Refund of Qualified Expense repayment to 529 plan

Forum|Forum|5 years ago
April 23, 2020
3 replies
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If a college has made a refund of qualified 529 expenses for which 529 funds were used, does this money have to be re-deposited to the 529 account IF there will be future expenses in the same calendar year to offset the refund?

Specifically:

Nov2019: Paid 2020 Spring Room and Board from 529 plan and claimed disbursement on 2019 taxes.

April 2020: A partial refund was provided by the university for Spring 2020 Room and Board (Rent and Meal plan due to COVID19).

If I use this refund to pay for Fall 2020 qualified 529 expenses in July 2020, do I first need to repay the refund money to the 529 plan or can the Fall 2020 expense offset this refund since it occurs in the same calendar year as the refund.

In other words, is it necessary to repay the funds within the 60day limit to avoid taxes/penalites if the money will ultimately be expensed in the same calendar year?

Not A Product Question

Hal_Al

Employee

Any colleges expenses paid in the same calendar year, as the 529 distribution, are qualified, whether paid directly with the funds or not.

What's not clear is whether your situation applies. Your distribution was in 2019 but the expenses will not be paid until 2020.

The IRS has not, to my knowledge, yet published any guidance on how covid 529 refunds will be handled. I suspect they'll be lenient, given the circumstances. You are effectively meeting the intent of the rules.

It is clear that the 60 day rule for refunds does apply. Even though it's a hassle, re-contributing the money may be the safe move.

Reference: https://www.savingforcollege.com/article/can-i-recontribute-a-refund-to-my-529-plan

DWIEBAuthor

Hal_Al....so for clarification, I paid for both Fall 2019 and Spring 2020 expenses in November 2019 and made corresponding withdrawals from the 529 plan to cover the expenses. Under normal circumstances, this would all be correct.

The college decided to refund room and board expenses in April 2020 because of COVID.

Any refund by the school of these expenses SHOULD be deposited back into the 529 within 60days to avoid penalites or taxes.

HOWEVER, since I will have Fall 2020 expenses coming due in July, I was wondering if I could avoid re-depositing the COVID refund into 529 because I will have offsetting expenses due in July and they occur in the same calendar year (tax year) as the refund. So you see, I just wouldn't withdrawal the full amount of Fall 2020 expenses. Instead I would reduce any future 529 withdrawal by the amount of the COVID refund.

Hal_Al

Employee

I don't know, if that technically meets the rules. You might check with your plan administrator.

To be safe, you should put the money back. It may be a a hassle, but it meets the rules.

SusanY1

For 2020, the IRS has issued temporary guidance to extend the usual 60 day redeposit window so that you may return tuition refunds to the 529 plan by July 15, 2020 in order to avoid a situation where the funds create taxable income. When returning contributions to the plan sponsor, be sure to indicate that the funds are a recontribution by including a letter of instruction or other notation with the funds.

Guidance is less clear regarding whether applying the funds to other expenses in 2020 would allow for the same tax treatment, though there is some reason to believe that it may. However, returning the funds to the plan sponsor is the most clear path to avoiding income tax and/or penalties on the amount of the refund.

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Earlybird

If the original checks from the schools have been cashed, can I just send a check from my personal account for the amount of the refunds?

Hal_Al

Employee

@Earlybird

Yes

ashubuta40

I withdrew $3,000 from my granddaughter's 529 college fund. within 60 days I redeposited $2,000 back into the fund. How do I handle this on my taxes.?

Hal_Al

Employee

@ashubuta40 Depends on what did you do with the other $1000. If it was used for qualified educational expenses, including room and board for a half time, or more, student, you do not need to report the distribution.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."

If it was a non qualified distribution, you will have to pay tax and the 10% penalty on one third (1000 / 3000) of the earnings (box 2 of the 1099-Q) portion of the distribution. TT can handle this. The TurboTax (TT) 1099-Q interview will ask if you rolled over any of the money to another 529 plan. Answer yes. Redepositing the money counts as a rollover.