Earlier this year we shared updates about H.R. 529 and a series of proposed enhancements to 529 college savings plans. Now, we have some good news for you!
On December 18th, Congress passed and the President signed the “Protecting Americans from Tax Hikes (PATH) Act of 2015.” The PATH Act extends or permanently renews a variety of federal tax provisions, and implements a number of new tax changes. Included in the legislation were the key provisions of H.R. 529.
These changes include:
- Make computer equipment and related technology and services1 a qualified expense (retroactive to January 1, 2015);
- Allow the re-contribution of qualified withdrawals refunded by a school to be re-deposited without tax penalty (retroactive to January 1, 2015);
- Update accounting rules to eliminate distribution aggregation, which eases burdensome recordkeeping requirements for plan administrators.
The first provision is one that CollegeAdvantage and all 529 plans have been working on for years and is a welcome advantage for account owners.
Now, computers, software, related equipment and internet access expenses1 used by the Beneficiary while enrolled in college will be considered qualified higher education expenses. This provision was made retroactive to January 1, 2015. So, if you’ve purchased a computer or incurred expenses for any of these related items in 2015, you can now take a qualified withdrawal for these expenses. Act before December 31 at 4:00 p.m. ET to have your withdrawal for these now-qualified expenses recorded by OTTA in your account records for the 2015 tax year.2
In addition, if for some reason a qualified withdrawal has been returned to you by your Beneficiary’s college, you can now recontribute those funds back into your CollegeAdvantage account3 anytime within 60 days of the refund, without any tax penalties. Please note that the individual making the re-contribution is responsible for maintaining all documentation linking the re-contribution to the refund from the eligible educational institution. Without such documentation the original withdrawal may be considered a non-qualified withdrawal by the IRS. You should consult your tax advisor regarding the tax implications (including but not limited to income, gift and generation-skipping taxes) of any refunds and/or re-contributions and any related documentation that you should maintain.
This re-contribution provision was also retroactive to January 1, 2015. If you’ve received a refund from your eligible higher education institution of a qualified withdrawal anytime during 2015, you have until February 16, 2016 to re-contribute those funds without penalty.
In early January, we will publish on the CollegeAdvantage website a Supplemented Offering Statement with further detail on, and related procedures around, these enhancements to the CollegeAdvantage 529 Program.
In the meantime, if you have account-specific questions, particularly if they’re related to qualified withdrawals for 2015, please be sure to contact our Customer Service Department by phone at 1-800-AFFORD-IT (800-233-6734) or through our Contact Us page. Customer Service is available to assist you on regular business days from 8:30 a.m. to 6:00 p.m. ET. The office will be closed on December 25 and January 1.
1) Computer and related equipment and services: Qualified higher education expenses include expenses for the purchase of computer or peripheral equipment (as defined in section 168(i)(2)(B) of the Internal Revenue Code, computer software (as defined in section 197(e)(3)(B) of the Internal Revenue Code)), or Internet access and related services, if such equipment, software, or services are to be used primarily by the Beneficiary during any of the years the Beneficiary is enrolled at an eligible educational institution.
2) Earnings on withdrawals used for qualified higher education expenses are not subject to taxation. In an Advance Notice of Proposed Rulemaking issued on January 18, 2008, the Department of the Treasury and the IRS indicated that they are considering a rule that would require withdrawals and expenses to be matched up in the same tax year, or by March 31st of the following tax year. While there is no final rule on this issue, you should consider this possible requirement when making decisions concerning your Account(s) and discuss withdrawal timing with your financial and/or tax advisor. The Account Owner or the Beneficiary, not OTTA, is responsible for retaining records substantiating the qualified higher education expenses of the Beneficiary. Requests must be submitted in good order to be processed.
3) Re-contributions cannot be made to the CollegeAdvantage Guaranteed Plan. If you wish to make a re-contribution, you must direct the re-contribution to an open account in another qualified 529 plan.
Updated December 23, 2015