Even when your child has put tremendous effort into thoughtfully selecting freshman year classes, living arrangements, and other aspects of their first-year experience, plans and preferences can change.
Depending on the nature and timing of the change in direction, it’s possible that your child could be eligible for a partial refund from the institution they are attending. What changes in circumstances could result in a partial refund?
1. Class Withdrawals During the Withdrawal Period
One of the most common reasons for colleges to issue refunds is when a student decides to withdraw from a class during the designated withdrawal period at the beginning of the semester. If a student drops a class within this timeframe and doesn’t add another, the university may refund a portion of the tuition associated with the course from which the withdrawal was made.
2. Change in Housing and/or Meal Plans
For students living and dining on campus, modifications to meal plans which result in access to fewer meals could lead to a partial refund of the original expense. Likewise, when a student decides to move from a single to a double room, off campus, or even home, a prorated refund may be available depending on the point in the semester at which the change is made.
3. A Leave of Absence or Complete Withdrawal
Students who decide to take a short-term leave of absence or make a full withdrawal from the institution they are attending may be eligible for a partial refund depending on circumstances and timing.
4. An Overpayment
When an overpayment to a student’s account is made, due to a billing error, receipt of a last-minute scholarship, or some other circumstance, a refund of the overpayment may be made.
Now What? If funds withdrawn from a 529 plan were used to cover the original qualified expense, what options do you have as a 529 plan account owner with respect to a refund received?
The good news is that if you took a withdrawal from your 529 plan to cover the expenses that have now resulted in a refund, you may be able to return the funds to your 529 plan without tax or penalty.
When an eligible educational institution refunds any portion of an amount you previously withdrew from your 529 account for payment of qualified expenses such as tuition and room and board, the refunded amount should not be subject to federal and state income tax as long as it is:
- Re-contributed to a 529 plan account established for the same beneficiary on whose behalf the withdrawal was originally made, and
- Re-contributed to a 529 plan not later than 60 days from the date of the refund.
It’s important to note that the amount you recontribute cannot exceed the amount of the refund you received and you’ll want to check with your 529 plan to see what documentation is required to clarify that you are making a re-contribution versus a new contribution.
Use toward a different qualified expense.
You may also be able to use a refund to cover the cost of a different qualified expense in the same tax year if there is something else you wish to cover.
If you do nothing once you receive a refund, it could be considered a non-qualified distribution from your 529 plan account, the earnings portion of which could be subject to ordinary income tax at your or the beneficiary’s tax rate (depending on how the withdrawal was made) and a 10% tax penalty.
Conclusion: With any of these scenarios, it is important to retain documentation associated with any refund received and any recontribution thereof. Speak with a tax professional about which approach may be best for you depending on your particular circumstances.