My son is a freshman this year. We live in and he attends school in California. We pulled out the first $ from our Utah 529 plan. I had the money deposited in my account since I paid the registration and dorm & meal plan. Our friend has a son a year ahead and he has the exact same 529 plan. He warned me that he got hit with a small tax penalty when he withdrew the money to his account and not to an account in his son's name. I called the 529 administrator and they said it shouldn't matter either way. Other online blogs agree. They say the only difference is that my son would get the tax forms and have to file if it went to his account. Nevertheless, my friend did get a penalty. Any clarity would be appreciated!
Your friend would have only been liable for a tax penalty if he withdrew more 529 money than he reported for qualified expenses.
That said, if he took the distribution in his name, it triggers a 1099-Q report to the IRS in his name rather than his beneficiaries. This will likely be flagged by the IRS, since it looks like he withdrew the money, but didn't pay taxes and penalties on it, not the beneficiary. In other words, qualified education expenses only apply to the beneficiary, not the plan owner/contributor. In this case, the IRS would request additional documentation to show that the expenses were indeed qualified.
To avoid this hassle, it's easiest to make sure the distribution is payed directly to the beneficiary rather than yourself. Once he or she has the check, then have them sign the check over to you or transfer it into your account. Otherwise you trigger an IRS 1099-Q in your name rather than your beneficiary.