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Congress Eases Requirements for ABLE Accounts

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Congress has eased the rules for ABLE accounts. The just enacted Omnibus Budget and Tax legislation eliminates the state residency requirement.

Under ABLE some individuals with disabilities are allowed to retain much higher amounts of savings without losing their Social Security and Medicaid benefits. (See my previous article on ABLE accounts here). But the prior law specified that the beneficiary of an ABLE account was required to reside in a state that had specifically authorized ABLE.

The Protecting American’s from Tax Hikes (PATH) Act of 2015 includes a section (Section 303) that eliminates the residency requirement for qualified ABLE programs. The provision allows ABLE accounts (tax-preferred savings accounts for disabled individuals), which currently may be located only in the State of residence of the beneficiary, to be established in any State. This will allow individuals setting up ABLE accounts to choose the State program that best fits their needs, such as with regard to investment options, fees, and account limits. The provision is effective for tax years beginning after December 31, 2014.

The new provision reads as follows:

  1. Elimination of residency requirement for qualified ABLE programs

(a) In general

Section 529A(b)(1) is amended by striking subparagraph (C), by inserting and at the end of subparagraph (B), and by redesignating subparagraph (D) as subparagraph (C).

(b) Conforming amendments

(1) The second sentence of section 529A(d)(3) is amended by striking and State of residence.

(2) Section 529A(e) is amended by striking paragraph (7).

(c) Technical amendments

(1) Section 529A(d)(4) is amended by striking section 4 and inserting section 103.

(2) Section 529A(c)(1)(C)(i) is amended by striking family member and inserting member of the family.

(d) Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2014.

The PATH Act, including Section 303, is incorporated as Division Q of the Consolidated Appropriations Act, 2016, the year-end tax and spending legislation that was signed into law by President Obama on December 18th.

This legislative change follows a regulatory easing of ABLE account restrictions announced by the IRS in November. In its guidance the IRS backed off a requirement mandating the submission of medical documentation of disability to open an ABLE account. The IRS also made changes intended to make it easier for states to administer the accounts.

The elimination of the residency requirement raises a number of new questions about the ABLE program. It may result in delays in states that are attempting to move forward with ABLE account implementation.