalf of the employee under the arrangement, if—
all employees eligible to participate in the arrangement are eligible to make such election,
the aggregate of all elective deferrals made by the employee under the arrangement does not exceed the limitation of section 402(g), and
no matching or nonelective contributions may be made to such account or with respect to elective deferrals contributed to such account.
Distribution, etc. rules to apply
The rules of this subsection, other than paragraph (3), shall apply to any account established under subparagraph (A).
Elective deferral
For purposes of this paragraph, the term elective deferral means any employer contribution under a qualified cash or deferred arrangement to the extent not includible in gross income for the taxable year under section 402(e)(3) (determined without regard to section 402(g)).
.
Effective date
The amendments made by this section shall apply to contributions made in taxable years beginning after December 31, 2021.
Deduction for qualified education expenses
In general
Part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended—
by redesignating section 224 as section 225; and
by inserting after section 223 the following new section:
Qualified education expenses
Deduction allowed
In the case of an individual, there shall be allowed as a deduction for the taxable year an amount equal to the qualified education expenses paid or incurred during such taxable year for the taxpayer or any other individual.
Qualified education expenses
For purposes of this section, the term qualified education expenses means—
qualified education expenses as defined in section 530(b)(2)(A), applied without regard to subparagraph (B) of section 530(b)(2), and
amounts paid in repayment of any loan made to an individual to assist the individual in attending an educational organization described in section 170(b)(1)(A)(ii).
Denial of double benefit
For purposes of subsection (a), the qualified education expenses with respect to any taxpayer shall be reduced by—
the amount of any distribution from a qualified cash or deferred arrangement (as defined in section 401(k)(2)), an annuity contract described in section 403(b), an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A), or an individual retirement account (as defined in section 408(a)) which is excluded from gross income of the taxpayer under section 402(m) (other than any portion of such a distribution which is attributable to the repayment of a loan described in section 72(t)(7)(C)), and
the amount of any such expenses taken into account in determining any credit or any other deduction under any other provision of this chapter.
Carryforward of unused amount
If any portion of the deduction allowed by subsection (a) for the taxable year is disallowed by reason of any limitation (including the amount of income of the taxpayer), such portion shall be treated as a deduction allowable under subsection (a) in the succeeding taxable year.
.
Deduction allowed above the line
Subsection (a) of section 62 of the Internal Revenue Code of 1986 is amended by inserting after paragraph 21 the following new paragraph:
Qualified education expenses
The deduction allowed by section 224.
.
Clerical amendment
The table of sections for part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by striking the item relating to section 224 and by inserting after the item relating to section 223 the following new items:
Sec. 224. Qualified education expenses.
Sec. 225. Cross reference.
.
Effective date
The amendments made by this section shall apply to taxable years beginning after December 31, 2021.
