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George F. Bearup, J.D. Senior Legal Trust Advisor

26-Dec-20

ABLE Accounts – Final Regulations Add Some Good New, and Not-So-Good-News

Take-Away: In 2020, there were more than 71,000 ABLE accounts that held more than $470 million assets. The average ABLE account held $6,600 in assets.  It took the Treasury Department six years to publish Final Regulations with regard to ABLE accounts. The Final Regulations were published on October 1, 2020; fortunately, there were few surprises in those Final Regulations.

Background: In 2014 Congress added Section 529A to the Tax Code. The Achieving A Better Life Experience Act, leads to the acronym ABLE accounts. Under this legislation, states create a Qualified ABLE Program much like the state creates a Qualified Tuition Program under IRC 529. An ABLE account is intended to mimic a self-settled Medicaid ‘payback’ trust. [42 USC 1396p(d)(4)(A).] Therefore, an ABLE account is a device used to hold excess assets above the $2,000 limit for an individual’s eligibility for social security disability and Medicaid benefits.

Some of the details and terminology associated with an ABLE account include:

  • Owner: The Designated Beneficiary is the Account Owner.
  • Authorized Signer: The authorized signer is the person who possesses the authority to manage ABLE account’s investments and make distributions.
  • Eligibility: An Eligible Individual is based on blindness or disability, or one who receives SSDI or SSI or who files a Disability Certificate with the Social Security Administration.

The Eligible Individual’s disability must have commenced prior to age 26 years. It is the onset of the disability prior to this age, not the condition that led ultimately to the disability, that counts. This can be a yearly determination of disability, which means that the eligibility status to contribute to an ABLE account can be lost from year to year.

  • One Account: Only one ABLE account is available per Eligible Individual.
  • Annual Contribution Limit: Contributions to the ABLE account, from all sources, is limited to the IRC 2503(b) annual exclusion amount of $15,000, for those other than the Account Owner. [IRC 529A(c)(2)(A)(i).]
  • Earnings Contribution: With the 2017 Tax Act’s amendment to IRC 529A, the Account Owner, who is the Designated Beneficiary, may also contribute his or her earnings, up to the poverty-line amount of a one-person household, which in 2020 is $12,490. [IRC 529A(a).] This amendment that enables contributions of one’s own earnings expires beginning in 2026.
  • Maximum ABLE Account Balance: Total contributions to an ABLE Account are limited to each state’s Qualified Tuition Program limit under IRC 529. Once the maximum account value is reached, or exceeds the state’s maximum value for 529 plan accounts, further contributions are prohibited. However, IRC 529A permits the ABLE account to grow internally beyond that limit. If the ABLE account value drops due to market conditions or distributions below the maximum value, contributions may resume to the account, even though that may mean that the aggregate contributions may in fact exceed the contribution limit.
  • ABLE Account Not Available Income: An ABLE account is not treated as income to the Account Owner for public assistance programs. However, amounts accumulated in an ABLE account above $100,000 will be ‘counted’ for SSI purposes, but those excess amounts only result in a suspension of the SSI benefits, not a termination of the SSI benefits. The suspension of SSI due to excess ABLE account funds will not result in a suspension of Medicaid benefits to which the ABLE Account Owner was entitled by reason of SSI eligibility. [ABLE Act 103(a) and (b).]

Qualified Disability Distributions: A qualified disability distribution (or QCD) is defined as: “expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary, including the following expenses: 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 which are approved by the Secretary and consistent with the purpose of this section.”

  • Distributions: While distributions from an ABLE account are not normally treated as income to the Account Owner, for public assistance purposes, distributions for housing expenses not used in the month of distribution, and distributions for  non-Qualified Disability Expenses will be treated as assets if retained after the month of distribution.
  • Medicaid Payback: Medicate payback is only for medical assistance provided since the date the ABLE account was established. This payback rule is in contrast to a self-settled Medicaid payback trust which requires payback for all medical assistance for the beneficiary’s entire life. [IRC 529A(f).]
  • Social Security Disability: The inter-play between an ABLE Account and social security disability is described in detail in the Social Security Administration’s Program Operations Manual System (POMS) at SSA POMS SI 01130.740, last amended on March 13, 2020.

Final 529A Regulations: The Final Regulations with regard to 529A basically provided confirmation of most of the 2016 Proposed Regulations, but there were a few surprises, both good and bad.

  • Effective Date: The Effective Date of the ABLE  Account Regulations is November 19, 2020. To the extent that the Regulations require a state’s ABLE Program to be changed, there is a two year period in which those Programs can come into compliance.
  • State Programs, Not Account Owners, the Focus: The Regulations do not specifically address what an Account Owner can do, or not do. Rather the Regulations address what a state’s ABLE Program may do or may allow an Account Owner to do.
  • Expands Who Can Create an ABLE Account: Initially the persons who could create an ABLE account for an Eligible Individual were pretty limited. The Final Regulations create a hierarchy of persons who can create an ABLE account: (i) the Eligible Individual if he or she is able to establish such an account, otherwise; (ii) an agent acting under a durable power of attorney; (iii) a conservator or guardian; (iv) a spouse; (v) a parent; (vi) a sibling; (vii) a grandparent; and (viii) a Social Security Representative Payee.

Unanswered Questions:  Unfortunately, the Final Regulations are silent on how to go about certifying that there is no one with higher priority in the list who can establish such an account for the disabled individual. Nor do the Regulations address what happens if someone opens an ABLE account, and thus becomes its Authorized Signer, but then someone with a higher priority steps in and demands to be the account’s Authorized Signer. Nor do they address when two persons in the same priority, e.g. parents, disagree over opening an ABLE account. However, the Regulations do address what happens when two persons occupy the same priority, as there may now be co-signers, but only so long as they are in the same hierarchy.

  • Ceases to be Disabled: The Final Regulations change the Proposed Regulations to provide that if the Account Owner ceases to be an Eligible Individual, immediately upon ceasing to be an Eligible Individual, i.e. no longer qualifying as disabled or blind, all distributions from the ABLE account will not qualify as qualified disability expenses.
  • Qualifying Disability Expense Expanded: The Final Regulations expand the definition of a QDE by noting that it also covers “basic living expenses and are not limited to items for which there is a medically necessity or which solely benefit an individual with a disability.”

Example: Donna has a medically determined mental impairment that causes marked and severe limitations on her ability to navigate and communicate. A smart phone would enable Donna to navigate and communicate more safely and effectively, thus helping her to maintain her independence and to improve her quality of life. The expense of purchasing, using and maintaining the smart phone that will be used by Donna would be a qualified disability expense under the Final Regulations.

  • Reporting: The Final Regulations do not require the Account Owner to report a QDE either to the ABLE Program or to the IRS or Social Security Administration. The Regulations do, though, note that the Account Owner should track QDEs properly to determine their taxable income.
  • 60-Day Rule: In a surprise, the Final Regulations permit an Account Owner to treat QDEs paid by the 60th day following the end of the Account Owner’s tax year as being made in the immediately preceding tax year, much like the 65-day rule for trusts and estates under IRC 663(b).