Joe's Q&A

The '529 Guru' offers his answers on questions you have asked about 529 Plans.

Health insurance not qualified 529 expense
11/01/2009

QUESTION:
Dear Joe,

The college my son attends requires that all full-time students have health insurance, and the school offers a policy for students who don't have one. If we purchase the school's policy, can we use funds from our 529 plan to pay for it?

-- Dave

ANSWER:
Dear Dave,
No, the cost of health insurance is not a qualified higher education expense under the tax code regardless of the college's requirements or policy options, and it cannot be counted when determining the tax treatment of your 529 plan distributions.

In Publication 970, Tax Benefits for Education, the IRS says that certain fees may be counted, along with tuition, as qualified higher education expenses provided those fees are payable to the institution as a condition of enrollment. The most common example is a student activity fee, billed separately from tuition, but required of all students and of which no portion covers personal expenses.

Even if the school did require the purchase of its own health insurance policy -- and I am not aware of any colleges that do -- the IRS would disallow that cost. Publication 970 specifically states that qualified education expenses do not include amounts paid for insurance or medical expenses, including student health fees.

Let's briefly review some of the other typical college costs, besides tuition and fees, that your college student may be incurring. You can include as Section 529 expenses the cost of books, supplies and equipment, provided that those items are required for enrollment or attendance.

Also, under a temporary rule for 2009 and 2010 only, you can count as qualified expenses the cost of purchasing computer technology and Internet access even when not required for enrollment or attendance, provided the computer is used by the student and his family at sometime during the college years.

There are two final categories of qualified higher education expenses. The first consists of expenses for a special needs student necessary for that student's enrollment or attendance. The second consists of the reasonable costs of room and board, but only for students who are attending college at least half-time. Qualified room-and-board expenses also are limited for on-campus residents to the amount charged by the college for room and board and for off-campus students to the allowance reported by the college in its "cost of attendance" figures.

How about transportation costs? Sorry, but no.

How about using 529 funds to repay student loans? No, sorry again.

Be sure that any expenses you intend to count for purposes of determining the income tax treatment of this year's 529 distributions actually get paid by Dec. 31. Under Section 529, expenses are not traced to the 529 plan distributions but must be incurred in the same taxable year. Until the IRS tells us differently, you should assume that "incurred" means "paid."