The IRS will provide transition relief for Achieving a Better Life Experience (ABLE) accounts authorized by Code Sec. 529A of the Tax Increase Prevention Act of 2014. Although the IRS is supposed to issue regulations or other guidance on the accounts by June 19, 2015, the IRS recognized that many states are proceeding with enabling legislation and that taxpayers may set up accounts before the IRS issues guidance. The IRS does not want the lack of guidance in early 2015 to discourage the creation of ABLE accounts.
In Notice 2015-18, the IRS assured states authorizing an ABLE program, and individuals establishing accounts in accordance with state law, that the accounts will qualify under Code Sec. 529A even if they do not “fully comport with the guidance when it is issued.” The IRS also pledged to provide sufficient time for making changes to satisfy the guidance.
ABLE accounts are tax-favored accounts maintained for beneficiaries who are blind or disabled. Contributions are not deductible but will accrue income tax-free in the account. Distributions will be tax-free if used to pay qualified expenses for the disabled beneficiary. These are expenses related to the eligible individual’s blindness or disability that are made for the benefit of the individual, including education, housing, transportation, employment, technology and personal support services, health, and other expenses.
The accounts are similar to qualified tuition programs (QTPs) under Code Sec. 529, but are not identical. For example, contributions to a QTP are unlimited, while contributions per person to an ABLE account are limited to the annual gift tax exclusion ($14,000 for 2015). The beneficiary must establish and own the account. The beneficiary must be a resident of the state authorizing the program or of a contracting state that provides access to another state’s ABLE program. Unlike QTPs, only one ABLE account can be established per beneficiary.
The disability must have occurred before the beneficiary reached age 26. The beneficiary must be entitled to Social Security Act benefits, or must provide a disability certificate in accordance with IRS requirements, to be set out in the guidance. Amounts in the account below $100,000 cannot be included to determine the individual’s eligibility for federal means-tested programs.