TIM GRANT Pittsburgh Post-Gazette tgrant@post-gazette.com
April 23: CSF Chair Vivian Tsai explained how families can redeposit funds received as higher-education refunds, into their 529 savings plans.
Colleges and universities sometimes need to refund a portion of the money families pay for expenses due to problems such as a student deciding to drop a class before midterm or if a student needs to leave school early due to significant changes in the family.
An imminent threat to public health caused by the spread of the COVID-19 virus has forced institutions of higher learning across the country this year to offer refunds to families on a massive scale as dormitories were shut down and millions of students were sent home before the end of the spring semester.
Families that originally withdrew the money from a 529 college savings account will have the option to put the refunds back into a 529 account for the same student with no tax or penalty.
“This is the first time this issue has been a topic of interest on such a scale as it is now,” said Vivian Tsai, chair of the Washington, D.C.-based College Savings Foundation. “The 529 industry is seeing lots of questions on how to do re-contributions to 529 accounts.”
Mark Kantrowitz, a Chicago-based expert on college financing and publisher of SavingForCollege.com, said about 70% of colleges are giving cash refunds to students. The refunds are typically for 40% to 60% of the room and board cost for the spring semester. He estimates families will get back between $2,500 and $3,500 based on the national average of about $6,000 a semester for room and board.
He said most colleges are not giving students refunds for tuition payments because classes were typically moved online.
Generally, the re-contribution must be made within 60 days of the refund date. However, under temporary Internal Revenue Service guidance, if that 60-day period ends on or after April 1 and before July 15, the re-contribution can be made any time before the later of July 15 or 60 days after the refund date, according to the CSF.
Ms. Tsai said the refunded money could be subjected to federal and state taxes and penalties if it remains outside a 529 plan and is not used for qualified educational expenses.
These 529 accounts are tax-advantaged investment accounts designed to encourage families to save for college. The contributions are allowed to grow tax-deferred. Distributions from the account are not taxed if used to pay expenses for K-12 public, private and religious school expenses or higher education costs.
The College Savings Foundation is a trade group for 529 plan program managers, state sponsors and financial services firms that manage the accounts. The nonprofit organization reports there are 14.5 million individual 529 plan accounts in the U.S. with a total of $371 billion in assets families have set aside for future higher education expenses in 529 accounts.
As chair of the CSF, Ms. Tsai is not only a 529 plan expert but also a parent with two sons — a sophomore and a junior — in college. She is going through the very same experience of other parents. She expects to receive a partial rent refund from both their colleges, which was paid for with 529 funds.
“I’m thinking I could re-contribute the refunded money or I could keep it aside because I’ll probably be billed in July or August for the fall term,” she said. “I’ll probably just keep it out to avoid the inconvenience of even having to think about it. But if one of them was a senior and it was his last year I would definitely put it back.”
Refunds that are not re-contributed are considered non-qualified distributions. The earnings portion of a non-qualified distribution is subject to income taxes at the beneficiary’s tax rate and a 10% tax penalty.
“There may even be a recapture of state income tax breaks attributable to the non-qualified distribution,” Mr. Kantrowitz said.
But that doesn’t mean there aren’t some alternatives to re-contributing a refund.
“Another option is to look for other qualified expenses in the same tax year that can justify the distribution as a qualified distribution,” Mr. Kantrowitz said.
“For example, if a student gets a prorated room and board refund because the college told students to vacate the dorms, but then buys a computer and pays for Internet access because the college moved classes online, they might be OK, since computer equipment, peripherals, software and Internet access are qualified higher education expenses for 529 plans.”
Tim Grant: tgrant@post-gazette.com or 412-263-1591.