Posted Apr 12, 2020
By Karin Price Mueller | NJ Advance Media for NJ.com
When colleges across the country started to shut down their dorms and cafeterias because of the coronavirus outbreak, families received partial refunds for housing and meal plan costs.
But what if you used a 529 plan to pay your college student’s bills? Could getting money back because of the coronavirus, when it’s from a tax-advantaged account, lead to an unexpected tax bill?
We took these questions to Vivian Tsai, chair of the College Savings Foundation, a nonprofit that helps families save for college.
Q: Can we put the refunded money back in a 529 plan?
A: Yes, if you have received a refund of tuition, housing or meal plans — or any other qualified higher education expense — from a community college, college or university, that was originally paid out from your 529 account, you may re-contribute those funds tax- and penalty-free to any 529 plan/qualified tuition program for the same beneficiary.
Generally, the re-contribution must be made within 60 days of the refund date. However, under temporary IRS guidance issued as a result of the health crisis, if that 60-day period ends on or after April 1, 2020, and before July 15, 2020, then the re-contribution can be made any time before the later of July 15, 2020, or 60 days after the refund date.
Q: What legislation allows this?
A: 2015’s Protecting Americans From Tax Hikes (PATH) Act added a special rule for a beneficiary of a 529 plan, usually a student, who receives a refund of tuition or other qualified education expenses.
This can occur when a student drops a class mid-term — or in circumstances like today’s global health crisis.
If the beneficiary re-contributes the refund to any of his or her 529 plans within 60 days, the refund will not be subject to penalties or taxes.
Under temporary IRS guidance issued as a result of the health crisis, if that 60-day period ends on or after April 1, 2020 and before July 15, 2020, then the re-contribution can be made any time before the later of July 15, 2020 or 60 days after the refund date.
Q: How does it work?
A: Fund re-contributions may be made directly into any 529 plan/qualified tuition program for the same beneficiary.
Q: What normally happens if more than 60 days has passed?
A: Account owners have 60 days from the date of the refund to re-deposit the 529 funds and not see taxes or penalties on those funds. If more than 60 days has passed, then the account owner (or beneficiary) will be subject to taxes and any penalty on the earnings of that distribution which would now be considered “non-qualified” expenses.
(As noted above, those deadlines have changed because of the coronavirus pandemic.)
Q: Should people put the money back in a 529 plan, or should they just use it for fall college expenses?
A: 529 plans provide a convenient way to earmark college savings funds away from family’s day-to-day expenses, and many come with cash-like or money market investment options.
Since the re-contributed funds will all be treated as new contributions under IRS guidance, it might make sense to put the funds back.
However, if the beneficiary is returning to college in the fall or will be paying invoices in the next few months, or will have use for the funds in this tax year, then it might make sense for them to keep the funds outside the 529 plan.
Again, it may make sense to check with your financial advisor or a tax professional.