The COVID-19 pandemic has caused many colleges and other qualifying educational institutions (private primary or secondary school, college, or university) to switch to an online curriculum by moving students off campus or canceling classes altogether. Those same colleges have been issuing pro-rated refunds for tuition. Many of these refunds are associated with 529 plans. As such, some individuals and families who had expenses paid by 529 plans may be left wondering what to do with the reimbursed funds, and can the funds be re-contributed or rolled over back into the 529 plans to avoid unnecessary income taxation. That answer is yes!
Generally, if a qualified educational institution issues a refund of tuition, qualifying room and board charges or other fees that were paid for with 529 plan funds, beneficiaries will not be required to pay taxes or penalties on the distribution if they return the money to their 529 plan within 60 days of the date they receive the refund. Recent IRS guidance related to the CARES Act enacted in 2020, extends the deadline so that the re-contribution may be made until July 15, 2020, even if the re-contribution date is more than 60 days from the refund date. The original distribution date is irrelevant.
Additionally, the amount returned cannot exceed the refunded amount, and any excess amount deposited will be considered a new contribution. The refund must be deposited back into a 529 plan for the same beneficiary. The client can either send a personal payment or endorse the school’s check to the appropriate plan. The re-contribution will display as a 2020 contribution in the account. If the refund is not deposited back into the 529 plan, it will be considered a non-qualified distribution, and the earnings portion of the non-qualified distribution will be subject to income taxes at the beneficiary’s tax rate and a 10% tax penalty.
Beneficiaries and account owners must keep proof of the refund for his or her records and should thoroughly document all transactions associated with 529 college savings plans to avoid unnecessary tax consequences and penalties. Those impacted should contact their 529 college savings plan provider to learn the steps required to deposit refunds back into their account. 529 accounts do not report contributions on a tax form to the IRS the way IRAs do, therefore it is the client’s responsibility to provide the IRS with proof of the refund and the re-contribution. A tax advisor can provide guidance on filing taxes after re-contributing part of a distribution.
John Hancock, COVID-19 and college reimbursements, April 22, 2020
Fiduciary Trust, College Refunds and 529 Plans, April 17, 2020
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