How does a tuition insurance payment affect 529 withdrawals?

Question

Qualified college tuition and expenses were paid from a 529 plan in 2014. The school sent a 1098-T and the 529 plan sent a 1099-Q and everything was fine on my 2014 taxes.

In 2015 my child has left school on a medical leave and I will be receiving an insurance reimbursement payment from the tuition insurance I had purchased. For 2015, I will receive a 1098-T from the insurance company with "Box 10" showing the amount of the reimbursement.

To clarify, tuition was all paid in calendar year 2014 for the school year 2014 to 2015. The medical leave began in 2015.

I don't know what I'm supposed to do with this payment. I would like to avoid any taxes or penalties. Some of the 2014 tuition was paid from 529 non-taxed earnings and since these were qualified education expenses, I didn't owe any taxes on those earnings. But, now those payments are being reimbursed.

Does this make my 2014 529 withdrawals taxable?

Is there something like a roll-over where I can put the money back into the 529 and not have a tax liability?

What happens to amounts reported in box 10 on the 1098-T?

I haven't found much information on this situation yet. The best info I've found so far includes:

• Instructions for Forms 1098-E and 1098-T

  Box 10. Insurance Contract Reimbursements or Refunds If you are an insurer, enter the total amount of reimbursements or refunds of qualified tuition and related expenses that you made to the student during 2015.

• Guide to Tax Form 1098-T: Tuition Statement

  Box 10 of the form comes into play only in cases in which students have had expenses reimbursed under a "tuition insurance" policy. Such policies reimburse students when they are forced to withdraw from school -- for medical reasons or family emergencies, for example -- after paying nonrefundable tuition.

  When an insurer reimburses a student's expenses, it must provide that student with a copy of the 1098-T. The only box that gets filled in is Box 10, which shows the amount reimbursed. The amount of expenses used to calculate deductions and credits generally must be reduced by any reimbursement reported here.

• IRS Publication 970 Tax Benefits for Education

  discusses Qualified Tuition Programs and "Figuring the TaxablePortion of a Distribution"

Answer 1

I received the following email from my 529 plan this week. Apparently, there are some new laws that just went into effect that may answer my question. Here is the key part of the email:

On December 18, 2015, Congress passed the "Protecting Americans from Tax Hikes Act of 2015" (PATH Act), which introduced various improvements to 529 plans, effective retroactively to tax years beginning after December 31, 2014, including, but not limited to, the following.

Computers Previously, 529 rules treated a computer as a "qualified higher education expense" only if the beneficiary's college required it as a condition of enrollment or attendance. But now, under the new law, a computer or peripheral equipment (e.g., printers), computer software, and Internet access or related services are considered qualified higher education expenses-as long as the beneficiary is the primary user of the computer, equipment, software, or services while enrolled in school.

Re-contributions When given a refund from an eligible educational institution of amounts paid out of a beneficiary's 529 plan account for qualified expenses, account owners can now re-contribute that money into the same or another 529 account for the same beneficiary. Re-contributed refunds will not have federal income taxes or penalties associated with them, provided you re-contribute a refund within 60 days of receiving it, and the re-contributed amount does not exceed the amount of the refund.

Refunds received after December 31, 2014 and before December 18, 2015 (the date the law was enacted) may be re-contributed by February 16, 2016 (60 days after the law was enacted). It's the responsibility of the account owner to keep all records of refunds and re-contributions.

Account owners are encouraged to consult their tax advisor to understand the impact of the PATH Act changes on their individual situations.

Now it looks like re-contributions are explicitly allowed within 60 days of receiving a 529 refund. For refunds received during most of calendar year 2015 (which is my situation), one can make a re-contribution until February 16, 2016. Making a re-contribution will avoid any federal taxes or penalties.

An article I found summarizing this says:

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 account 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.

Answer 2

That re-deposit rule covers refunds from colleges. You said your refund is from an insurance company. That sounds like a difference, although you could try arguing that it meets the spirit of the law.