The Achieving a Better Life Experience (ABLE) Act of 2014 was passed by Congress in late 2014 with significant bipartisan support. The ABLE Act created tax-favored savings accounts for qualified individuals with disabilities (who became disabled before age 26) for tax years beginning after December 31, 2014.
In Notice 2015-18, the IRS explained that future guidance would confirm that the owner of the ABLE account is the designated beneficiary of the account, and that the person with signature authority over (if not the designated beneficiary of) the account may neither have nor acquire any beneficial interest in the ABLE account and must administer that account for the benefit of the designated beneficiary of that account.
The proposed regs reiterate that in order to be a qualified ABLE program, the program must, among other requirements, be established and maintained by a state or state agency or instrumentality; permit the establishment of an ABLE account only for a designated beneficiary who is an eligible individual; limit a designated beneficiary to only one ABLE account; permit contributions to an ABLE account established to meet the qualified disability expenses of the account’s designated beneficiary; and limit the nature and amount of contributions that can be made to an ABLE account.
In some cases, the IRS explained that individuals may be unable to establish an account themselves. The proposed regulations clarify that, if the eligible individual cannot establish the account, the eligible individual’s agent under a power of attorney or, if none, his or her parent or legal guardian may establish the ABLE account for that eligible individual.
An individual is an eligible individual for a tax year if, during that year, either 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 date on which the individual attained age 26, or a disability certification meeting specified requirements is filed with the IRS.
A qualified ABLE program may accept cash contributions in the form of cash or a check, money order, credit card payment, or other similar method of payment. Total contributions to an ABLE account per calendar year cannot exceed the annual gift tax exclusion. Where contributions exceed the annual gift tax exclusion, failure to return excess contributions results in a six percent excise tax. For 2015, the gift tax exclusion is $14,000.
If distributions from an ABLE account do not exceed the designated beneficiary’s qualified disability expenses, no amount is included in the designated beneficiary’s gross income. Otherwise, the distribution may be subject to income tax and an additional tax.
Qualified expenses are expenses that relate to the designated beneficiary’s blindness or disability, and are for the benefit of that designated beneficiary in maintaining or improving his or her health, independence, or quality of life, the IRS explained. These include expenses for education, housing, transportation, employment training, and personal support services.
A qualified ABLE program must report establishment of each ABLE account on new Form 5498-QA: ABLE Account Contribution Information. Information regarding distributions will be reported on new Form 1099-QA: Distributions from ABLE Accounts.
If you have any questions regarding this new type of account, please do not hesitate to contact us.