New benefits for 529 plans and HSAs

[UNITED STATES] Significant legislative proposals in 2025 could reshape the landscape of education and healthcare savings in the United States. The Achieving Choice in Education (ACE) Act and the Student Empowerment Act seek to expand the benefits of 529 college savings plans, while new bills aim to modernize Health Savings Accounts (HSAs), potentially offering greater flexibility and higher contribution limits.

529 College Savings Plans: Proposed Enhancements

Two major legislative initiatives—the ACE Act and the Student Empowerment Act—propose substantial changes to 529 college savings plans:

Increased Distribution Limits: The ACE Act suggests doubling the annual tax-free withdrawal limit for K–12 education expenses from $10,000 to $20,000 per beneficiary.

Expanded Gift Tax Exclusion: Both bills propose raising the annual gift tax exclusion for 529 contributions to $20,000 per donor ($40,000 for married couples), up from the current $15,000.

Rollover to Roth IRA: Under the SECURE 2.0 Act, up to $35,000 of unused 529 funds may be rolled over to a Roth IRA for the same beneficiary, provided the plan has been open for at least 15 years and the contributions are more than five years old.

These changes aim to provide families with greater flexibility in saving for education and managing leftover funds. The ACE Act also ties tax-exempt municipal bonds to school choice policies, incentivizing states to adopt policies supporting alternative education options.

The Student Empowerment Act builds on the 2017 Tax Cuts and Jobs Act, which allowed families to use 529 plans for K-12 tuition. The new bill seeks to expand 529 plan eligibility further, allowing funds to cover costs associated with microschooling and other alternative education models.

These proposals could impact a substantial portion of U.S. families. Homeschooling has grown significantly, reaching about 5.2% of students aged 5-17 in the 2022-23 school year, while approximately 4.7 million K–12 students were enrolled in private schools in the 2021–22 School Year.

Health Savings Accounts (HSAs): Proposed Reforms

Several legislative proposals seek to modernize HSAs:

Increased Contribution Limits: Proposed bills aim to raise the annual contribution limits for HSAs, with some suggesting alignment with the high-deductible health plan (HDHP) out-of-pocket maximums.

Expanded Eligibility: The Personalized Care Act (H.R.810/S.276) proposes allowing individuals covered by various health plans, including group health plans and healthcare sharing ministries, to contribute to HSAs.

Broader Use of Funds: Proposed legislation includes allowing HSA funds to cover long-term care expenses, over-the-counter oral care products, and certain health insurance premiums.

Catch-Up Contributions: For individuals aged 55 and older, the catch-up contribution limit is proposed to increase from $1,000 to $1,200 in 2025.

These reforms aim to enhance the flexibility and utility of HSAs, making them more accessible and beneficial for a broader range of individuals.

Considerations and Outlook

While these proposed changes have the potential to significantly impact education and healthcare savings, they are still under consideration and have not yet been enacted into law. If passed, these reforms could provide families with more tools to manage education and healthcare expenses, potentially easing financial burdens.