ABLE Regs Expand List of Individuals with Signature Authority over ABLE Accounts

(Parker Tax Publishing October 2020)

The IRS issued final regulations which provide guidance on the requirements a program established and maintained by a state, or agency or instrumentality thereof, must satisfy to be considered a qualified ABLE program under Code Sec. 529A. The final regulations provide an expanded hierarchy of persons who may establish an ABLE account for an individual or exercise signature authority over that individual's ABLE account and also address the requirements for establishing an ABLE account, for qualifying as an eligible individual and thus a qualified designated beneficiary of an ABLE account, and provide rules regarding changes in the designated beneficiary of an ABLE account. T.D. 9923.

Background

In 2014, the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act) was enacted. Under the ABLE Act, states or state agencies or instrumentalities may establish and maintain a federal tax-favored savings program for eligible individuals with a disability who are the owners and designated beneficiaries of accounts to which contributions may be made to meet qualified disability expenses. These accounts also receive favorable treatment for purposes of certain means-tested federal programs.

Code Sec. 529A allows the creation of a qualified ABLE program by a state (or agency or instrumentality thereof) under which a separate ABLE account may be established for an eligible individual with a disability who is the designated beneficiary and owner of that account. Generally, contributions to an ABLE account are subject to both an annual limit and a cumulative limit, and, when made by a person other than the designated beneficiary, are treated as gifts to the designated beneficiary. These gifts may be sheltered from federal gift tax by the annual per-donee gift tax exclusion. Distributions from an ABLE account for the qualified disability expenses of the designated beneficiary are not included in the designated beneficiary's gross income. However, the earnings portion of distributions from an ABLE account in excess of the qualified disability expenses generally is includible in the gross income of the designated beneficiary. An ABLE account may be used for the long-term benefit or short-term needs of the designated beneficiary.

The IRS issued proposed regulations in 2015 and received so many comments that it released interim guidance in Notice 2015-81. The contribution limits and other provisions of Code Sec. 529A were modified by the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA amended Code Sec. 529A(b)(2)(B) to allow an employed designated beneficiary described in revised Code Sec. 529A(b)(7) to contribute, before January 1, 2026, an additional amount in excess of the limit in Code Sec. 529A(b)(2)(B)(i) (the annual gift tax exclusion amount in Code Sec. 2503(b), formerly set forth in Code Sec. 529A(b)(2)(B)). This additional permissible contribution is subject to its own limit. Specifically, this additional contributed amount may not exceed the lesser of (i) the designated beneficiary's compensation as defined by Code Sec. 219(f)(1) for the tax year, or (ii) an amount equal to the poverty line for a one-person household for the calendar year preceding the calendar year in which the tax year begins. The TCJA also amended the Code Sec. 529A(b)(2) flush language to require the designated beneficiary, or a person acting on behalf of the designated beneficiary, to maintain adequate records to ensure, and to be responsible for ensuring, that the requirements of Code Sec. 529A(b)(2)(B)(ii) are met.

Code Sec. 529A(b)(7)(A) identifies a designated beneficiary eligible to make this additional contribution as one who is an employee (including a self-employed individual) with respect to whom there has been no contribution made for the tax year to: a defined contribution plan meeting the requirements of Code Sec. 401(a) or Code Sec. 403(a); an annuity contract described in Code Sec. 403(b); or an eligible deferred contribution plan under Code Sec. 457(b).

The TCJA also amended Code Sec. 529 (regarding qualified tuition programs) to allow, before January 1, 2026, a limited amount to be rolled over to an ABLE account from the designated beneficiary's own Code Sec. 529 qualified tuition program (QTP) account or from the QTP account of certain family members. The TCJA added Code Sec. 529(c)(3)(C)(i)(III), which provides that a distribution from a QTP made after December 22, 2017, and before January 1, 2026, is not subject to income tax if, within 60 days of the distribution, it is transferred to an ABLE account of the designated beneficiary or a member of the family of the designated beneficiary. Under Code Sec. 529(c)(3)(C)(i), the amount of any rollover to an ABLE account is limited to the amount that, when added to all other contributions made to the ABLE account for the tax year, does not exceed the contribution limit for the ABLE account under Code Sec. 529A(b)(2)(B)(i), that is, the annual gift tax exclusion amount under Code Sec. 2503(b).

To address the TCJA modifications to Code Sec. 529A, the IRS issued Notice 2018-62, which announced the intent of the IRS to issue proposed regulations to implement these changes and describes the anticipated rules to implement the statutory changes.

In October of 2019, the IRS issued proposed regulations to address the TCJA modifications to Code Sec. 529A (2019 proposed regulations). The 2019 proposed regulations confirmed that the employed designated beneficiary, or the person acting on his or her behalf, is solely responsible for ensuring that the requirements in Code Sec. 529A(b)(2)(B)(ii) are met and for maintaining adequate records for that purpose. In addition, to minimize burdens for the designated beneficiary and the qualified ABLE program, the 2019 proposed regulations provided that ABLE programs may allow a designated beneficiary or the person acting on his or her behalf to certify, under penalties of perjury, that he or she is a designated beneficiary described in Code Sec. 529A(b)(7) and that his or her contributions of compensation do not exceed the limit set forth in Code Sec. 529A(b)(2)(B)(ii). The 2019 proposed regulations also clarified that the poverty line in Code Sec. 529A(b)(7)(B) is to be determined by using the poverty guidelines updated periodically in the Federal Register by the U.S. Department of Health and Human Services.

Because Code Sec. 529A(b)(2) provides that rules similar to those set forth in Code Sec. 408(d)(4) regarding the return of excess contributions to an individual retirement account or annuity apply to ABLE accounts, the 2019 proposed regulations provided that a qualified ABLE program must return any contributions of the designated beneficiary's compensation in excess of the limit in Code Sec. 529A(b)(2)(B)(ii) to the designated beneficiary. The 2019 proposed regulations also provided that it will be the sole responsibility of the designated beneficiary (or the person acting on the designated beneficiary's behalf) to identify and request the return of any excess contribution of such compensation income. Such returns of excess compensation contributions must be received by the employed designated beneficiary on or before the due date (including extensions) of the designated beneficiary's income tax return for the year in which the excess compensation contributions were made. A failure to return excess contributions within this time period will result in the imposition on the designated beneficiary of a 6 percent excise tax under Code Sec. 4973(a)(6) on the amount of excess compensation contributions.

Finally, in order to minimize administrative burdens for the designated beneficiary and the qualified ABLE program, for purposes of ensuring that the limit on contributions made under Code Sec. 529A(b)(2)(B)(ii) is not exceeded, the 2019 proposed regulations provided that a qualified ABLE program may rely on self-certifications, made under penalties of perjury, of the designated beneficiary or the person acting on the designated beneficiary's behalf. According to the IRS, only six comments were received in response to the 2019 proposed regulations and no public hearing was requested or held.

Final Regulations

The IRS has now finalized the regulations under Code Sec. 529A in T.D. 9923. Like the 2015 proposed regulations, the final regulations provide that a program is established by a state, or its agency or instrumentality, if the program is initiated by state statute or regulation, or by an act of a state official or agency with the authority to act on behalf of the state. A program is maintained by a state, or its agency or instrumentality, if all the terms and conditions of the program are set by the state, or its agency or instrumentality, and the state, or its agency or instrumentality, is actively involved on an ongoing basis in the administration of the program, including supervising decisions relating to the investment of assets contributed to the program. The final regulations set forth factors that are relevant in determining whether a state, or its agency or instrumentality, is actively involved in the administration of the program. Among those factors is the nature and extent of the state's role in selecting and overseeing private contractors contracted to provide administrative or other services.

In response to requests from practitioners, the IRS noted that the final regulations are consistent with the rules applicable to qualified tuition programs, where appropriate. However, the final regulations allow certain flexibility in the way each ABLE program may implement the applicable requirements.

Several practitioners had asked whether qualified ABLE programs could join together to form a consortium for the purpose of offering broader investment choices, streamlined program administration, and lower fees for account holders. In response, the final regulations provide that a qualified ABLE program may be maintained by two or more states or agencies or instrumentalities of a state. If a state or agency or instrumentality of a state participates in a consortium, the consortium's program is considered to be the program of each member (state or agency or instrumentality of a state) of the consortium.

As originally enacted, Code Sec. 529A(b)(1)(C) required a qualified ABLE program to allow for the establishment of an ABLE account only for a designated beneficiary who is a resident of that state or of a contracting state. Consistent with the statute, the 2015 proposed regulations required that 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 beneficiary's residence has contracted for the provision of ABLE accounts. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) removed the requirement that a state's qualified ABLE program allow the establishment of an ABLE account only for a designated beneficiary who is a resident of that state or of a contracting state. As a result, the final regulations eliminate all references to a residency requirement and to a "contracting state." A qualified ABLE program may allow an ABLE account to be established for an eligible individual regardless of his or her residence and, subject to the rules of the particular qualified ABLE program, an eligible individual may be the designated beneficiary of an ABLE account under the qualified ABLE program of any state. However, the IRS noted that the final regulations do not prohibit a state from limiting its program to state residents nor do they require a state to establish or participate in an ABLE program.

The IRS noted that numerous practitioners asked that the list of persons who may exercise signature authority over the ABLE account on behalf of the designated beneficiary (signatories) be expanded to provide greater flexibility and to avoid the need for the court appointment of a conservator or other legal representative, particularly in cases in which the designated beneficiary has no parent available to serve as signatory. As a result, the final regulations clarify that an eligible individual with legal capacity may delegate these responsibilities to any other person. The final regulations provide an expanded hierarchy of persons who may establish an ABLE account for an individual or exercise signature authority over that individual's ABLE account. That hierarchy consists of the individual selected by the eligible individual or the eligible individual's agent under a power of attorney, conservator or legal guardian or conservator, the spouse, a parent, a sibling, a grandparent, or a representative payee (whether an individual or organization) appointed by the Social Security Administration (SSA), in that order.

According to the IRS, because each eligible individual is allowed to have only one ABLE account, the ordering rule is necessary to provide a clearer process for determining who may establish the designated beneficiary's only permissible ABLE account. To further facilitate the establishment of ABLE accounts without imposing undue burden on the program or the eligible individuals, the final regulations permit a qualified ABLE program to accept a certification by an individual, under penalties of perjury, that he or she is authorized to establish the ABLE account for the benefit of the eligible individual and that there is no other willing and able person with a higher priority to do so.

The final regulations also allow a designated beneficiary with legal capacity to remove and replace from time to time the individual with signature authority over that designated beneficiary's ABLE account, and to name a successor signatory. The final regulations also allow a person with signature authority to name a successor signatory, consistent with the same ordering rule, if the designated beneficiary lacks the legal capacity to do so.

A few practitioners suggested that more than one person be allowed to serve as authorized co-signatories. The IRS agreed and the final regulations allow a qualified ABLE program to permit co-signatories as long as each co-signatory would satisfy the ordering rule if the other had refused to so serve.

As in the 2015 proposed regulations, the final regulations provide that, because individuals with signature authority over an ABLE account would be acting on behalf of the designated beneficiary, references to actions of the designated beneficiary, such as establishing or managing the ABLE account, are deemed to include the actions of any individual with signature authority over the ABLE account. Further, the final regulations continue to provide that, except for the designated beneficiary of the ABLE account, any person with signature authority over the account may neither have, nor acquire, a beneficial interest in the account during the lifetime of the designated beneficiary, and must administer the account for the benefit of the designated beneficiary.

For a discussion of the tax rules for ABLE accounts, see Parker Tax ¶11,800.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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