What uses of a VHEIP account trigger the 10 percent repayment penalty?

Vermont law requires that a taxpayer who has received a credit repay 10 percent of any distribution from a VHEIP account unless a distribution is for the allowed uses specified in law. The maximum repayment penalty cannot exceed the total tax credits received. A failure to make the repayment can result in further penalties and interest.

The uses that do not require repayment are: (1) costs to attend approved postsecondary education institutions, (2) expenses associated with registered apprenticeship programs, (3) uses made after the death or disability of the beneficiary, and (4) uses for qualified higher education expense loan repayment pursuant to 26 U.S.C. § 529(c)(9). The loan repayment exception is limited to loans used exclusively for costs of attendance to an approved postsecondary education institution (approved postsecondary education institutions are explained in the question below).

Because of the exception for uses made after the disability of a beneficiary, rollovers from a VHEIP account to an Achieving a Better Life Experience (ABLE) account will not be penalized if the accounts have the same beneficiary.

All other uses of a distribution from a VHEIP account are subject to the repayment penalty. Some of those uses include: (1) K-12 education expenses, (2) rollovers from a VHEIP account with one beneficiary to another account with a different beneficiary, (3) rollovers to another state’s college savings plan (other than to an ABLE account with the same beneficiary), and (4) rollovers to a private savings account.