ABLE Accounts for Individuals with Disabilities

Financial planning for a family that includes an individual with disabilities, especially those without the resources to fully fund a special needs trust, often has substantial challenges. In December of 2014, the United States Congress passed legislation permitting families with individuals who develop a disability before age 26 to save for future expenses in an account that will grow tax-free. The Stephen Beck, Jr., Achieving a Better Life Experience (“ABLE”) Act of 2014, allows families to save in an account akin to a 529 college savings account. Those hoping to take advantage of the program must wait for their state to statutorily adopt the program, however many states, including Nebraska, have already acted.

An ABLE account holder can save up to $100,000 in the account and still be eligible for social security, Medicaid, and other federal programs. The annual limit for all contributions to an account is $14,000, paid from after-tax contributions. Although the contributions are after-tax, the disbursements, including the interest growth in the account, are tax free if spent on qualifying expenses. A qualifying expense for an individual with a disability includes “education, housing, transportation, employment training and support, assistive technology and personal supports services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight.”

On June 22, 2015, the Internal Revenue Service (“IRS”) issued proposed regulations to implement the law pertaining to ABLE accounts, enabling states to fully adopt the program. These proposed regulations have a variety of limitations, such as requiring the beneficiary to be a resident of the state where the ABLE account is created, requiring the beneficiary to have an eligible disability, limiting each beneficiary to one account, and limiting the investment direction a designated beneficiary can make to twice a year. Other aspects of the proposed regulations include limitations on types of contributions, specific accounting procedures, and options for states to contract with other states for administering programs.

The tax provisions in the proposed regulation include applying Internal Revenue Code (“IRC”) § 72 to distributions from the ABLE account. Under this section, all distributions during a tax year are treated as one distribution in that year and the value of the account is computed at the end of the calendar year. Further, if a distribution from an ABLE account is not for a qualifying expense, the distribution is includable in gross income for that taxable year. That means the distribution will be included as taxable income, as well as incurring an additional 10% tax on the amount of the distribution included in gross income. However, if the non-qualifying distribution occurs after the beneficiary dies or the distribution is a result of an excess contribution, the added 10% tax does not apply.

Another tax provision includes the application of the gift tax to ABLE account contributions by a person other than the designated beneficiary. Under the proposed regulation, the contribution is immediately considered a completed gift to the designated beneficiary and not a future transfer under IRC § 2503(e), thus any future distribution is not a taxable gift to the beneficiary. However, when the designated beneficiary dies, the amount remaining in the ABLE account is part of the beneficiary’s estate for purposes of the estate tax.

In Nebraska, Legislative Bill 591 was signed into law on May 27, 2015, formally adopting the program. The law, known as Nebraska ABLE, will allow qualifying individuals in Nebraska to take advantage of the program. At this time, however, it is unclear exactly how the state program will operate as the law allows the Nebraska State Treasurer to either establish a program within the state or contract with another state to provide for the accounts.

It is expected that final regulations will be issued at some point in the future, but the IRS states that the proposed regulations may be used and relied upon for creating programs and accounts. Those states that adopt programs and individuals who create an ABLE account based upon the proposed regulations will receive the benefits of IRC § 529(a), regardless of whether the final regulations impact the qualification of the ABLE program.

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