On March 10, 2015, the Internal Revenue Service released Notice 2015-18, which provides advance notification of a provision that is expected to be included in final regulations to be issued under section 529A of the Internal Revenue Code with respect to “ABLE” programs.
Section 529A was enacted on December 19, 2014, as part of the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014, P.L. 113-295 (the “ABLE Act”). The ABLE Act permits a state (or agency or instrumentality of a state) to establish a new type of tax-advantaged savings program under which contributions may be made to an ABLE account that is established for the purpose of meeting the qualified disability expenses of the designated beneficiary of the account.
Sutherland Observation: Those familiar with section 529 qualified tuition programs will recognize many similarities between section 529 and section 529A plans. There are, however, some significant differences between those two programs. Some of the features unique to 529A plans and not applicable to 529 plans are highlighted below.
Certain notable provisions of the ABLE Act include the following:
- The designated beneficiary of an ABLE account must be a resident of the state that established and maintains the program or a resident of a contracting state. A contracting state is a state without an ABLE program that contracts with a state that has an ABLE program.
- The designated beneficiary must be considered “disabled,” as defined for purposes of section 529A.
- Distributions from an ABLE account used for “qualified disability expenses” of the designated beneficiary are not subject to federal income tax. Qualified disability expenses include any expenses related to the designated beneficiary’s blindness or disability including costs related to education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, and funeral and burial expenses. Non-qualified distributions are subject to federal (and possibly state) income tax and may be subject to a 10 percent additional federal income tax.
- Upon the death of the designated beneficiary, amounts remaining in an ABLE account, up to the total amount of medical assistance paid for the designated beneficiary after the establishment of the account, net of any premiums paid to a Medicaid Buy-In program under the state Medicaid plan, may be required to be paid to the state.
- Distributions from an ABLE account for housing expenses or ABLE accounts with balances over $100,000 may negatively impact eligibility for supplemental social security (SSI).
- ABLE plan programs are required: (1) to notify the IRS upon formation of an ABLE account of the name and state of residency of the beneficiary; and (2) to submit information on a monthly basis regarding distributions and ABLE account balances to the Social Security Administration.
The ABLE Act directs the Department of the Treasury to issue regulations or other guidance to implement section 529A no later than June 19, 2015. Notice 2015-18 confirms that Treasury and the IRS are currently working on such guidance, but recognizes that several states are in the process of enacting enabling legislation to create ABLE programs and, therefore, ABLE programs may be in operation in some states before the guidance is issued. The Notice provides the following in regard to such programs:
- The Notice assures states that enact ABLE legislation and individuals who establish ABLE accounts “that they will not fail to receive the benefits of section 529A merely because the legislation or account documents do not fully comport with the guidance when it is issued.” Treasury and the IRS intend to provide transitional relief with regard to necessary changes to ensure that state programs and accounts meet the requirements of the guidance.
- The Notice also provides that Treasury and the IRS anticipate that the guidance will confirm that the owner of an ABLE account is the designated beneficiary of the account, and that if another person has signatory authority over the account, such person may not have any beneficial interest in the account and must administer the account for the designated beneficiary.