Education Expenses Guidance


The IRS recently issued a notice announcing that it intends to issue regulations providing clarification regarding:

1) The special rules for contributions of refunded qualified higher education expenses to a qualified tuition program under IRC section 529,

2) The new rules permitting a rollover from a qualified tuition program to an ABLE account under IRC section 529A, and

3) The new rules treating certain elementary or secondary school expenses as qualified higher education expenses under IRC section 529.

Re-contribution of refunded QHEEs. IRC section 529 defines the rules for qualified tuition programs (QTPs). A QTP allows taxpayers to make nondeductible contributes to an account for a designated beneficiary's qualified higher education expenses (QHEEs).

Earnings in the account grow tax-free, and distributions (including any attributable earnings) from a QTP are not taxable if such distributions do not exceed the designated beneficiary's QHEE. To the extent distributions exceed the designated beneficiary's QHEE, a portion of the distribution is taxable.At times, an eligible educational institution may refund certain expenses to the beneficiary. This could occur, for example, if the beneficiary were to drop a class mid-semester. IRC section 529(c)(3)(D) provides that the portion of such a distribution refunded to the beneficiary is not taxable to the extent that the refund is re-contributed to the beneficiary's QTP within 60 day.

The IRS notice acknowledges that a QTP administrator generally would be unable to determine the earnings portion of a re-contribution. Accordingly, the IRS intends to issue regulations providing that the entire re-contribution will be treated as principal. The re-contribution will also not count against the limit on contributions on behalf of the designated beneficiary. The re-contribution must be to a QTP for the benefit of the designated beneficiary who received the refund, but it does not need to be to the same QTP from which the distributions for the QHEEs were made.

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