IRS offers clarity on recent 529 plan changes

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By Kathryn Flynn

July 31, 2018

The PATH Act of 2015 and the Tax Cuts and Jobs Act of 2017 included significant changes to 529 college savings plans. These changes allow qualified distributions to be recontributed to a 529 plan when the funds are refunded by an eligible educational institution, expand the definition of qualified higher education expenses to include K-12 tuition and allow tax-free rollovers from traditional 529 plans to ABLE accounts. The IRS and the Department of the Treasury recently issued Notice 2018-58, which announced their intent to issue regulations on these changes, providing clarity to 529 plan owners and administrators. Here is a summary of the changes and the expected regulations: 

Allows refunded qualified higher education expenses to be recontributed to a 529 plan 

If a 529 plan beneficiary receives a refund from an eligible educational institution for tuition or other qualified expenses, the distribution will be tax-free if it is recontributed to a 529 plan within 60 days. 529 plan administrators expressed concerns about how to treat the recontribution, since unlike a plan-to-plan rollover, it is not possible to identify the income and earnings portions of refunded tuition payments. 

The IRS intends to provide new regulations to simplify the process by treating the entire recontributed amount as principal, which will not be counted against the beneficiary’s aggregate contribution limit. The recontributed refunds must be contributed to a 529 plan for the same beneficiary, but they do not have to be made to the same 529 plans from which they were distributed. 

K-12 tuition expenses are now a qualified 529 plan expense 

The Tax Cuts and Jobs Act of 2017 expanded the benefits of 529 savings plans by allowing up to $10,000 per beneficiary per year in tuition expenses at eligible private, public or religious elementary or secondary schools to be considered a qualified expense. However, it was unclear how to determine whether or not a school was considered an eligible institution. 

New regulations will clarify the definition of “elementary and secondary” so that it is consistent with the definition used for Coverdell Education Savings Accounts. For the purposes of Coverdell ESAs, eligible elementary or secondary schools provide kindergarten through 12th grade education as determined under State law. 

Funds from traditional 529 plans can be rolled into 529 ABLE accounts 

The Tax Cuts and Jobs Act also included a provision that allows tax-free rollovers from a 529 savings plan to an ABLE account for the same beneficiary or a qualified family member, so long as the rollover takes place within 60 days and does not exceed the annual gift tax exclusion amount ($15,000 in 2018). 

The IRS intends to issue regulations requiring the sum of 529 plan rollovers and any other contributions to the beneficiary’s ABLE plan to be within the annual contribution limit. However, individuals who are working and who do not participate in an employer-sponsored retirement plan may contribute an additional amount above the limit.

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