The IRS has proposed regulations that provide guidance regarding programs under the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act), which was enacted on December 19, 2014, as part of the Tax Increase Prevention Act of 2014 (P.L. 113-295). The ABLE Act permits states and state agencies or instrumentalities to establish and maintain a new type of tax-favored savings program through which contributions may be made to the account of an eligible disabled individual to meet qualified disability expenses. These accounts also receive favorable treatment for certain means-tested federal programs.
Distributions made from an ABLE account for qualified disability expenses of the designated beneficiary are not included in the designated beneficiary’s gross income. The earnings portion of distributions from the ABLE account in excess of the qualified disability expenses is includible in the gross income of the designated beneficiary. An ABLE account may be used for the long-term benefit and/or short-term needs of the designated beneficiary.
Qualification as an ABLE program
The proposed regulations provide guidance on the requirements a program must satisfy in order to be a qualified ABLE program. In addition to other requirements, the program must: (1) be established and maintained by a state or a state’s agency or instrumentality; (2) permit the establishment of an ABLE account only for a designated beneficiary who is a resident of that state, or a state contracting with that state for purposes of the ABLE program; (3) permit the establishment of an ABLE account only for a designated beneficiary who is an eligible individual; (4) limit a designated beneficiary to only one ABLE account, wherever located; (5) permit contributions to an ABLE account established to meet the qualified disability expenses of the account’s designated beneficiary; (6) limit the nature and amount of contributions that can be made to an ABLE account; (7) require a separate accounting for the ABLE account of each designated beneficiary with an ABLE account in the program; (8) limit the designated beneficiary to no more than two opportunities in any calendar year to provide investment direction, whether directly or indirectly, for the ABLE account; and (9) prohibit the pledging of an interest in an ABLE account as security for a loan.
The proposed regulations also provide guidance regarding annual re-certifications.
The proposed regulations allow a qualified ABLE program or any of its contractors to contract with one or more Community Development Financial Institutions (CDFIs) that commonly serve disabled individuals and their families to provide one or more required services. For example, a CDFI could provide screening and verification of disabilities, certification of the qualified purpose of distributions, debit card services to facilitate distributions, and social data collection and reporting. A CDFI also may be able to obtain grants to defray the cost of administering the program.
Designated beneficiary account eligibility and payments
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.
The proposed regulations also provide clarification of certain disability certification and determination requirements.
If a designated beneficiary ceases to be an eligible individual, the proposed regulations provide that no contributions to the ABLE account may be accepted beginning on the first day of the tax year following the tax year in which the designated beneficiary ceased to be an eligible individual. If the designated beneficiary later becomes an eligible individual again, then additional contributions may be accepted subject to the applicable annual and cumulative limits.
ABLE account contributions generally must be made in cash. The proposed regulations provide that 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.
Excess Annual and Aggregate Contributions
The proposed regulations provide that the total contributions to an ABLE account in the designated beneficiary’s tax year, other than amounts received in rollovers and program-to-program transfers, must not exceed the amount of the annual per-donee gift tax exclusion under Code Sec. 2503(b) in effect for the calendar year (currently $14,000) in which the designated beneficiary’s tax year begins.
The proposed regulations provide that a qualified ABLE program must return contributions in excess of the annual gift tax exclusion (excess contributions) to the contributor(s), along with all net income attributable to those excess contributions.
A failure to return excess contributions that exceed the annual gift tax exclusion within the allotted time period will result in the imposition on the designated beneficiary of a six-percent excise tax under Code Sec. 4973(a)(6) on the amount of excess contributions. As part of a planned revision of IRA regulations, the Treasury Department and the IRS intend to propose regulations under Code Sec. 4973 to reflect that ABLE accounts are subject to Code Sec. 4973.
A qualified ABLE program must provide adequate safeguards to prevent aggregate contributions on behalf of a designated beneficiary in excess of the limit established by the state under Code Sec. 529(b)(6) relating to Qualified State Tuition Programs. The proposed regulations also require the return of all contributions, along with all net income attributable to contributions, that caused an ABLE account to exceed the limit established by the state for its qualified tuition program (excess aggregate contributions).
The proposed regulations provide a safe harbor that permits a qualified ABLE program to satisfy the requirement regarding total cumulative contributions if the program prohibits any additional contributions to an account as soon as the account balance reaches the specified contribution limit under such state’s program established under Code Sec. 529 . Once the account balance falls below the prescribed limit, contributions may resume, subject to the same limitation.
Qualified Disability Expenses
The proposed regulations provide that qualified disability 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. Such expenses include, but are not limited to, expenses for 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, funeral and burial expenses, and other expenses that may be identified from time to time in future guidance published in the Internal Revenue Bulletin. Expenses incurred when a designated beneficiary is neither disabled nor blind within the meaning of the proposed regulations are not qualified disability expenses.
The Treasury Department and the IRS conclude that the term “qualified disability expenses” should be broadly construed to permit the inclusion of basic living expenses and should not be limited to expenses for items for which there is a medical necessity or which provide no benefits to others in addition to the benefit to the eligible individual. For example, expenses for common items such as smart phones could be considered qualified disability expenses if they are an effective and safe communication or navigation aid for a child with autism. The Treasury Department and the IRS request comments regarding what types of expenses should be considered qualified disability expenses and under what circumstances.
Distributions made from an ABLE account for qualified disability expenses of the designated beneficiary are not included in the designated beneficiary’s gross income. The earnings portion of distributions from the ABLE account in excess of the qualified disability expenses is includible in the gross income of the designated beneficiary.
The proposed regulations provide that, for purposes of applying Code Sec. 72 (e.g., inclusion of income from annuities, etc.) to amounts distributed from an ABLE account: (1) all distributions during a tax year are treated as one distribution; and (2) the value of the contract, income on the contract, and investment in the contract are computed as of the close of the calendar year in which the designated beneficiary’s tax year begins.
The proposed regulations provide that, in addition to the income tax on the portion of a distribution included in gross income, a tax of 10 percent of the amount includible in gross income is imposed. This additional tax does not apply, however, to distributions on or after the designated beneficiary’s death or to returns of excess contributions, excess aggregate contributions, or contributions to additional purported ABLE accounts made by the due date (including extensions) of the designated beneficiary’s tax return for the year in which the relevant contributions were made. The proposed regulations address additional situations in which amounts will not be included in income.
Limitation on Number of Accounts
Except with respect to rollovers and program-to-program transfers, no designated beneficiary may have more than one ABLE account in existence at the same time. The proposed regulations provide that a qualified ABLE program must require the designated beneficiary to verify under penalties of perjury, when creating an ABLE account, that the account being established is the designated beneficiary’s only ABLE account.
Under the proposed regulations, an ABLE account for a designated beneficiary may be established only under the qualified ABLE program of the state in which that designated beneficiary is a resident or with which the state of the designated beneiciary’s residence has contracted for the provision of ABLE accounts. However, a qualified ABLE program may permit a designated beneficiary to continue to maintain his or her ABLE account that was created in that state, even after the designated beneficiary is no longer a resident of that state.
Application of Gift, GST, and Estate Tax Provisions
The proposed regulations provide that any contribution by a designated beneficiary to a qualified ABLE program benefitting the designated beneficiary is not treated as a completed gift.
The proposed regulations provide that contributions to an ABLE account by a person other than the designated beneficiary are treated as completed gifts to the designated beneficiary of the account, and that such gifts are neither gifts of a future interest nor a qualified transfer under Code Sec. 2503(e). Accordingly, no distribution from an ABLE account to the designated beneficiary of that account is treated as a taxable gift.
Neither gift nor GST taxes apply to the change of designated beneficiary of an ABLE account, as long as the new designated beneficiary is an eligible individual who is a sibling of the former designated beneficiary.
The proposed regulations provide that, upon the death of the designated beneficiary, all amounts remaining in the ABLE account are includible in the designated beneficiary’s gross estate for purposes of the estate tax and clarify other estate and generation-skipping tax related issues.
Unrelated Business Taxable Income
A qualified ABLE program generally is exempt from income taxation, but is subject to the taxes imposed by Code Sec. 511 relating to the imposition of tax on unrelated business taxable income (“UBTI”). For purposes of this tax, certain administrative and other fees do not constitute unrelated business income to the ABLE program. A qualified ABLE program is not required to file Form 990, “Return of Organization Exempt From Income Tax,” but will be required to file Form 990-T, “Exempt Organization Business Income Tax Return,” if a filing would be required under the rules of Reg. §§1.6012-2(e) and 1.6012-3(a)(5) if the ABLE program were an organization described in those sections.
The proposed regulations set forth recordkeeping and reporting requirements. A qualified ABLE program must maintain records that enable the program to account to the for all contributions, distributions, returns of excess contributions or additional accounts, income earned, and account balances for any designated beneficiary’s ABLE account. In addition, a qualified ABLE program must report the establishment of each ABLE account, including the name and residence of the designated beneficiary, and other relevant information regarding the account that is included on the new Form 5498-QA, “ABLE Account Contribution Information.” It is anticipated that the qualified ABLE program will report if the eligible individual has presented an adequate disability certification, accompanied by a diagnosis, to demonstrate eligibility to establish an account. Information regarding distributions will be reported on the new Form 1099-QA, “Distributions from ABLE Accounts.” The proposed regulations contain more detail on how the information must be reported.
In addition, Code Sec. 529A(b)(3) requires that a qualified ABLE program provide separate accounting for each designated beneficiary.
Until the issuance of final regulations, taxpayers and qualified ABLE programs may rely on the proposed regulations. The regulations are proposed to be effective as of the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. These rules, when adopted as final regulations, will apply to tax years beginning after December 31, 2014. The reporting requirements of Proposed Reg. §§1.529A-5 through 1.529A-7 will apply to information returns required to be filed, and payee statements required to be furnished, after December 31, 2015.
However, states that enact legislation creating an ABLE program in accordance with Code Sec. 529A , and individuals establishing ABLE accounts in accordance with such legislation, will not fail to receive the benefits of section Code Sec. 529A merely because the legislation or the account documents do not fully comport with the final regulations when they are issued. The Treasury Department and the IRS intend to provide transition relief to enable those state programs and accounts to be brought into compliance with the requirements in the final regulations, including providing sufficient time after issuance of the final regulations for changes to be implemented.
Comments and Public Hearing
A public hearing is scheduled for October 14, 2015, at 10:00 a.m. The public hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, D.C.
Comments and outlines of topics discussed must be received by September 21, 2015. Submissions should be sent to: CC:PA:LPD:PR (REG-102837-15), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington D.C. 20044. Submissions may be hand delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG-102837-15), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, D.C., or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-102837-15).
IR-2015-91, 2015FED ¶46,351
Proposed Regulations, NPRM REG-102837-15, 2015FED ¶49,654
Code Sec. 511
CCH Reference – 2015FED ¶22,822B
Code Sec. 513
CCH Reference – 2015FED ¶22,841B
Code Sec. 529A
CCH Reference – 2015FED ¶22,948
CCH Reference – 2015FED ¶22,948B
CCH Reference – 2015FED ¶22,948D
CCH Reference – 2015FED ¶22,948F
CCH Reference – 2015FED ¶22,948H
CCH Reference – 2015FED ¶22,948J
CCH Reference – 2015FED ¶22,948L
CCH Reference – 2015FED ¶22,948N
Code Sec. 6011
CCH Reference – 2015FED ¶35,125B
Tax Research Consultant
CCH Reference – TRC INDIV: 30,550