COVID-19: Be Careful with Tuition and Expense Refunds Paid from a 529 Plan

Posted By Matthew Frost

One of the steps for slowing the spread of the COVID-19 outbreak was the closure of many public places, including colleges and universities. This action led to classroom instruction being replaced with online classes, which meant that students were evicted from on-campus housing. With this change of events, many students or their parents received a refund of either full or partial payment of tuition and other related higher education expenses. This was well-received solution for many families, however proper steps must be taken if the tuition was originally paid from a 529 Plan.

Issue: Tuition paid using funds from a 529 plan that were then refunded are no longer being used for qualified educational expenses. Now, the earnings portion of the refund could potentially be subject to income tax, including a 10% penalty.

Solution: Recontribute the refunded amount back into the 529 plan. This must be done within 60 days from the date the refund is issued and must be made to a qualified tuition plan of which the student is the beneficiary. The amount recontributed cannot exceed the refunded amount. The recontribution will not count against plan contribution limits. Subject to limitations, the refund can also be contributed back to an ABLE Account of the designated beneficiary or a member of family of the beneficiary’s family.

When sending the check of the refunded amount to the 529 plan administrator, it is important to include a letter of instruction which states the following:

  • Amount you want to recontribute to your 529 plan account
  • Note that you want this amount to be characterized as a recontribution to the plan of a prior withdrawal from the same account, rather than a new contribution to the plan
  • Documentation of the amount and date of the original withdrawal from the account
  • Documentation of the amount and date of the refund from the educational institution
  • Recontribution is being made within the 60-day time frame of receiving the refund
  • Name of the student beneficiary and the associated 529 plan account number

It is important to keep documentation of the above in case you are questioned by the IRS down the line about meeting the 60-day rollover rule.

Please be sure to reach out to your BLS Team Member or email us at info@belfint.com with any questions.

 

 

Photo by: HendersonStateU (License)

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