Extended deadline to recontributed education expenses

When a student paid for college tuition and fees from a §529 plan, and then receives a refund for the tuition and fees, any portion of the refunded amounts recontributed to the §529 plan within 60 days of receiving the refund is not subject to tax. This was the case for many students across the country, who received refunds of tuition and fees for the Spring 2020 semester when schools were forced to close down because of COVID-19.

IRS Notice 2020-23 extended the deadline for many time-sensitive actions, including recontributions to §529 plans. If the 60-day recontribution deadline falls between April 1 and July 15, 2020, the notice extends the recontribution deadline to July 15, 2020. The extended deadline applies to tuition refunds received on or after February 1, because February 1 is the date that is 60 days before April 1. As an added bonus, the IRS will allow the student to use the payment for other tuition and fee expenses due before the end of 2020.

Added bonus for recontributions of education expenses

Back in 2018, the IRS stated in Notice 2018-58 that they would issue regulations that would treat as principal the entire refunded amount of education expenses paid with §529 funds when the funds are recontributed back into an education savings account. But to date, they have not issued those regulations.

Notice 2018-58 says the recontributions have to be made to a qualified tuition program for the benefit of the designed beneficiary who received the tuition refund. But the recontribution does not have to be to the same exact tuition program that the original distribution was made from.

As an example of how all this works, let’s say a student, Brooke, received a distribution from her §529 college savings account in the amount of $15,000. Of that amount, $11,000 was allocated to principal and $4,000 was allocated to earnings. Brooke used all $15,000 to pay for her Spring 2020 college tuition.

On March 15, 2020, the spring semester at Brooke’s college was cancelled because of the COVID-19 pandemic, and Brooke received a full refund of her $15,000 tuition on March 25. May 24 is the date that is 60 days after March 25. Because May 24 falls between April 1 and July 15, 2020, Brooke is allowed to recontribute her $15,000 back into her §529 plan by July 15, 2020.

And Notice 2018-58 allows Brooke to treat the entire recontribution as principal. In other words, if she later pulls the $15,000 out again, her basis will not have been reduced.

California conformity

California conforms the provision allowing 60-day rollovers for §529 plans. California also conforms to both IRS Notice 2020-23 (which extends the 60-day recontribution deadline to July 15, 2020) and IRS Notice 2018-58 (which treats recontributions as principal).

We hope the above helps many of you that find yourself in the situation as in the example. If you need further assistance contact Crystal Wampler and @Amit Chandel at 562.281.1040.