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New Law Provides Tax-Favored Savings Plans for Disabled Individuals.
(Parker Tax Publishing December 23, 2014)
With strong bipartisan support, Congress passed the Achieving a Better Life Experience Act (ABLE) on December 16, providing a new type of tax-advantaged savings plan for disabled individuals. Dubbed "ABLE" plans, the new Code Sec. 529A plans are modeled off Code Sec. 529 Qualified Tuition Plans. H.R. 5771 (12/16/2014).
Contributions to 529A plans are not deductible, but qualified distributions (including distributions of earnings) are tax free. In addition to offering tax benefits, Code Sec. 529A plans provide a way for disabled individuals to accumulate and earn income on assets, within statutory limits, that otherwise might disqualify them from programs such as Supplemental Security Income and Medicaid.
The new rules go into effect for tax years beginning in 2015.
Background
An early version of the ABLE Act was introduced in 2006 by Representative Ander Crenshaw (R-Fl). Since that time, there have been several attempts to pass the bill amidst debate over the cost of the program. During the 112th Congress, ABLE was redrafted to mirror the rules for Code Sec. 529 qualified tuition plans. However, the session concluded early January 2013 with no action.
The bill was reintroduced in February of 2013 containing a series of offsets and compromises to encourage passage. Apparently the bill's backers finally found the right mix. ABLE passed the House as H.R. 647 on December 3, 2014 with overwhelming bipartisan support, and easily won passage in the Senate two weeks later after being tacked on to the tax extenders bill (H.R. 5771). President Obama is expected to sign it into law later this week, nearly eight years after its initial introduction.
Under the ABLE program, a 529A plan may be set up for any eligible state resident, who will generally be the only person allowed to take distributions from the account. 529A plans are established and maintained by the designated beneficiary's home state. A designated beneficiary is allowed limited control over investments, and may direct the investments of any contributions or earnings no more than twice per year.
Eligible Individuals
A 529A plan is established for the exclusive benefit of a designated beneficiary, who must be an "eligible individual". To qualify, an individual must have become blind or disabled before attaining age 26. Such blindness or disability must be evidenced by the individual having become entitled to receive Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), or by providing a disability certification (including a signed diagnosis by a physician), establishing that "the individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, or is blind."
In contrast to qualified tuition plans, only one 529A plan is permitted per beneficiary. Any accounts subsequently established for that beneficiary will not be treated as a 529A plan (Code Sec. 529A(c)(4)). Additionally, the beneficiary must be a resident of the state that established the account.
Tax Treatment of Contributions
The contributions made to a 529A plans are not deductible. The only limit on contributions is that plans are not permitted to accept additional contributions after the account value reaches the limit set by the state for Section 529 Qualified Tuition Plans (Code. Sec. 529A(b)(6)). These limits presently range from a low of $260,000 for the District of Columbia to high of $452,210 for Pennsylvania. There is no limit on the amount of an individual contribution to a 529A plan, other than that a contribution cannot push the account value above the state maximum.
OBSERVATION: In contrast to 529 plans which are marketed across state lines, states can only offer 529A plans to individuals who reside in the state. Thus, contribution limits will be tied to the limits imposed by the designated beneficiary's home state.
Practice Tip: Any contribution to a 529A plan is treated as a completed gift to the plan's designated beneficiary. In some situations, a taxpayer's desire to stay within the gift tax annual exclusion amount may effectively limit the amount of a contribution. See the section on "Estate and Gift Tax Treatment" below.
The 529A plan itself is generally exempt from tax. However, like other tax-exempt organizations, a 529A plan is subject to the taxes imposed by Code Sec. 511 on its unrelated business income (Code Sec. 529A(a)).
Tax Treatment of Distributions
Generally, a distribution from a 529A plan to a designated beneficiary is not includible in the gross income of either the beneficiary or the taxpayer(s) who made contributions. However, if the total 529A plan distributions to a designated beneficiary exceed the beneficiary's qualified disability expenses for the year, a portion of those distributions is taxable to the beneficiary (Code Sec. 529A(c)(1)(B)). An additional 10 percent penalty tax also generally applies to a taxable distribution from a 529A plan (Code Sec. 529A(c)(3)(A); see exceptions below).
"Qualified disability expenses" means any expenses related to the eligible individual's blindness or disability, including:
(1) education,
(2) housing,
(3) transportation,
(4) employment training and support,
(5) assistive technology and personal support services,
(6) health, prevention and wellness,
(7) financial management and administrative services,
(8) legal fees,
(9) expenses for oversight and monitoring,
(10) funeral and burial expenses, and
(11) other expenses as may be provided in IRS regulations
To determine the taxable part of the total 529A distributions for a year, the portion of those distributions attributable to earnings is multiplied by a fraction, the numerator of which is the amount by which the total 529A plan distributions exceed the disability expenses and the denominator of which is the amount of the total 529A plan distributions (Code Sec. 529A(c)(1)(B)(ii)).
Ten Percent Penalty Tax: In addition to income tax, a 10 percent penalty tax generally applies to taxable distributions from a 529A plan. Exceptions apply to: (1) distributions made to upon the death of the designated beneficiary, and (2) distributions made to reverse excess contributions, provided the distribution is made by the due date of the return for the tax year to which the excess contribution relates.
Rollovers and Beneficiary Changes
An amount that is distributed from a 529A plan is not taxable if, within 60 days of the distribution, it is rolled over to another 529A plan for the benefit of the same designated beneficiary or for the benefit of a member of the beneficiary's family who is an eligible individual. In the case of a rollover for the benefit of the same designated beneficiary, only one such tax-free rollover is allowed during any 12-month period (Code Sec. 529A(c)(1)(C)(i)).
There are no tax consequences when the designated beneficiary of a 529A is changed from one family member to another family member who is an eligible individual. For this purpose, a family member of a designated beneficiary includes a brother, sister, stepbrother, or stepsister.
OBSERVATION: The definition of a "family member" under Code Sec. 529A is considerably narrower than the definition under Code Sec. 529 plans. When combined with the requirement that a newly designated beneficiary must also be an eligible individual (i.e. someone who was disabled or blind by age 26), many families may find that making a tax-free rollover to a new designated beneficiary is not an option.
Estate and Gift Tax Treatment
Any contribution to a 529A plan on behalf of any designated beneficiary is treated as a completed gift to the beneficiary that is not a future interest in property. Thus, contributions to a 529A plan qualify for the Code Sec. 2503(b)(1) gift tax annual exclusion (Code Sec. 529A((c)(2)).
Even if funds contributed to a 529A plan are intended to be eventually be used to pay medical or educational expenses, such contributions are not treated as qualified transfers under Code Sec. 2503(e) (which excludes transfers for educational expenses or medical expenses from gift taxation). Code Sec. 529A(c)(2). (Staff Editor Parker Tax Publishing)
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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