529 Plans & COVID-19 Tuition Refunds - 60 Days to Act

Posted on Fri, May 15, 2020 ©2021 Drucker & Scaccetti

collegelogos-resized-600There have been many adjustments to society due to the coronavirus; the largest, of course, being the extended stay-at-home order. With fears of the virus spreading, schools have quickly switched to online learning and closed campus dorms. Many students who paid for room and board have or will receive partial refunds from their learning institutions, possibly leading to an unexpected tax bill.  If a student, or their parents, used a 529 plan withdrawal to pay for qualified education costs and then received a refund from the educational institution it is important to take action within 60 days of receiving the refund. Here’s why…


What should account owners do?  

Option One

To avoid an unexpected tax bill for 2020,  refunded tuition funds should be redeposited into a 529 Savings Plan account for the same beneficiary. If funds are not redeposited, the distribution will be considered a non-qualified taxable withdrawal.  This will result in the earnings portion of the non-qualified distribution taken being taxed in addition to a 10% penalty on the non-qualified distribution.


Option Two

If it is still in the same tax year, a student can pay for qualified expenses for another semester without having to pay penalties and income taxes on the earnings portion of the distribution. Therefore, if the student plans on attending courses in the fall, they can also apply the 529 funds previously withdrawn to the 2020 fall semester. This is riskier than option one, given the uncertainty surrounding, well, everything right now.  We suggest applying any refund to tuition only until there is more clarity about how the fall semester will proceed.


Is there a time limit?

Yes, account owners have 60 days from the date of the refund to redeposit the 529 funds and avoid paying taxes or penalties on those funds.

However, IRS Notice 2020-23 provides that if the 60-day period for redeposit 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.


How are funds redeposited?

In the event an account owner wants to re-contribute the refunds received, they can be made directly into any 529 plan/qualified tuition program for the same beneficiary. The redeposit amount should not exceed the refund received.


The account owner is responsible to make sure the transaction meets the Internal Revenue Service requirements to avoid possible tax consequences. 529 plan providers should be contacted to determine their specific documentation requirements.  The owner of the account should document the redeposit by including a letter with the check for redeposit. The letter should include the date(s) any refund(s) was from the eligible educational institution and the redeposit process.


Continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the coronavirus pandemic may impact your tax filings, payments, and planning. We encourage you to share the page with others. Through this unprecedented series of events, you can count on The Tax Warriors® at Drucker & Scaccetti to help. Call on us for assistance.

Topics: 529 Plans, qualified education expenses, Tax Bill, higher education expenses, coronavirus, COVID-19, Room and Board, on-campus housing, college expenses, plan withdrawals, redeposit, non-qualified taxable withdrawal, IRS Notice 2020-23, 60-days

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