My daughter received money for “Covid-19” relief (via the American Rescue Plan) from her state university for Fall 2021. (All students who enrolled for Fall 2021 received this money.). This is NOT a refund for any past tuition or room and board. My question is how to handle this with our 529 plan. Do these funds need to be put into the 529 plan or is this money free to use for any purpose? Also, how will this money be handled for 2021 taxes?
(I have researched this on the IRS website, the Internet, have spoken to the 529 plan administration, and the school, and have no answers…)
I have not seen any answers to this either. I believe the intention was for this to be a stimulus payment and not taxable or accountable to 529. I hope some clear answers are given for this soon. But it could also be considered a refund of tuition and room and board fees, so may need to go back to the 529 plan or deducted from the amount of 529 claimed for 2021.
Page 2 of pub 970:"What's New for 2020 Emergency Financial Aid Grants under the CARES Act. Emergency financial aid grants under the CARES Act for unexpected expenses, unmet financial need, or expenses related to the disruption of campus operations on account of the COVID-19 pandemic, are not includible in your gross income. Because the grant is not includible in your gross income, you cannot claim any deduction or credit for expenses paid with the grant including the tuition and fees deduction, the American opportunity credit, or the lifetime learning credit. See FAQs: Higher Education Emergency Relief Fund and Emergency Financial Aid Grants under the CARES Act."
As to your 529 distribution; you cannot count it as a tax free distribution if the expenses were already covered by the emergency government funds. But, you're free to match the expenses and funds as you see fit, e,g, say the government money went to room and board and the 529 money went to tuition.
Note: some users have reported that their school included the relief money in box 5 of the 1098-T, as scholarship, complicating the answer.
Thank you for the response! Here is a good FAQ from Ed.gov:
They say that the monies can be used for tuition, room & board, meals etc. AND healthcare and mental care. So I’m still questioning whether the funds need to be deposited into the 529 given that you cannot use 529 for healthcare/mental care…
Q. So I’m still questioning whether the funds need to be deposited into the 529 given that you cannot use 529 for healthcare/mental care?
A. You take the attitude that the government emergency money was used for those costs of attendance (e.g. healthcare/mental care/child care) so that you can say the 529 money was used for the other qualified costs (room, board, tuition, fees, books, computers, software and other course materials).
If you do not have enough qualified expenses, then yes, you need to redeposit the 529 money. But, technically, the money must be put back within 60 days of the "refund".
This is still not making sense to me.
1. Let's say I receive $600 in HEERF funds, deposited in our bank account.
2. School bills me for $2600 tuition and I have $3000 in room and board (all 100% qualified expenses) for a total of $5600 and I pay for them from my bank account.
3. How much can I withdraw tax-free from our 529 as reimbursement?
A) Can I withdraw only $5,000? (reduced $600 by the amount of HEERF)
B) Can I withdraw the full $5,600? (the HEERF is independent of the 529)
Has the IRS provided an authoritative answer to these questions? It looks like they've addressed the American Opportunity Credit and Tuition Tax Deductions, but they've said nothing about 529 distributions.
1. HEERF grants appear to have no strict rules on their use; for example, it looks like they could be used for expenses that would be considered non-qualified for 529 purposes. The IRS describes these grants as: "emergency financial aid grants to students for expenses related to the disruption of campus operations due to the COVID-19 pandemic (including eligible expenses under a student's cost of attendance, such as food, housing, course materials, technology, health care, and child care)."
* Notice that the wording doesn't limit what the qualified expenses are. The key word to note is "including," which also seems to imply "not limited to."
* There's no requirement for record-keeping and no provision for refunding grant money back to the government if it's not spent on "qualified expenses."
2. After I deposit funds in my bank account and pay my bills, who's to say which dollar paid for a particular expense?
These considerations suggest to me that HEERF grants are independent from 529 plans, and should not affect the amount of qualified 529 withdrawal. I hope that's the case.
Replying to myself with additional information from the IRS. This appears to be the answer, but I'm not sure I trust it.
In a March 30, 2021 bulletin, the IRS wrote: (see https://www.irs.gov/newsroom/emergency-aid-granted-to-students-due-to-covid-is-not-taxable :(
"Emergency financial aid grants made by a federal agency, state, Indian tribe, higher education institution or scholarship-granting organization (including a tribal organization) to a student because of an event related to the COVID-19 pandemic are not included in the student's gross income.
Also, students should not reduce an amount of qualified tuition and related expenses by the amount of an emergency financial aid grant."
@daveneedsanswers You can withdraw the full $5600, as long as you have some other "education related" expenses for the $600 HERF. As you surmised, they can be expense that don't qualify for a 529 plan distribution. In the original poster's case, it was "healthcare/mental care/child care".
I know of no IRS provided authoritative answer to these questions. The expenses just appear to be needed to allow you to pursue education. I think transportation (gas) would even qualify.
It is not necessary to match the actual funds to actual expenses. You just need to have expenses in those amounts during the same calendar year.
Circling back, it turned out that the HEERF Covid emergency payments had no restrictions on how they were used, and the IRS March 31, 2001 memo confirmed that they did not reduce the qualified and related expenses for the purpose of 529 withdrawals. These non-taxable payments were issued directly by educational institutions, so recipients were pre-qualified by having enrolled in school, but the payments were not contingent on them being used to pay for any specific expense, nor were they to be applied to offset any other public benefits or scholarships.