Written by Guy Schmitz J.D., LL.M.
Commentators have wisely emphasized the extender provisions of the recently passed federal tax legislation because the extender provisions are the bread and butter of any tax practice. There are, however, other provisions that merit attention, including a new savings provision designed to meet the financial needs of disabled persons and of families raising disabled children.
The ABLE Account
For tax years beginning after December 31, 2014, the Tax Increase Prevention Act of 2014 (TIPA) allows for an account similar to a qualified tuition plan (QTP, also known as a 529 plan). More specifically, states can establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts under an ABLE program to assist disabled persons in paying for qualified disability expenses. Amounts contributed to an ABLE account are not deductible, but once in the account, the income generated is tax free, and distributions are tax free to the beneficiary of an account provided that the distributions do not exceed the designated beneficiary’s disability expenses. Perhaps as important, the account funds, with certain limitations, can be used without disqualifying a beneficiary for certain government benefits.
The ABLE Program
The ABLE program is a watch dog and administrator of ABLE accounts. Under Code §529A, a state can establish an ABLE program that:
- Accepts cash up to the annual gift exclusion ($14,000 in 2015);
- Provides separate accounting for each designated beneficiary;
- Limits the beneficiary’s investment directions to no more than two times in a calendar year;
- Prohibits the use of any interest in the program (a specific ABLE account) as security for a loan; and
- Provides for adequate safeguards to prevent excess aggregate contributions.
Definition of Disabled Person
An individual is disabled if:
- He or she is entitled to benefits based on blindness or disability under the Social Security disability program or the supplemental security income (SSI) program, provided that blindness or disability occurred before the individual reached the age of 26; or
- He or she (or a guardian or parent) provides a disability certification to the IRS which certifies that the individual has severe mental or physical disabilities which will result in death or last for at least 12 continuous months or is blind (as certified by a physician), provided that blindness or disability occurred before the individual reached the age of 26.
Definition of Qualified Disability Expenses
Distributions from an ABLE account are not included in the gross income of the disabled beneficiary provided that the distributions are used to pay “qualified disability expenses,” which include:
- Employment training and support;
- Assistive technology and personal support services;
- Health, prevention, and wellness;
- Financial management and administrative expenses;
- Legal fees;
- Expenses for oversight and monitoring;
- Funeral and burial expenses; and
- Other expenses approved under IRS regulations, consistent with the purpose of Code §529A.
Except for SSI, ABLE Accounts are Disregarded for Federal Means-Tested Programs
Various federal means-tested programs provide benefits for individuals with limited income and other financial resources. For example, there is a $2000 resource limit for individuals for the SSI program. In other words, when SSI recipients’ income and resources exceed the $2000 limit, their SSI benefits are suspended.
Under the new TIPA law, contributions to and distributions from an ABLE account to pay qualified disability expenses are disregarded for federal means-tested programs, with the exception of the SSI program. In the case of the SSI program, distributions from an ABLE account for housing expenses are considered income. Furthermore, amounts in an ABLE account in excess of $100,000 (including income) will suspend SSI benefits until the ABLE account falls below the $100,000 limitation. The suspension of SSI benefits does not affect Medicaid eligibility.
Further Provisions of Code §529A
There are additional provisions in Code §529A for taxes on excess distributions, rollovers into other ABLE accounts, changes in designated beneficiaries, and other rules.
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