Refund of Qualified Expense repayment to 529 plan

[DWIEB]

If a college has made a refund of qualified 529 expenses for which 529 funds were used, does this money have to be re-deposited to the 529 account IF there will be future expenses in the same calendar year to offset the refund?

Specifically:

Nov2019:  Paid 2020 Spring Room and Board from 529 plan and claimed disbursement on 2019 taxes.

April 2020: A partial refund was provided by the university for Spring 2020 Room and Board (Rent and Meal plan due to COVID19). 

If I use this refund to pay for Fall 2020 qualified 529 expenses in July 2020, do I first need to repay the refund money to the 529 plan or can the Fall 2020 expense offset this refund since it occurs in the same calendar year as the refund.

In other words, is it necessary to repay the funds within the 60day limit to avoid taxes/penalites if the money will ultimately be expensed in the same calendar year? 

[Hal_Al]

Any colleges expenses paid in the same calendar year, as the 529 distribution, are qualified, whether paid directly with the funds or not.  

What's not clear is whether your situation applies.  Your distribution was in 2019 but the expenses will not be paid until 2020.  

The IRS has not, to my knowledge, yet published any guidance on how covid 529 refunds will be handled.  I suspect they'll be lenient, given the circumstances.  You are effectively meeting the intent of the rules. 

It is clear that the 60 day rule for refunds does apply.  Even though it's a hassle, re-contributing the money may be the safe move. 

Reference: https://www.savingforcollege.com/article/can-i-recontribute-a-refund-to-my-529-plan

[DWIEB]

Hal_Al....so for clarification, I paid for both Fall 2019 and Spring 2020 expenses in November 2019 and made corresponding withdrawals from the 529 plan to cover the expenses.  Under normal circumstances, this would all be correct.

The college decided to refund room and board expenses in April 2020 because of COVID.

Any refund by the school of these expenses SHOULD be deposited back into the 529 within 60days to avoid penalites or taxes.

HOWEVER, since I will have Fall 2020 expenses coming due in July, I was wondering if I could avoid re-depositing the COVID refund into 529 because I will have offsetting expenses due in July and they occur in the same calendar year (tax year) as the refund.  So you see, I just wouldn't withdrawal the full amount of Fall 2020 expenses.  Instead I would reduce any future 529 withdrawal by the amount of the COVID refund.

[Hal_Al]

I don't know, if that technically meets the rules.  You might check with your plan administrator.

To be safe, you should put the money back. It may be a a hassle, but it meets the rules.

[DWIEB]

yeah, unfortunately plan administrators do not answer tax questions.  It's sort of a vicious circle I'm in here.

[linyphia1515]

Dear Champ: I have a related question if you don't mind. My son's first year tuition of $4089 was taken out of his 529 on 8-15-19. Sent to the University 8-21-19. He quickly dropped out and we did not find out right away. He got a full tuition refund. We refunded the 529 the full $4089 on 10-29-2019. Should I even bother reporting all this? The 529 outfit did send us a 1099-Q listing the withdrawal. The refund to the 529 account was a few days over the "60-day limit." Thank you for your time and expertise. - Paul, Albuquerque, NM, USA

[Hal_Al]

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

 When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records.

[Earlybird]

I asked the exact same question but likely not as clearly as you did!  My daughters received the refunds and deposited them, and my plan was to do the same- reduce the 529 withdrawal in 2020 by the amount of the refund.  I was past the 60 days to redeposit when I first read about this in Kiplinger magazine, and my daughter already deposited the funds.  I have this situation with 2 children and 2 529 plans.  They both will be filing a tax return and could report the refunds as taxable income, but that doesn't seem fair when I can just reduce the 529 withdrawal this year.  Did you find any additional information on this? I know your question was a couple of months ago.

[SusanY1]

For 2020, the IRS has issued temporary guidance to extend the usual 60 day redeposit window so that you may return tuition refunds to the 529 plan by July 15, 2020 in order to avoid a situation where the funds create taxable income.   When returning contributions to the plan sponsor, be sure to indicate that the funds are a recontribution by including a letter of instruction or other notation with the funds.

Guidance is less clear regarding whether applying the funds to other expenses in 2020 would allow for the same tax treatment, though there is some reason to believe that it may.  However, returning the funds to the plan sponsor is the most clear path to avoiding income tax and/or penalties on the amount of the refund.  

[Earlybird]

If the original checks from the schools have been cashed, can I just send a check from my personal account for the amount of the refunds? 

[Hal_Al]

Thanks Susan. Good info.

Note that the July 15 recontribution date  date applies to those receiving refunds in 2020.  Posters who asked about refunds received in 2019 would not be covered.

[Hal_Al]

@Earlybird 

Yes

[Hal_Al]

See this update:

https://ttlc.intuit.com/community/college-education/discussion/re-refunds-made-by-school/01/1652878#...

The most recent comment says:

My college refunded tuition paid with 529 Plan funds. What do I do?

May 01, 2020 : H&R Block

In most cases, if your college issues a refund for a qualified expense, you have 60 days to reinvest the money back into your 529 account. Right now, you might be counting the days since your college issued the refund to see if your 60-day window has passed. Luckily, recent IRS guidance gives you some additional time to recontribute the refunded amount back to your account.

With the IRS announcement, you have the following options:

• Redeposit the refunded amount by July 15, 2020, or 60-days after the refund was issued, whichever date is later.
• Apply the funds to other qualified expenses later this year. Be sure to spend it on expenses for the fall semester as the funds need to be used by December 31, 2020.

[Ed109]

When you receive a refund from the college and do not deposit it back in the 529 plan within 60 days but rather use the refund to pay a future tuition expense in the same tax year, how should this be accounted for using TurboTax?   You can answer "Yes" to the question if you received a refund and "No" to the question if you deposited the refund back into the 529 plan.  However there is not an option to indicate that you used the refunded amount for future tuition in the same tax year. Is 

[Hal_Al]

@Ed109 

Answer No when asked it you got a refund.  You did not effectively get a "refund", you just payed different expenses.  All you need to do is match distributions to qualified expenses, paid for, in the same calendar year.