Congress Boosts 529 Plans

Computers, Internet Service Now Considered Qualified Expenses

As your student leaves for college this month for the spring semester, he or she will likely be taking a laptop.

The reality of 21st century higher education is that students—whether studying astrophysics or English literature —are using computers.

Now federal law has caught up with that reality by allowing 529 funds to be used for computers, educational software, peripheral equipment, and even Internet access for the beneficiary. The equipment and services must be used primarily by the beneficiary while he or she is enrolled at an eligible educational institution.

The Protecting Americans from Tax Hikes (PATH) Act was passed by Congress and signed into law by President Barack Obama on December 18, 2015. The PATH Act included several provisions that impacted 529 plans.

Previously, computers were designated as a qualified higher education expense only if required by the institution. The PATH Act now allows computer purchases as a qualified educational expense regardless of school requirement as long as the beneficiary is the primary user.

Recontribute without penalty

Another PATH Act enhancement gives account owners a 60-day window to recontribute refunds from schools into the same 529 account from which the money was withdrawn.

For example, if a beneficiary withdraws from a qualified higher education institution due to illness or unforeseen circumstances, he or she may be entitled to a refund. The account owner has 60 days from the date of the refund to recontribute the money into his or her 529 account. The recontributed amount must not exceed the refunded amount.

The new legislation was made retroactive to January 1, 2015. For refunds received prior to the passage of the PATH Act, account owners have 60 days from the enactment date to recontribute the funds to their 529 accounts. That deadline is February 16, 2016.

Aggregation change

The final 529 enhancement involves aggregation of accounts. Prior to passage of the PATH Act, when account owners with multiple 529 UESP accounts for the same beneficiary made withdrawals, the withdrawals were taken proportionally across all accounts in order to meet a then-existing aggregation requirement.

The PATH Act eliminates the aggregation of multiple UESP accounts for withdrawals, which eases recordkeeping requirements. Once UESP has updated its computer system to accommodate this change, account owners will be able to choose the UESP account from which to withdraw funds, or they may choose to take a proportional withdrawal across all accounts for the same beneficiary. UESP expects to complete this upgrade of its record-keeping systems and to issue new withdrawal forms (form 300) on or before June 30, 2016.