How to Get Relief for Refunds of College Costs Paid from 529 Funds

SC&H’s Key Takeaways

  • Colleges and universities may be issuing refunds for closing campuses and dorms due to concern over the spread of the Coronavirus.
  • If these refunds stem from 529 plan funds, you may redeposit the refunded amount, and the window for those redeposits has been extended.
  • Refunds of qualified expenses paid from 529 plans that are not redeposited could be subject to income tax and assessed a 10% penalty, since the refunded amounts are no longer being used for qualified education expenses.

Colleges and universities across the country are closing campuses and dorms to help slow the spread of the Coronavirus. Many have shifted to online curriculum for the remainder of the year and may be issuing refunds of education expenses. In some cases, these expenses were initially paid from a 529 plan, leading many to ask whether it is possible to place the money back into the 529 account, while avoiding any potential tax ramifications.

Under normal circumstances, 529 funds must be redeposited within 60 days of the refund date. These redeposits are still considered qualified by the IRS, so that taxes and penalties are not applied at the federal level. Check with your state to determine how a recontribution may be treated under state law. However, during this nationwide pandemic, the IRS has increased your 60-day redeposit period as follows:

  • If the 60-day period ends on or after April 1, 2020 and before July 15, 2020, then the redeposit can be made any time before the later of July 15, 2020 or 60 days after the refund date.

This means that any 60-day redeposit period that ends between April 1, 2020 and July 15, 2020 has been extended to July 15, 2020.

Keep in mind that redeposits need to meet the following guidelines:

  • The funds you wish to redeposit must have been refunded to you by your beneficiary’s eligible educational institution.
    • Please note that refunds from K-12 schools are NOT eligible for redeposit.
  • You must redeposit the refund into a 529 account for the same beneficiary from which the original distribution was taken.
  • The portion of the refund you wish to redeposit must be a refund of qualified higher educational expenses only.
  • Your redeposit cannot exceed the amount of the refunded amount.
  • Redeposits will not be eligible for a state level tax deduction

You will want to make sure you maintain all documentation and records related to the refund and redeposit. If you miss the deadline or choose not to redeposit the refund, it may be considered a non-qualified withdrawal and any earnings are subject to both federal income taxes and the 10% distribution penalty.

If you would like to discuss the implications of any refunds and/or redeposits, please contact your SC&H relationship manager or if you’re not an SC&H client, please reach out to us here.