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  Total annual contributions for the designated beneficiary, excluding any rollover contributions, cannot exceed $2,000 in any year.

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  An individual or organization cannot contribute more than $2,000 for any one designated beneficiary for a year.

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  No contributions can be made after the designated beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary.

There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary.

A contributor is any individual or organization, including the designated beneficiary, who contributes to a Coverdell ESA. Generally, the Internal Revenue Service (IRS) allows any individual to fund a Coverdell ESA as long as the person’s income is within a certain limit.

The “contributions” meet the definition of a gift if:

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  They are not repayment for goods or services provided by the designated beneficiary;

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  They are not given because of a legal obligation on the contributor’s part; and

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  They are given irrevocably (i.e., the contributor relinquishes all control). For additional information on gifts, see SI 00830.520.

A designated beneficiary is the individual (i.e., a student or future student) who is to receive the benefit of the funds in the account. The designated beneficiary can be changed to a member of the beneficiary’s family.

The designated beneficiary’s family includes the beneficiary’s spouse and the following other relatives of the beneficiary:

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  son, daughter, stepchild, foster child, adopted child, or a descendant of any of them;

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  brother, sister, stepbrother, or stepsister;

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  father, mother, or ancestor of either;

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  stepfather or stepmother;

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  son or daughter of a brother or sister;

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  brother or sister of father or mother;

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  son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law;

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  the spouse of any individual listed above; or

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  first cousin.

Regulations defining a “special needs beneficiary” have not been released by the Internal Revenue Service (IRS). Assume an individual who is age 18 or older and eligible for Supplemental Security Income (SSI) due to blindness or disability is a “special needs beneficiary.”

Any amount “rolled over” or transferred to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary’s family.

Withdrawals or distributions are the issuance of funds from the account. Funds in a Coverdell ESA should be withdrawn or distributed within 30 days when the designated beneficiary:

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  reaches age 30, unless the beneficiary is a special needs beneficiary; or

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  dies (before age 30).

Educational expenses are tuition, fees, and other necessary educational expenses at any educational institution. Examples of educational expenses include:

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  tuition and fees;

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  books;

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  laboratory fees;

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  student activity fees;

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  transportation;

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  stationary supplies;

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  technology fees; and

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  impairment-related expenses necessary to attend school or perform schoolwork (e.g., special prosthetic devices necessary to operate school machines or equipment).

Exclude funds in a Coverdell ESA from the resources of the designated beneficiary.

Assume that any distribution the designated beneficiary receives from a Coverdell ESA is a gift, unless there is evidence to the contrary (e.g., there is an allegation that contributions to the account are mandated by a court). Distributions that meet the definition of a gift and are used for educational expenses of the designated beneficiary are excluded as income in the month of receipt.

If an excluded distribution is retained into the month following the month of receipt, it is an excluded resource of the designated beneficiary for 9 months beginning with the month after the month of receipt. Any funds retained after the 9-month exclusion period are countable resources of the designated beneficiary beginning with the month following the end of the 9-month exclusion period. For information on educational gifts, see SI 00830.455 and SI 01130.455.

If the designated beneficiary spends any portion of a Coverdell ESA distribution for a purpose other than their educational expenses or no longer intends to use the funds for their educational expenses, the non-educational portion of the funds is income at the earlier of two points:

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  in the months the funds are spent; or

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  in the month the individual no longer intends to use the funds for educational expenses.

If a countable distribution is retained into the month following the month of receipt, it is a countable resource of the designated beneficiary.

EXAMPLE 1: Distribution excluded as income and resources

A disabled adult, age 19, is the designated special needs beneficiary of a Coverdell ESA with a balance of $1,200 as of the first of the month. The disabled adult’s grandfather contributes to the account. On August 15, the individual receives $800 from the account. The disabled adult spends $600 on student activity fees and stationary supplies in August. As of September 1, $200 of the distribution remains. The disabled adult tells the field office (FO) that they will use the rest of the money for future educational expenses. The FO determines:

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  The Coverdell ESA is an excluded resource of the disabled adult.

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  The distribution meets the definition of a gift for educational purposes and is excluded from income in the month of August.

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  The remaining amount of $200 is excluded from resources for the months of September through May. As of June 1, any portion that remains is a countable resource of the disabled adult.

EXAMPLE 2: Distributions counted as income and resources

A disabled child is the designated beneficiary of a Coverdell ESA with a balance of $700 as of the first of the month. The disabled child’s aunt and uncle contribute to the account. On September 30, the child’s parent, who acts as an agent on behalf of the child, receives $150 from the account. The child’s parent spends $80 on a non-educational software game for the child. As of October 1, $70 of the distribution remains. The child’s parent tells the FO that they intend to spend the rest of the money during an upcoming vacation. The FO determines:

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  The Coverdell ESA is an excluded resource of the disabled child.

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  The distribution of $150 is countable income to the child for the month of September because $80 was spent on non-educational expenses and $70 is intended for non-educational expenses. As of October 1, the $70 that remains is a countable resource of the disabled child.

When a designated beneficiary receives a distribution from a Coverdell ESA in which they is the sole contributor, the distribution is a conversion of a resource (i.e., a resource in a different form). Any portion of the converted resource that the designated beneficiary retains into the month following the month of receipt is a countable resource.

EXAMPLE

A disabled adult, age 20, is the designated special needs beneficiary of a Coverdell ESA with a balance of $900 as of the first of the month. The disabled adult is the only contributor to the account. On June 10, the individual receives $500 from the account. They spend $325 on tuition and fees. As of July 1, $175 of the distribution remains. The FO determines:

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  The Coverdell ESA is an excluded resource of the disabled adult.

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  The distribution of $500 is a conversion of a resource (i.e., a resource in a different form).

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  That, as of July 1, any portion of the distribution that remains (i.e., $175) is a countable resource of the disabled adult.

When a Coverdell ESA contains funds contributed by the designated beneficiary and at least one other contributor, assume that the funds deposited by the other contributor(s) are distributed first from the account.

EXAMPLE

A disabled adult, age 21, is the designated special needs beneficiary of a Coverdell ESA with a balance of $1,200 as of the first of the month. The disabled adult contributed $300 to the account and their grandparents contributed $900. On October 15, the individual receives $500 from the account. They spend $400 on transportation and stationary supplies. As of November 1, $100 of the distribution remains. The FO determines:

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  The Coverdell ESA is an excluded resource of the disabled adult.

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  The distribution of $500 meets the definition of a gift for educational purposes and is excluded from income in the month of October.

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  The remaining amount of $100 is excluded from resources for the months of November through July. As of August 1, any portion that remains is a countable resource of the disabled adult.

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  Record any allegations on a form SSA-5002 Report of Contact (RC) or the Report of Contact page.

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  Record on an RC or the Report of Contact page the amount of funds deposited by the designated beneficiary and the amount that remains after any withdrawals or distributions.

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  For any information obtained through an automated telephone customer service line, record the evidence on an RC or the Report of Contact page.

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  Fax any paper documentation to the electronic folder (EF) or the Non-disability Repository for Evidentiary Documents (NDReD). For information on the retention of paper material after faxing into either the EF or NDReD, see GN 00301.322.

Verify the costs of educational expenses when:

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  the designated beneficiary or an agent acting on behalf of the designated beneficiary alleges withdrawing funds from an excluded Coverdell ESA, or

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  evidence submitted to verify the balance of the excluded account indicates a withdrawal was made.