Michael Bork, CFP® | Associate Advisor

Amidst the widespread impacts of COVID-19, the mass closure of colleges, universities and private secondary schools may create some unexpected tax consequences for students and their parents after receiving partial refunds for qualified expenses paid this semester. For students who originally used 529 plan assets to pay their qualified education expenses, any refund received is at risk of being recategorized as a non-qualified distribution. This situation triggers a 10% tax penalty and the earnings portion of the distribution will be subject to income taxes at the beneficiary’s tax rate.

Distributions will remain tax-free if refunds are recontributed to a 529 plan within 60 days of receiving the refund. The recontributed amount will be treated as principal and will not be counted against the beneficiary’s aggregate contribution limit. The recontributed refunds must be contributed to a 529 plan for the same beneficiary but does not have to be the same 529 plan from which it was originally distributed.

An alternative is to use the refund for qualified educations expenses in the same tax year. With most schools completing the year online, students may have incurred additional qualified expenses if they had to buy a computer, software, or pay for internet access to complete the semester.

Be sure to keep track of all the records showing the date of the refund from the eligible educational institution and then its recontribution into the 529 plan. If the refund is used for other qualified expenses be sure to keep all receipts and records.
We recommend you consult your tax preparer for full guidance on the impact to your tax situation. As always, we welcome your questions and are available to discuss your personal situation and help you determine what actions you need to take.