Tax Benefit for Individuals With Disabilities: IRC Section 529A
The Stephen Beck, Jr., Achieving a Better Life Experience Act (ABLE Act) was enacted on December 19, 2014, as part of The Tax Increase Prevention Act of 2014 (P.L. 113–295).
Generally, the ABLE Act permits a state to establish and maintain a new type of tax-advantaged savings program (under Section 529A of the Internal Revenue Code). Contributions may be made to a 529A account established for a designated beneficiary to pay for qualified disability expenses.
The Consolidated Appropriations Act of 2016 (P.L. 114-113, H.R.2029, Dec. 18, 2015) eliminates the requirement that ABLE accounts be established only in the ABLE account owner’s state of residence. This change will be addressed in the final regulations.
Notice 2015-81 (IR-2015-130, Nov. 20, 2015) notes three changes to the proposed rules for ABLE accounts that’ll be included in the final regulations when issued. These changes will make it easier for states to offer and administer ABLE programs.
- ABLE programs won’t be required to establish safeguards to determine which distributions are for qualified disability expenses. They also are not required to specifically identify or record distributions used for housing expenses. Designated beneficiaries, however, will need to categorize distributions to determine their federal income tax obligations.
- ABLE programs won’t be required to request the taxpayer identification number (TIN) of ABLE contributors if the program has a system in place to reject contributions that exceed the annual and/or cumulative limits. However, if an excess contribution is deposited into a designated beneficiary’s ABLE account, the program must request the contributor’s TIN. For most people, the TIN is their Social Security number (SSN).
- Designated beneficiaries can open an ABLE account by certifying, under penalties of perjury, that they meet the necessary requirements. This means they have a signed physician’s diagnosis and will provide it to the program or the IRS upon request. Eligible individuals with disabilities will not need to provide the written diagnosis when opening the ABLE account and ABLE programs will not need to receive, retain, or evaluate detailed medical records.
Proposed regulations (IR-2015-91, June 19, 2015) provide rules by which states or state agencies or instrumentalities may establish a qualified ABLE program through which contributions may be made to the account of an eligible disabled individual to pay for qualified disability expenses. These accounts are generally disregarded for purposes of certain means-tested federal programs. Notice 2015-18 (March 10, 2015) offers information for states enacting enabling legislation for qualified ABLE Programs before additional guidance was issued to ensure that the residents of those states could create ABLE accounts during 2015.
The final regulations for 529A will be issued later this year.
ABLE programs will use two forms (Form 1099-QA, Distributions from ABLE Accounts and Form 5498-QA, ABLE Account Contribution Information) (Instructions) to report relevant account information annually to designated beneficiaries and the IRS.