The Treasury Department and the IRS have announced that they intend to regulate three recent tax-law changes that affect 529 education savings plans.
Notice 2018-58, Guidance on Recontributions, Rollovers and Qualified Higher Education Expenses Under Section 529, the Treasury Department and the IRS have announced that they will issue three regulations that clarify the special rules for contributions of refunded qualified higher education expenses to a qualified tuition program under Section 529(c)(3)(D), the new rules under 529(c)(3)(C)(i)(lll) permitting a rollover from a qualified tuition program to an ABLE account under Section 529(A); and the new rules under Section 529(c)(7) treating certain elementary or secondary school expenses as qualified higher education expenses.
The notice addresses changes included in the 2015 Protecting Americans From Tax Hikes (PATH) Act, and two changes included in the 2017 Tax Cuts and Jobs Act (TCJA). Taxpayers, beneficiaries, and administrators of 529 and Achieving a Better Life Experience programs (ABLE) can rely on the rules described in the notice until Treasury and the IRS issue regulations clarifying the changes.
The PATH Act change added a special rule for a beneficiary of a 529 plan, usually a student, who receives a refund of tuition or other qualified education expenses. This can occur when a student drops a class mid-semester. If the beneficiary recontributes the refund to any of his or her 529 plans within 60 days, the refund is tax-free.
Treasury and the IRS intend to issue future regulations simplifying the tax treatment of these transactions. Re-contributions would not count against the plan’s contribution limit.
One of the TCJA changes allows distributions from 529 plans to be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year at an elementary or secondary (K-12) public, private or religious school of the beneficiary’s choosing.
Rollovers to an ABLE account
The second TCJA change allows funds to be rolled over from a designated beneficiary’s 529 plan to an ABLE account for the same beneficiary or a family member. ABLE accounts are tax-favored accounts for certain people who become disabled before age 26, designed to enable these people and their families to save and pay for disability-related expenses.
The regulations would provide that rollovers from 529 plans, together with any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) cannot exceed the annual ABLE contribution limit -- $15,000 for 2018.
For more information about other TCJA provisions, visit IRS.gov/taxreform.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.