Par. 2. An undesignated centerheading and Secs. 1.529-0 through 1.529-6 are added to read as follows:
(a) Effective date. Section 529 is effective for taxable years ending after August 20, 1996, and applies to all contracts entered into or accounts opened on August 20, 1996, or later.
(b) Programs maintained on August 20, 1996. Transition relief is available to a program maintained by a State under which persons could purchase tuition credits, certification or similar rights on behalf of, or make contributions for educational expenses of, a designated beneficiary if the program was in existence on August 20, 1996. Such program must meet the requirements of a QSTP before the later of August 20, 1997, or the first day of the first calendar quarter after the close of the first regular session of the State legislature that begins after August 20, 1996. If a State has a two-year legislative session, each year of such session shall be deemed to be a separate regular session of the State legislature. The program, as in effect on August 20, 1996, shall be treated as a QSTP with respect to contributions (and earnings allocable thereto) pursuant to contracts entered into under the program. This relief is available for contributions (and earnings allocable thereto) made before, and the contracts entered into before, the first date on which the program becomes a QSTP. The provisions of the program, as in effect on August 20, 1996, shall apply in lieu of section 529(b) with respect to such contributions and earnings. A program shall be treated as meeting the transition rule if it conforms to the requirements of section 529, Secs. 1.529-1 through 1.529-5 and this section by the date this document is published as final regulations in the Federal Register.
(c) Retroactive effect. No income tax liability will be asserted against a QSTP for any period before the program meets the requirements of section 529, Secs. 1.529-1 through 1.529-5 and this section if the program qualifies for the transition relief described in paragraph (b) of this section.
(d) Contracts entered into and accounts opened before August 20, 1996--(1) In general. A QSTP may continue to maintain agreements in connection with contracts entered into and accounts opened before August 20, 1996, without jeopardizing its tax exempt status even if maintaining the agreements is contrary to section 529(b) provided that the QSTP operates in accordance with the restrictions contained in this paragraph (d). However, distributions made by the QSTP, regardless of the terms of any agreement executed before August 20, 1996, are subject to tax according to the rules of Sec. 1.529-3 and subject to the reporting requirements of Sec. 1.529-4.
(2) Interest in program pledged as security for a loan. An interest in the program, or a portion of an interest in the program, may be used as security for a loan if the contract giving rise to the interest was entered into or account was opened prior to August 20, 1996 and the agreement permitted such a pledge.
(3) Member of the family. In the case of an account opened or a contract entered into before August 20, 1996, the rules regarding a change in beneficiary, including the rollover rule in Sec. 1.529-3(a) and the gift tax rule in Sec. 1.529-5(b)(3), shall be applied by treating any transferee beneficiary permitted under the terms of the account or contract as a member of the family of the transferor beneficiary.
(4) Eligible educational institution. In the case of an account opened or contract entered into before August 20, 1996, an eligible educational institution is an educational institution in which the beneficiary may enroll under the terms of the account or contract.