ABLE Act Rules Clarified by IRS
Last December saw the enactment of the Achieving a Better Life Experience Act of 2014 (ABLE Act). The Act creates Section 529A of the Internal Revenue Code (26 U.S. Code §529A) which authorizes a new form of tax free savings account for individuals who became severely disabled before they reached age 26.
Earnings on an ABLE account will not be subject to federal income tax, and more importantly, the funds in the account will not disqualify the owner from continued benefits under the Supplemental Security Income (SSI) and Medicaid programs. Money can be saved for future expenses and needs without jeopardizing the owner’s SSI and Medicaid eligibility.
ABLE accounts are only available to residents of a state which has either established its own qualified ABLE program or entered into a contract with another state to provide its residents with access to a qualified ABLE program.
It will take a while for the IRS to develop regulations implementing the ABLE Act. However, several states are already moving forward on legislation that would authorize their residents to establish ABLE accounts this year (2015). ABLE accounts in those states may be in operation before the IRS regulations have been issued.
The IRS does not want to discourage states from moving forward on legislation creating their ABLE programs. If states wait for the IRS to issue regulations it could delay the ability of the families of disabled individuals or others to begin to fund ABLE accounts for those disabled individuals. Therefore, the IRS has issued a notice to let states know that once regulations are issued, it will allow states that have already established programs sufficient time to change their programs to conform to the federal rules.
In addition, the IRS has provided states with two clarifications regarding how it intends to implement ABLE. These are two important ways that ABLE accounts will differ from the rules governing Section 529 education accounts:
- The owner of an ABLE account is the designated beneficiary of the account;
- Where the designated beneficiary is not the person with signature authority over that account, the person with signature authority over the account of the designated beneficiary may neither have nor acquire any beneficial interest in the account and must administer that account for the benefit of the designated beneficiary of that account.
The IRS Notice is available here: https://www.irs.gov/pub/irs-drop/n-15-18.pdf
Here is a link to my December 2014 blog post which provides a lot of additional information on ABLE accounts: https://tinyurl.com/qc9neld
