Accepting and Reporting Coverdell ESA Contributions
By Jodie Norquist, CIP, CHSP
Coverdell education savings accounts (ESAs) allow parents and grandparents—or anyone involved in a child’s life—to save and grow tax-free money to be used to pay for the child’s future qualified education expenses. In many ways, ESA trust or custodial accounts operate similarly to IRAs and health savings accounts. But ESAs have unique rules that financial organizations need to consider as they accept and report contributions.
We have a few family members who send in contributions for a child’s ESA. Is it our responsibility to ensure that they don’t contribute more than the annual contribution limit?
Everyone involved—your financial organization, the grantor or depositor of the ESA, the contributors, the named responsible individual for the account, and even the child (i.e., the “designated beneficiary”)—bears some responsibility for each role in successfully managing the ESA. While financial organizations aren’t solely responsible for making sure that ESA contributions do not exceed the annual contribution limit, they should document the receipt of each ESA contribution to ensure reporting accuracy. Each contributor should fill out a contribution form. Retain a copy of the completed form for your records.
It can be helpful for everyone involved, including frequent or infrequent contributors, to know what the annual limit is: $2,000 per child. The $2,000 limit is not subject to IRS cost-of-living adjustments, so, unless there is a law change, it will remain $2,000 every year.
Contributors should also know whether they are eligible to contribute. Contributors do not have to have earned income to make ESA contributions, but those with earned income must remain under or within an income phaseout range based on their modified adjusted gross income (MAGI). This determines whether a full or partial contribution can be made. MAGI phaseout ranges are $190,000 to $220,000 for married taxpayers who file a joint tax return or $95,000 to $110,000 for other taxpayers. Completing an ESA contribution eligibility form can help contributors determine whether they qualify to contribute.
The parents of one of our ESA designated beneficiaries wants to make an ESA contribution for their child who is turning 18 today. Can we accept the contribution or is it too late?
Unfortunately, it’s too late. Contributions can only be made to an ESA until the child’s 18th birthday*. This is a date-specific deadline that also applies to prior-year contributions. The deadline for making an ESA contribution for a tax year is the tax-filing deadline, generally April 15, not including extensions. If a designated beneficiary turns 18 before April 15, a prior-year contribution cannot be made on or after the child’s birthday, even if the contribution is intended for the previous year when the child was not yet 18. It’s important to note that an ESA contribution sent by mail is considered timely made if the envelope is postmarked before the child’s 18th birthday, even if it is received after that date. If your financial organization chooses to accept timely-postmarked contributions after the deadline, retain the actual envelope (or an image of it) that shows the postmarked date for your records.
How do we report ESA contributions and what is the reporting deadline?
ESA contributions, including rollovers, are reported on Form 5498-ESA, Coverdell ESA Contribution Information. Enter regular contributions in Box 1, Coverdell ESA contributions, and rollover contributions in Box 2, Rollover contributions. Your organization is not required by the IRS to file this form if no contributions were made. Unlike reporting for IRAs, you are not required to include the fair market value (FMV) of the ESA on Form 5498-ESA. (In specific cases the FMV must be included on Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530)).
The deadline for providing the ESA designated beneficiary with Copy B of Form 5498-ESA or a substitute form is April 30**. Copy A of Form 5498-ESA is due to the IRS by May 31**. If required by the plan agreement, the responsible individual must also receive copies of all required IRS information returns, including Copy B of Form 5498-ESA.
*ESA contributions are allowed beyond age 18 for special needs individuals.
**When the reporting due date falls on a Saturday, Sunday, or legal holiday, the due date is the next business day. Because May 31, 2021, is a legal holiday, the deadline to submit 2020 Form 5498-ESA to the IRS is Tuesday, June 1, 2021.
