n-18-58.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Guidance on Recontributions, Rollovers and Qualified Higher Education Expenses under
Section 529

Notice 2018-58

I. PURPOSE AND OVERVIEW
This notice announces that the Department of the Treasury (the Treasury Department)
and the Internal Revenue Service (the IRS) intend to issue regulations providing clarification
regarding (1) the special rules for contributions of refunded qualified higher education expenses
to a qualified tuition program under § 529(c)(3)(D) of the Internal Revenue Code (Code); (2) the
new rules under § 529(c)(3)(C)(i)(III) permitting a rollover from a qualified tuition program to
an ABLE account under § 529A; and (3) the new rules under § 529(c)(7) treating certain
elementary or secondary school expenses as qualified higher education expenses.
II. BACKGROUND
Under § 529, a State or its agency or instrumentality may establish or maintain a program
that permits a person to prepay or contribute to an account for a designated beneficiary’s
qualified higher education expenses (QHEEs). In addition, an eligible educational institution
may establish or maintain a program that permits a person to prepay a designated beneficiary’s
QHEEs. These programs are collectively referred to as section 529 qualified tuition programs
(QTPs). Section 529(c)(3) provides that distributions (including any attributable earnings) from
a QTP are not included in gross income if such distributions do not exceed the designated
beneficiary’s QHEEs. To the extent distributions exceed the designated beneficiary’s QHEEs, a
portion of the distribution is included in gross income.

2

Prior to its amendment by “An Act to provide for reconciliation pursuant to titles II and V
of the concurrent resolution on the budget for fiscal year 2018”, Pub.L. 115-97 (the “2017 Act”),
signed into law on December 22, 2017, § 529(e)(3)(A) defined QHEEs to include tuition, fees,
books, supplies, and equipment required for the enrollment or attendance of a designated
beneficiary at an eligible educational institution,
1
including certain computer equipment and
software used primarily by the beneficiary during any years the beneficiary is enrolled at an
eligible educational institution. In the case of a special needs beneficiary, QHEEs include
expenses for special needs services that are incurred in connection with such enrollment or
attendance. QHEEs also include reasonable costs for room and board for eligible students as
defined in § 25A(b)(3) (generally, those who are enrolled at least half-time).
Sections 529(c)(3)(C)(i)(I) and (II) permit a tax-free rollover of a distribution from a
QTP, made within 60 days of the distribution, to another QTP for the benefit of either the same
designated beneficiary or another designated beneficiary who is a member of the family of the
original designated beneficiary. However, Notice 2001-81, 2001-52 I.R.B. 617, provides that the
distributing QTP must provide a breakdown of the earnings portion of the rollover amount to the
recipient QTP and, until the recipient QTP receives appropriate documentation showing the
earnings portion, the entire rollover amount is treated as earnings. Notice 2001-81 applies the
same rule to a direct transfer (i.e., a trustee-to-trustee transfer) from a QTP to another QTP.
Section 529(c)(3)(D), added to the Code by the Protecting Americans from Tax Hikes
Act of 2015 (PATH Act), part of the Consolidated Appropriations Act, 2016 (Pub. L. 114-113),
addresses situations in which QTP funds are distributed for a beneficiary’s QHEEs, but some

1
Section 529(e)(5) defines an “eligible educational institution” as an institution (A) which is described in § 481 of
the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of this paragraph, and
(B) which is eligible to participate in a program under title IV of such Act.

3

portion of those expenses is refunded to the beneficiary by the eligible educational institution.
This could occur, for example, if the beneficiary were to drop a class mid-semester. Section
529(c)(3)(D) provides that the portion of such a distribution refunded to an individual who is the
beneficiary of a QTP by an eligible educational institution is not subject to income tax to the
extent that the refund is recontributed to a QTP of which that individual is the beneficiary not
later than 60 days after the date of such refund and does not exceed the refunded amount.
Section 529(c)(3)(D) applies to refunds received after December 31, 2014. The PATH Act also
included a transition rule with regard to the deadline for recontributing a refund received after
2014 but before the date of enactment (December 18, 2015). Specifically, those refunded
distributions are exempt from income tax if they were recontributed to the beneficiary’s QTP not
later than February 16, 2016 (60 days after the date of enactment of the PATH Act).
The 2017 Act added § 529(c)(3)(C)(i)(III) which provides that a distribution from a QTP
made after December 22, 2017, and before January 1, 2026, is not subject to income tax if,
within 60 days of the distribution, it is transferred to an ABLE account (as defined in
§ 529A(e)(6))
2
of the designated beneficiary or a member of the family of the designated
beneficiary. Under § 529(c)(3)(C)(i), the amount of any rollover to an ABLE account is limited
to the amount that, when added to all other contributions made to the ABLE account for the
taxable year, does not exceed the contribution limit for the ABLE account under
§ 529A(b)(2)(B)(i), i.e., the annual gift tax exclusion amount under § 2503(b).
In addition, the 2017 Act expanded the definition of QHEEs to include tuition in
connection with the designated beneficiary’s enrollment or attendance at an elementary or
secondary public, private, or religious school. See § 529(c)(7). The 2017 Act also amended

2
Generally, an ABLE account is established under a § 529A qualified ABLE program to pay the qualified disability
expenses of an eligible individual who is blind or has a disability.

4

§ 529(e)(3)(A) to limit the total amount of these tuition distributions for each designated
beneficiary to $10,000 per year from all QTPs of the designated beneficiary. Both amendments
apply to distributions made after December 31, 2017.
III. RECONTRIBUTION OF REFUNDED QHEEs
The Treasury Department and the IRS are aware of concerns expressed by QTP
administrators regarding the administrative burdens that would arise if a recontribution of a
refunded QHEE is treated in the same manner as a rollover under Notice 2001-81 requiring a
breakdown of the earnings portion of the recontribution. Because the amount is refunded by the
eligible educational institution, which will have no information regarding the income portion of
each tuition payment (whether made from a single or multiple QTPs), QTP administrators
generally would be unable to determine the earnings portion of the recontribution. Accordingly,
the Treasury Department and the IRS intend to issue regulations providing that the entire
recontributed amount will be treated as principal. This rule of administrative convenience will
eliminate the burdens associated with determining the earnings portion. Furthermore, because
the recontributed amount previously was taken into account in applying the overall contribution
limit under § 529(b)(6), the Treasury Department and the IRS anticipate that the regulations will
provide that the recontributed amount does not count against the limit on contributions on behalf
of the designated beneficiary under § 529(b)(6). In addition, consistent with § 529(c)(3)(D), the
Treasury Department and the IRS anticipate that the regulations will confirm that the
recontribution must be to a QTP for the benefit of the designated beneficiary who received the
refund of QHEEs, although the recontribution need not be to the QTP from which the
distributions for the QHEEs were made.
IV. ROLLOVER FROM A QTP TO AN ABLE ACCOUNT

5

In accordance with new § 529(c)(3)(C)(i)(III), the Treasury Department and the IRS
intend to issue regulations providing that a distribution from a QTP made after December 22,
2017, and before January 1, 2026, to the ABLE account of the designated beneficiary of that
QTP, or of a member of the family of that designated beneficiary, is not subject to income tax if
two requirements are satisfied. First, the distributed funds must be contributed to the ABLE
account within 60 days after their withdrawal from the QTP. Second, the distribution, when
added to all other contributions made to the ABLE account for the taxable year that are subject to
the limitation under § 529A(b)(2)(B)(i) (the annual gift tax exclusion under § 2503(b)), must not
exceed that limitation. Specifically, the regulations are expected to provide that the sum of the
distribution and all other contributions to the ABLE account for the taxable year, other than
contributions of the designated beneficiary’s compensation as described in § 529A(b)(2)(B)(ii),
must not exceed the annual gift tax exclusion for that taxable year. Consistent with the
longstanding approach of treating direct transfers similarly to rollovers in Notice 2001-81, the
Treasury Department and the IRS also anticipate that the regulations will provide that the same
rules will apply regardless of whether such a QTP distribution is rolled over to an ABLE account
or instead is transferred by a direct transfer from a QTP to an ABLE account.
To the extent that a direct transfer (or, in the case of a rollover, a contribution of the
distributed amount) would cause the contribution limit under § 529A(b)(2)(B)(i) to be exceeded,
it would be subject to income tax and a 10% additional tax under § 529(c)(6), if applicable.
3

Therefore, the Treasury Department and the IRS anticipate that the regulations will require a
QTP to prohibit the direct transfer of any amount that would cause the limit under

3
Section 529(c)(6) provides that the additional 10% tax imposed by § 530(d)(4) applies to any payment or
distribution from a QTP in the same manner as it applies to a payment or distribution from a Coverdell education
savings account.

6

§ 529A(b)(2)(B)(i) to be exceeded. Furthermore, a qualified ABLE program is prohibited from
accepting certain contributions in excess of the limitations applicable to ABLE accounts, and any
violation of those rules could cause the designated beneficiary to incur tax, and could impact
adversely the ABLE beneficiary’s eligibility for certain public benefits.
4

The Treasury Department and the IRS encourage the QTP designated beneficiary, in the
case of a rollover, or the QTP, in the case of a direct transfer, to contact the qualified ABLE
program before contributing any funds to the ABLE account to ensure that the
§ 529A(b)(2)(B)(i) limit will not be exceeded. However, the Treasury Department and the IRS
anticipate that the regulations will provide that, in the case of a direct transfer, any excess
contribution that is rejected by the qualified ABLE program and returned to the QTP will not be
deemed to be a new contribution to the QTP for purposes of the § 529(b)(6) contribution limit.
Further, the Treasury Department and the IRS anticipate that the regulations will specify
that, for purposes of identifying the ABLE accounts permitted to receive such a rollover from a
designated beneficiary’s QTP, a member of the family of the designated beneficiary means a
member of the family as defined in § 529(e)(2), rather than the more limited definition in
§ 529A(e)(4) that applies for purposes of qualified ABLE programs.
V. SECTION 529 EXPANSION OF QHEES TO INCLUDE ELEMENTARY AND
SECONDARY EDUCATION TUITION EXPENSES
Consistent with new § 529(c)(7) and (e)(3)(A), respectively, the Treasury Department
and the IRS anticipate that the regulations will provide that QHEEs include tuition in connection
with the designated beneficiary’s enrollment or attendance at an elementary or secondary public,

4
For more information on the effect of ABLE accounts on the beneficiary’s eligibility for public benefits, see the
preamble of the Notice of Proposed Rulemaking (80 FR 35602) published in the Federal Register on 6/22/2015.

7

private, or religious school, but that such QHEEs are limited to a total of $10,000 per year per
designated beneficiary, regardless of the number of QTPs making such distributions for that
same designated beneficiary. The Treasury Department and IRS intend to issue regulations
defining the term “elementary or secondary” to mean kindergarten through grade 12 as
determined under State law, consistent with the definition applicable for Coverdell education
savings accounts in § 530(b)(3)(B). Coverdell education savings accounts are another type of
tax-favored savings account governed under § 530 and also may be established to pay for tuition
and other expenses in connection with enrollment or attendance at an elementary or secondary
public, private, or religious school. Applying the same definition to both a QTP and a Coverdell
education savings account will facilitate the allocation of expenses between those two accounts
as is required by § 530(d)(2)(C)(ii) if a designated beneficiary receives distributions from both a
QTP and a Coverdell education savings account and those total distributions exceed the
designated beneficiary’s qualified expenses.
VI. RELIANCE
Before the issuance of the proposed regulations described in this notice, taxpayers,
beneficiaries, and administrators of 529 and ABLE programs may rely on the rules described in
sections III, IV, and V of this notice.
VII. DRAFTING INFORMATION
The principal author of this notice is Peter A. Holiat of the Office of the Associate Chief
Counsel (TEGE). For further information regarding this notice contact Mr. Holiat at 202-317-
4541 (not a toll-free number).