Certain College Refunds Must Be Handled with Care

April 28, 2020 | Wendy Hoey Sheinberg | Banking

Colleges and universities across the country have closed in response to the COVID-19 crisis. Some have announced that they will provide pro-rated refunds for certain expenses.

If your college-age child received a refund for tuition or other education payments made through a 529 College Savings Plan (“529 Plan”), you will need to pay special attention to what you do with the refund.

Section 529 of the Internal Revenue Code (the “Code”) governs 529 Plans. Distributions from 529 Plans to pay for qualified expenses (textbooks, room and board, etc.) are generally exempt from gross income. Distributions that are not used for qualified expenses do not enjoy the same exemption, and are subject to a 10% penalty. Refunded distributions have not been used for qualified expenses.  To avoid the penalty and tax, the refunded portion of the original distribution must be re-contributed to the 529 Plan within 60 days of the refund. Taxpayers should be sure to document the re-contribution.

The following steps will help taxpayers to document the re-contribution:

  1. Keep copies of the refund check and the correspondence sent by the school.
  2. The re-contribution should be made by check; the memo should reflect that it is a 529 Plan recontribution.
  3. The re-contribution check to the 529 plan should be accompanied by correspondence to the 529 Plan administrator. The correspondence should state that the funds are a re-contribution of a refunded amount. The correspondence should include the student’s name, the name of the educational institution, the date of the initial distribution, the date that the payment was made to the school, the date of the refund and any other relevant details.
  4. Keep copies of all documentation related to the re-contribution, including the re-contribution check.
  5. Send the re-contribution and correspondence to the 529 administrator by traceable delivery such as FedEx, UPS, or USPS Certified Mail.
  6. Provide copies of the above to your tax preparer with the other documents needed for your 2020 income tax returns.
  7. Maintain copies of all of the above for at least three years after filing your 2020 income tax return.

While neither the Code nor the IRS provide express guidance on the mechanics of re-contributions, maintaining the above documentation will be help taxpayers respond to any questions related to both the refund and re-contribution.

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