With the onset of the coronavirus in the spring, colleges and universities shuttered their campuses, sending students home to finish the semester via online learning. Many of these same institutions have since issued refunds of room and board charges, tuition, and other fees.
What Should I Do with This Refund?
If you paid for qualified higher education expenses from a 529 plan and you or your beneficiary have received a refund, you should consider re-contributing the refund to the 529 plan to avoid paying taxes or penalties.
- The re-contribution must be made by the later of July 15, 2020, or within 60 days of the date of the refund.
- The refund must be contributed to a 529 plan account with the same beneficiary as the beneficiary who received the refund.
- You cannot recontribute more than the amount of the refund. Any amounts in excess of the refund are considered a new contribution, not a re-contribution.
What Happens if I Don’t ReContribute the Refund?
If you do not recontribute the refund and the amount of your 529 plan withdrawals for the year exceed the qualified higher education expenses paid, the excess will be a non-qualified distribution. The earnings portion of the non-qualified distribution will be taxed and will be subject to a 10% penalty. If you received a state tax deduction when the plan was funded, you may also have to recapture the state deduction attributable to the non-qualified distribution.
What if I Paid for Additional College Expenses with Funds Outside my 529 Plan?
The refund will not be considered a non-qualified distribution if you paid for enough other qualified expenses out-of-pocket. For instance, if you incurred $20,000 of qualified expenses, you had a withdrawal of $10,000 from your 529 plan and received a refund of $3,000. The refund reduces your qualified expenses making them $17,000 ($20,000 of expenses less the $3,000 refund). Since your qualified expenses are greater than your 529 plan withdrawal of $10,000, the refund is not considered a non-qualified distribution and you would not pay any tax or penalties on the refund. When calculating your qualified expenses, don’t forget that expenses such as books, lab fees, and computers are includable.
What if I am Still Unsure of What I Should Do?
The July 15th deadline to make a re-contribution is quickly approaching. If you are unsure whether you should recontribute a refund to your 529 plan, the first thing you should do is gather any documentation including college bills, receipts for other expenses such as books, lab fees, and computers, and copies of any correspondence regarding the refund. Once you have this information together, contact your tax advisor who can assist you in determining the best course of action.
As always, The Bonadio Group is here to help guide you through this process. Click here to get in touch with us for assistance today.
The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.