A New Tax-Free Vehicle for the Disabled

Demystifying Valuation, Economic Damages + Forensic Accounting

The Achieving a Better Life Experience Act (“ABLE Act”) offers a new tax-free savings vehicle for disabled individuals to pay for expenses not covered by government programs such as health care, employment training and support, housing, transportation and education. The ABLE Act was passed by Congress and signed by President Obama in December 2014 as part of The Tax Increase Prevention Act of 2014, adding Section 529A to the Internal Revenue Code (IRC). The intent is to supplement, not supplant, benefits otherwise available to those individuals, whether through private sources, employment, public programs or otherwise.

On June 22, 2015, the Internal Revenue Service issued proposed regulations under Section 529A of the IRC which provide guidance on the requirements a program must satisfy in order to be a qualified ABLE program described in Section 529A. Section 529A allows the creation of a qualified ABLE program by a State (or agency or instrumentality thereof) under which a separate ABLE account may be established for a disabled individual who is the designated beneficiary and owner of that account.

Section 529A(e)(1) provides that an individual is eligible for an ABLE account if either: 1) the individual is entitled to benefits based on blindness or disability under Title II or XVI of the Social Security Act and the blindness or disability occurred before the age of 26, or 2) a disability certification satisfying special requirements is filed with the Secretary.

Below are some of the criteria associated with ABLE Act, Section 529A, and the proposed regulations:

  • Account contribution limit is currently $14,000 per year (tied to the gift tax exclusion amount)
  • Contributions must be made in cash
  • Contributions can be made by any person – includes an individual, trust, estate, partnership, association, company or corporation
  • Contribution may be made by the designated beneficiary however this would not qualify as a gift for tax purposes
  • Only one ABLE account per beneficiary
  • Residency requirement – must open ABLE account in state where owner resides
  • Total contribution limit over lifetime is tied to state’s 529 maximum. In Arizona the limit is currently $412,000.
  • If ABLE account balance exceeds $100,000, Supplemental Security Income (SSI) benefits will be suspended
  • If distributions do not exceed the designated beneficiary’s qualified disability expenses, no amount is includible in the designated beneficiary’s gross income
  • Upon the death of the designated beneficiary, all amounts remaining in the ABLE account are includible in the designated beneficiary’s gross estate for purposes of the estate tax. However, the State may file a claim for the amount of the total medical assistance paid for the designated beneficiary under the State’s Medicaid Plan after establishment of the ABLE account.

The regulations are proposed to be effective as of the date of the publication of the Treasury decision adopting these rules as final regulations in the Federal Register. These rules, when adopted as final regulations, will apply to taxable years beginning after December 31, 2014. Until the issuance of final regulations, taxpayers and qualified ABLE programs may rely on these proposed regulations.

The Treasury Department and the IRS request comments to be posted at www.regulations.gov and have scheduled a public hearing for October 14, 2015. To read more about the ABLE Act and proposed regulations, click here.

By Cindy Andresen, ASA

Sources:

Federal Register: Guidance Under Section 529A: Qualified ABLE Programs – A Proposed Rule by the Internal Revenue Service on June 22, 2015.