Important Information for 529 Fees Recovery Scholarship

If you use 529 money for an ineligible / non‑qualified school in North Carolina, the earnings portion of that withdrawal is treated as a non‑qualified distribution and hit with tax plus penalties.

What you’ll owe

For a non‑qualified 529 withdrawal in North Carolina (i.e., not used for qualified education expenses at an eligible institution):

• Federal income tax on earnings: The earnings portion of the withdrawal is taxed as ordinary income in the year of the distribution.

• 10% federal penalty on earnings: An additional 10% penalty applies to the earnings portion (contributions are never penalized).

• North Carolina state income tax on earnings: NC also taxes the earnings portion as state income when the withdrawal is non‑qualified.

• NC plan fee (if using the state plan): The NC 529 Plan assesses a one‑time $50 processing/transaction fee on a non‑qualified withdrawal.

The part of the distribution that is your original contributions (basis) comes back tax‑ and penalty‑free; all of the pain is on the earnings slice.

Exceptions and nuances

In a few situations, the 10% federal penalty (but not the income tax) can be waived, such as if the beneficiary dies, becomes disabled, attends a U.S. military academy, or receives scholarships up to the amount withdrawn, but simply choosing an ineligible school generally does not qualify for an exception

What we will cover:

For students who complete the Program, we will cover 100% of the fees and taxes listed above, minus the $50 NC Plan Fee. 

What you need to do:

Fill out the 529 Fees Recovery Form and submit it upon completion of the program or when you file your taxes, whichever occurs first.

What you will receive:

You will receive a refund of the amount paid for fees and taxes within 10 days via check mailed to the address on file.