Section R7-3-506. Withdrawals; Reporting of Non-qualified With- drawals; Penalties

A.       An account owner may withdraw funds from an account at any time. The designated beneficiary of an account shall not have any authority to withdraw funds from an account unless the account is structured to give the designated beneficiary such right of withdrawal upon matriculation or upon incurring qual- ified higher education expenses.

B.       Withdrawals.

1.        Qualified Withdrawals.

In order to  make  a  qualified  withdrawal, the account owner or the account owner’s designee must complete a certification, on a form approved by the Commission, declaring that the funds will be used for the purposes set forth in A.R.S. § 15-1871(11). The form shall include a statement advising the designated beneficiary and account owner of their obligations to report, in accor- dance with R7-3-506(B)(3)(c), refunds received from an eligible educational institution. In addition to the certifi- cation, a withdrawal shall be deemed qualified only if:

a.        The financial institution is provided with a copy of an invoice from the eligible educational institution, and the distribution is made directly to the eligible educational institution; or

b.        The financial institution is provided with a copy of an invoice from the eligible educational institution, and the distribution is made in the form of a check payable to both the designated beneficiary and the eligible educational institution; or

c.        Within 30 days following the withdrawal, substanti- ation that the withdrawal was actually expended for qualified higher education expenses is submitted to the financial institution.

2.        Withdrawal Based on Death, Disability, or Scholarship. A penalty-free withdrawal may be made as a result of the designated beneficiary’s death, disability, or scholarship, if written substantiation thereof is provided. Such written substantiation must come from a party other than the des- ignated beneficiary or the account owner. In the case of a scholarship, the withdrawal may not exceed the amount of the scholarship.

3.        Non-Qualified or Unsubstantiated Withdrawals.

Pursuant to A.R.S. § 15-1875(H), the Commission has authority to assess penalties for non-qualified withdraw- als. If an account owner fails to certify that a withdrawal is qualified or penalty-free, as defined in R7-3-506(B)(1) and (2), above, or if a financial institution has reason to believe that a withdrawal is non-qualified, the financial institution shall withhold from such withdrawal an amount equal to 10% of that portion of that withdrawal which constitutes income under § 72 of the Code. If an account owner seeks to make a withdrawal in accordance with R7-3-506(B)(1)(c) and does not provide the required substantiation at the time of the withdrawal, the with- drawal shall be limited so that the balance remaining in the account is sufficient to pay the 10% of earnings pen- alty. If the financial institution is not provided with the required substantiation within 30 days, the withdrawal shall be treated as a non-qualified withdrawal, the penalty shall be assessed at that time, and the financial institution shall withdraw the penalty from the account.

a.        If the withdrawal has not been declared, by the party making the withdrawal, to be non-qualified, the amount of any penalty shall be remitted to the Com- mission with the financial institution’s first monthly report  following  the   date  that  the  withdrawal  is

determined to be non-qualified. If the withdrawal has been declared to be non-qualified, the amount of said withholding may be remitted to the Commis- sion with the financial institution’s required monthly report.

b.        If the withdrawal has not been declared, by the party making the withdrawal, to be non-qualified, the financial institution shall report any such withhold- ing, in writing, to the Commission with the financial institutions’s first monthly report following the date that the withdrawal is determined to be non-quali- fied. The report shall include identification of the account owner, beneficiary, date of withdrawal, amount of withdrawal, and a brief description as to why the financial institution believes the withdrawal to be non-qualified. If the withdrawal has been declared to be non-qualified, the report may be sub- mitted to the Commission with the financial institu- tion’s required monthly report. The financial institution shall notify the account owner and benefi- ciary, in writing, of any withholding.

c.        If a qualified withdrawal is made from an account in any calendar year, within 60 days after the end of such year and within 60 days after the end of the fol- lowing year, any designated beneficiary or account owner who received a partial or total refund from the eligible educational institution attended by the des- ignated beneficiary or the eligible educational insti- tution that the designated beneficiary had expected to attend shall provide to the financial institution a signed statement identifying the amount of any refunds received. In addition, the designated benefi- ciary or account owner shall provide an explanation as to what portion, if any, of the refund is allocable to a qualified withdrawal. If all or a portion of a refund is allocable to a qualified withdrawal, the designated beneficiary (or the account owner) may provide the financial institution with substantiation of qualified higher education expenses for which the refund was used or substantiation that the refund was made by reason of scholarship, or the death, or disability of the designated beneficiary. To the extent that a refund allocable to a qualified withdrawal was not used to pay qualified higher education expenses or made on account of death, disability, or scholar- ship of the designated beneficiary, it shall be consid- ered a non-qualified withdrawal subject to the penalty described in R7-3-506(B)(3). The financial institution shall withdraw the penalty from the account from which the original qualified with- drawal was made, if sufficient funds are available in the account, or attempt to collect the penalty by bill- ing the designated beneficiary or account owner for the penalty, if sufficient funds are not available in the account.

4.        Substantiation Procedures.

Before treating any withdrawal as qualified or penalty- free based on substantiation provided, the financial insti- tution shall review the substantiation to confirm that sub- stantiation is provided for the amount of a withdrawal that the account owner or designated beneficiary asserts is qualified or penalty-free, that the substantiation com- plies with the program rules, and, in the case of a with- drawal to pay qualified higher education expenses, that the substantiated expenditures are of a nature and in amounts that can be treated as qualified higher education

expenses. The financial institution may seek additional information from the account owner, the designated bene- ficiary, or the eligible educational institution before approving or rejecting substantiation, and the financial institution may seek guidance from staff of the Commis- sion. If the financial institution determines that substanti- ation is inadequate, it shall promptly notify the account owner and defer making any distribution with respect to any inadequately substantiated request until proper sub- stantiation is provided or the account owner instructs the financial institution to make the requested distribution and either withhold the penalty from the distribution or from other funds in the account.

5.        Distributions Made after December 31, 2001.

R7-3-506(B)(1) through (4) shall not apply to any with- drawals made after December 31, 2001, except to the extent that any provision contained therein is required for the Family College Savings Program to qualify as a qual- ified tuition program under § 529 of the Code. A financial institution shall not be required to collect a penalty on any withdrawal made after December 31, 2001. Withdrawals may be made pursuant to forms prepared or used by the financial institution and meeting the requirements of R7- 3-501 through R7-3-507, if any, and any requirements for the Family College Savings Program to qualify as a qual- ified tuition program under § 529 of the Code. To the extent that A.R.S. § 15-1875 requires provisions that will generally enable the Commission to determine whether withdrawals are qualified or nonqualified withdrawals, a financial institution shall require an account owner to state whether the account owner expects that the with- drawal will be a qualified or nonqualified withdrawal.

C.       The account owner may dispute any withholding made by a financial institution under subsection (B) by submitting writ- ten notice, to the Commission, within 30 days from the date of such withholding. The Commission shall make a written deter- mination regarding the dispute within 30 days of the receipt of its notice from the account owner. If the account owner dis- agrees with the Commission’s determination, the matter shall be adjudicated in accordance with A.R.S. § 41-1092 et seq.

Historical Note

Adopted effective December 21, 1998, under an exemp- tion from the Administrative Procedure Act pursuant to

A.R.S. § 15-1852(C) (Supp. 98-4). Amended by exempt rulemaking at 6 A.A.R. 917, effective February 10, 2000

(Supp. 00-1). Amended by exempt rulemaking at 6

A.A.R. 2486, effective June 7, 2000 (Supp. 00-2). Amended by exempt rulemaking at 8 A.A.R. 3743, effec- tive August 8, 2002 (Supp. 02-3). Amended by exempt rulemaking at 9 A.A.R. 3886, effective August 14, 2003

(Supp. 03-3).