Can You Use a 529 Plan to Pay for Health Insurance?

Many colleges require students to have health insurance. Unexpected medical expenses or an illness left untreated can hinder a student’s ability to complete college or graduate on time. College students have the option to stay on their family’s health insurance, enroll in a campus health plan or purchase their own insurance plan. 

The cost of student health insurance varies by the type of insurance and the coverage you select. You cannot use a 529 plan to pay for health insurance. Health insurance is not considered a qualified 529 plan expense because the expense is not required of all students and is not part of tuition. Even if a college requires all students to have health insurance, students who are covered under their parent’s health insurance plan can typically get a waiver of the requirement. 

However, if health insurance is charged by the college as part of a comprehensive tuition fee, or the fee is identified as a “fee that is required for enrollment or attendance” at the college, the expense may be considered a qualified 529 plan expense.

A 529 plan withdrawal used to pay for health insurance or other medical expenses is considered a non-qualified distribution. The earnings portion of a non-qualified distribution is subject to income taxes and a 10% penalty. A non-qualified distribution may also be subject to recapture of any state income tax benefits previously claimed. 

Student health insurance coverage is also not considered a qualified education expense in connection with the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit.

Health insurance options for college students

Parents and students should compare the costs and features of the different health insurance options available.

• Parent’s health plan. The Affordable Care Act (ACA) allows dependents to remain on their parent’s health insurance until they turn 26 years old. A family health insurance plan may be the most cost-effective option, especially if a parent’s employer helps cover the costs. However, students who are on their parent’s health insurance plan may be charged out-of-network fees for services provided by their campus health clinic.

• Campus health plan. Many colleges offer their own health insurance plans for students, with an average cost of $1,500 to $2,500 per year. Campus health plans typically include local healthcare providers in their network but may only offer coverage during the academic year. Some colleges automatically enroll students in the campus health insurance plan and include the cost on the tuition bill. In most cases, students who are on a parent’s health insurance plan or have other coverage must apply for a waiver to be removed from the college’s health insurance plan.

• Individual insurance plan. College students may also enroll in their own health insurance plan through HealthCare.gov. Moving to a college campus is considered a life change that qualifies for special enrollment period outside of normal open enrollment. Independent students may be eligible for savings on an insurance plan based on their income.

Even if a college requires all students to have health insurance, dental insurance might not be required.

Health center fees

Colleges may charge a health center fee that does not include health insurance. A health center fee may be bundled into a comprehensive tuition charge or listed as a separate fee. If the fee is required for enrollment and cannot be waived, it is most likely considered a qualified 529 plan expense.

Other medical expenses

Special needs services for a beneficiary with special needs are considered qualified 529 plan expenses if the expenses are incurred in connection with enrollment or attendance at a college. But, special needs services are usually not medical in nature. Common examples include costs of note-takers, service animals and physical accommodations.

If a 529 plan beneficiary becomes disabled and does not attend college, parents may take a non-qualified distribution without penalty. To qualify for the exception, the IRS states “A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.”

Co-pays, insurance deductibles, prescription medications, medical equipment and other related medical expenses for college students are not considered qualified 529 plan expenses.