529 Complication Due to Unexpected Late Scholarship After Reimbursement

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Topic Author
inepteft
Posts: 49
Joined: Tue Feb 24, 2015 12:19 pm

529 Complication Due to Unexpected Late Scholarship After Reimbursement

Post by inepteft »

Our child ended up receiving an unexpected scholarship more than a month after the payment deadline for the fall semester. We already paid the bills directly and then requested and received reimbursement from a 529 plan for qualified expenses. The university is issuing a check to our student for the scholarship amount. We were hoping that the scholarship could just be applied next semester and then we would just use less of the remaining 529 account, but I suspect the receipt of the scholarship in 2021 means that we now have a portion of the 529 funds already received that are taxable (but no penalty due to the scholarship and tax incurred only on the earnings). Has anyone experienced something similar? Lesson learned to hold off on 529 reimbursement until later in the semester. Thanks for any insight on the situation.
marcopolo
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Joined: Sat Dec 03, 2016 10:22 am

Re: 529 Complication Due to Unexpected Late Scholarship After Reimbursement

Post by marcopolo »

We just had the same happen to us. Small, unexpected scholarship. I don't see much option other than it being taxable, but no penalty.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
inepteft
Posts: 49
Joined: Tue Feb 24, 2015 12:19 pm

Re: 529 Complication Due to Unexpected Late Scholarship After Reimbursement

Post by inepteft »

Thanks for sharing your experience and congrats to your child on the surprise scholarship! We definitely still come out ahead and are grateful for the scholarship, but it'll just complicate things a bit come tax time.
pizzy
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Re: 529 Complication Due to Unexpected Late Scholarship After Reimbursement

Post by pizzy »

Can you pay the spring tuition payment in late December?
HereToLearn
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Joined: Sat Mar 17, 2018 5:53 pm

Re: 529 Complication Due to Unexpected Late Scholarship After Reimbursement

Post by HereToLearn »

I thought there was some rule that allowed tuition refunds to be re-contributed to the 529 plan within 60 days of the refund from the school? I know this was the case when schools issued R&B refunds last spring after CV-19 shutdowns, but I thought the rule pre-dated 2020.

I found this discussion: https://www.collegeadvantage.com/blog/b ... no-problem!

I went around in circles with my 529 administrator last year after my son decided to take a gap year AFTER I had the 529 administrator issue a check to his university. Even though the university never cashed the check, and I returned it to the 529 plan well within 60 days, the 529 administrator said they would still have to issue the 1099-Q, and they did! I am holding onto copies of my correspondence in case the IRS ever comes looking for me.
Learning2Bogle
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Joined: Sun Dec 30, 2018 2:57 pm

Re: 529 Complication Due to Unexpected Late Scholarship After Reimbursement

Post by Learning2Bogle »

If you next semester tuition bill arrives in December 2021, can you pay it with the 529 funds less the amount of the scholarship (x2 if it's an annual scholarship) so your net reimbursement evens out for 2021?
secondcor521
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Joined: Wed Sep 10, 2014 4:11 pm

Re: 529 Complication Due to Unexpected Late Scholarship After Reimbursement

Post by secondcor521 »

You're allowed to redeposit the money back into the 529 and effectively reverse that portion the distribution. You have 60 days to do so; I believe the clock starts ticking the day you receive the check. Call your 529 plan administrator and ask how they want you to handle it; mine just asks me to send in a check with a letter of explanation.

You can find the details of this in IRS Pub 970 chapter 8. It's on page 60 of the 2020 version, search for "Recontribution of Refunded
Amounts" here: https://www.irs.gov/pub/irs-pdf/p970.pdf

My 529 plan administrator doesn't seem to have their computer system set up very well to account for these things. The recontributed amount appears to be recorded as a contribution, although I'm not allowed the state tax deduction for a contribution on those dollars because they are not, in fact, a contribution.

I'm not sure how they handle it on the 1099-Q, because I personally just keep my own separate set of records on what everything is for. I have a rather complicated and complex situation between scholarships, non-qualified expenses, grants, work-study, AOTC, out-of-pocket across two kids at two different schools.
Flyer24
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Re: 529 Complication Due to Unexpected Late Scholarship After Reimbursement

Post by Flyer24 »

You have 60 days to re-deposit the money back into the 529. Also consider if you have any other expenses that could offset (room/board, books, etc).
Topic Author
inepteft
Posts: 49
Joined: Tue Feb 24, 2015 12:19 pm

Re: 529 Complication Due to Unexpected Late Scholarship After Reimbursement

Post by inepteft »

Thanks for the additional feedback! Great point about paying early in December for the Spring semester if the bills post by then (I'm not sure they will). I'll also look into reversing the scholarship portion of the distribution within 60 days. Reading the IRS documentation again and reaching out to the 529 administrator should help clarify next steps.
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