Among the restrictions of the traditional Section 529 qualified tuition programs was their inability to fit into the requirements of long term services programs for specially-abled individuals.
The Stephen Beck, Jr., Achieving a Better Life Experience Act (ABLE Act) was enacted on Dec. 19, 2014, as part of The Tax Increase Prevention Act of 2014 (P.L. 113–295) and added Section 529A to the Internal Revenue Code.
The ABLE Act recognizes the special financial burdens endured by families raising children with disabilities and the fact that increased financial needs generally continue throughout the disabled person's lifetime. The purpose of the Act is to “provide secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits” otherwise available to those individuals. The Act permits a state to establish and maintain a new type of tax-advantaged savings program under which contributions can be made for a designated beneficiary to pay for qualified disability expenses.
The IRS issued proposed regulations in June 2015, providing guidance by which states or state agencies or instrumentalities may establish a qualified ABLE program. In November 2015, IRS Notice 2015-81 made changes to the proposed regulations making it easier for states to offer and administer these programs. Under the PATH Act (December 2015), the requirement that ABLE accounts be established only in the ABLE account owner’s state of residence was eliminated.
Overview of Qualified ABLE Programs
Section 529A allows a state (or state agency or instrumentality) to establish and maintain a tax-advantaged savings program under which contributions may be made to an account (an ABLE account) for the purpose of providing for the qualified disability expenses of the designated beneficiary of the account.
Generally, an individual is considered to be an eligible designated beneficiary of an ABLE account if before their 26th birthday, they are entitled during that taxable year to benefits under title II or XVI of the Social Security Act, or have a disability certification filed with the Secretary for that taxable year. Only one ABLE account may be established for each eligible individual.
Except in the case of program-to-program transfers, contributions to an ABLE account may only be made in cash. There will be a limit on annual contributions to the ABLE account. Under the proposed regulations, this limit is the annual gift tax exclusion (under section 2503(b)) in effect for that calendar year (currently $14,000). The limit will apply to all contributions, whether from the designated beneficiary or another contributor (such as a parent or family member). Contributions, as well as annual fair market values, will be reported on IRS Form 5498-QA.
The undistributed income earned in an ABLE account is not taxable, and distributions made from an ABLE account for qualified disability expenses of the designated beneficiary are not included in the designated beneficiary’s gross income for federal income tax purposes. However, the earnings portion of distributions from an ABLE account in excess of qualified disability expenses is generally includible in the gross income of the designated beneficiary.
Distributions will be reported on IRS Form 1099-QA. Changes to the designated beneficiary of an account are permitted if the new designated beneficiary is both an eligible individual for his or her taxable year in which the change is made and a sibling of the former designated beneficiary. This change can only be made before the death of the former designated beneficiary. If these requirements are met, the change is not considered a distribution.
Rollover and program-to-program transfers are also permitted. A distribution paid to the designated beneficiary of the ABLE account can be rolled over to another (or the same) ABLE account for the benefit of the designated beneficiary (or of an eligible individual who is a family member of the designated beneficiary) not later than the 60th day after the date of the distribution.
However, the preceding sentence does not apply to such a distribution that occurs within 12 months of a previous rollover to another ABLE account for the same designated beneficiary. A program-to-program transfer is the direct transfer of the entire balance of an account to another ABLE account of the same designated beneficiary or of part or all of the balance to an ABLE account of another eligible individual who is a sibling of the former designated beneficiary. This requires that the transferor ABLE account be closed upon completion of the transfer. A program-to-program transfer is not a distribution, however receipt of these transfers are reported on Form 1099 via a checkbox.
Given the creation of the new versions of Form 5498-QA and 1099-QA for the 2016 tax year, it is clear that the IRS is preparing for the establishment of these accounts in in 2016/2017. The final regulations for 529A are expected to be issued later this year. Once these final regulations are released, much like the 529 college savings plans, each state will create its own program for Qualified ABLE Accounts and to select investment providers, administrators, etc.
Sue Diehl, QPA, is President of Penserv and Chair of the NTSA Communications Committee.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.