Take-Away: Planning for an individual’s disability, while preserving the eligibility for governmental benefits should include opening an ABLE account for the disabled individual.

Background: In 2014 Congress adopted the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (the ABLE Act.) This Act added IRC 529A to the Tax Code. The Act provides rules under which States, or State agencies, may establish and maintain a federal tax-favored savings program for eligible individuals with a disability who are the owners and designated beneficiaries of ABLE accounts to which contributions may be made to meet qualified disability expenses (QDE’s.) Such accounts also receive favorable treatment for the purpose of some means-tested federal benefit programs.

Final Regulations: Final Regulations with respect to ABLE accounts were published in late 2020.[26 CFR 1.529A).]

Eligibility: Eligible individuals can open an ABLE account for themselves, or an authorized individual can open an ABLE account on their behalf. There are only a few requirements that individuals with disabilities must meet in order to open an ABLE account: (i) the disability was present before the age of 26; and (ii) one of the following is true- (a) the individual is eligible for SSI or SSDI because of their disability; (b) the individual experienced blindness as determined by the Social Security Act; or (c) the individual has a similarly severe disability with a written diagnosis from a licensed physician that can be produced if requested. Eligibility requires some self-certification of blindness as defined by the Social Security Act, or a medically determinable physical or mental impairment with a severe limitation in function that is expected to last for at least 12 months or result in death. Recertifications are required annually.

Contribution Limits: Contributions to an ABLE account can be made up to $16,000 in 2022. The account owner may contribute more if he/she has earned income, in which case they may contribute funds beyond the $16,000 annual limit equal to the federal poverty level for a one-person household, or their gross wages, whichever amount is lower.  Thus, working ABLE account owners who do not participate in their employer’s qualified plans may be eligible to contribute above the $16,000 limit, and their personal contributions, if made, will qualify for the federal Savers Credit.

Qualified Disability Expenses: Qualified disability expenses, or QDEs, are any expense that is incurred at a time when the ABLE account designated beneficiary is an individual that relates to the blindness or disability of the designated beneficiary and are for the benefit of the designated beneficiary to improve the designated beneficiary’s health, independence, or quality of life. These expenses include, but are not limited to, expense that are  related to the designated beneficiary’s education, housing, transportation, employment training and support, assistive technology and related services, personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, and funeral and burial expenses. [Regulation 1.529A-2(h)(1).] Additional qualified disability expenses may, from time to time, be added by the IRS in its published Internal Revenue Bulletin.

ABLE Account Distributions: Distributions from an ABLE account for the designated beneficiary’s QDE’s are not included in the beneficiary’s gross income or his/her estate’s gross income and are not taxable as gifts. However, if any amount of a distribution from an ABLE account is includible in gross income, the income tax imposed on that distribution will be increased by an amount equal to 10% of the includible amount. [Regulation 1.529A-3(d)(1).]

529 Accounts: Funds held in an IRC 529 account can be rolled into another family member’s ABLE account. However, the rollover amount is limited to the annual contribution limit to the ABLE account.

Michigan: Michigan income taxpayers can claim up to a $5,000 deduction for single filers, and $10,000 for joint files for MiABLE contributions. Note, that beginning on July 1, 2022 the MiABLE quarterly fee was reduced to $14.75. It is even reduced further to $8.50 per quarter if the MiABLE account owner selects email delivery for statements and confirmations.

Additional Guidance: In addition to publishing Final Regulations on ABLE accounts in 2020, the IRS on June 6, 2022 published additional guidance with respect  to the tax implications of distributions from or a transfer of an ABLE account. [INFOR 2022-0007, June 6, 2022.] This guidance comes in the form of several questions posed to the IRS.

  1. Question: Do QDEs include payments towards a home mortgage or a vehicle purchase, both during the designated beneficiary’s life and upon the designated beneficiary’s death?

Answer: If the real property or the vehicle is owned by the designated beneficiary, then payments towards these purchases, including a payment of the remaining balance of the loans after the designated beneficiary’s death, do qualify as QDEs.

  1. Question: Does the repayment of an overpayment of Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) benefits qualify as an QDE?

Answer:  The repayment of SSI and SSDI overpayments would be a QDE since the repayment falls under the category of ‘financial management.’ [Regulation 1.529A-2(h)(1).]

  1. Questions: What are the tax consequence when the remaining balance of an ABLE account passes to the surviving spouse, or a named beneficiary, upon the designated beneficiary’s death?

Answers: The Regulations provided that a qualified ABLE program may permit a change in the designated beneficiary of an ABLE account during the life of the designated beneficiary, to take effect upon the designated beneficiary’s death, i.e. a successor designated beneficiary can be named for the ABLE account.

Income Tax: If the successor designated beneficiary is both a sibling of the designated beneficiary AND an eligible individual at the time of the transfer, there will be no income tax implications for the designated beneficiary’s estate, or the successor designated beneficiary. Nor would the ABLE account be subject to any additional tax. [Regulation 1.529A-3(d)(1).] However, the ABLE account would be subject to the payment of any outstanding QDE’s of the designated beneficiary as well as any State Medicaid reimbursement claims.

Gift or GST Tax: With regard to gift tax consequences, a transfer to a successor designated beneficiary who is BOTH a sibling of the designated beneficiary AND an eligible individual has no gift tax or GST tax implications. However, if the successor designated beneficiary is anyone else, the transfer is a gift for gift tax purposes by the designated beneficiary to the successor designated beneficiary, and the GST tax applies if the successor designated beneficiary also is two or more generations below the designated beneficiary’s generation assignment, e.g. a grandchild.

Marital Deduction: If the successor designated beneficiary is the spouse of the designated beneficiary, the gift tax marital deduction will generally apply. [IRC 2523.]

Estate Tax: The designated beneficiary’s ABLE account is includible in the designated beneficiary’s gross estate for federal estate tax purposes. [IRC 2031.] However, if the successor designated beneficiary is the designated beneficiary’s surviving spouse, the federal estate tax marital deduction will generally apply. [IRC 2056.]

Claims Deduction: The payment of the designated beneficiary’s outstanding QDEs and State Medicaid reimbursement claims may be deductible for federal  estate tax purposes. [IRC 2053.]

  1. Question: Can an employer take an income tax deduction for a contribution to an ABLE account?

Answer: An employer may make contributions to an employee’s ABLE account, or to an employee’s family member’s ABLE account, subject to the annual contribution limit. The contribution would be treated as a taxable fringe benefit paid to the employee and thus would be deductible as wages or compensation paid by the employer. This would be reported by the employer in box 1, box 3 and box 5 of the employee’s W-2, regardless of whether the contribution is made to the ABLE account of the employee or the employee’s family member.

Conclusion: The IRS is finally getting around to providing some helpful guidance with regard to ABLE accounts and how they are handled and taxed. The annual contribution  limits is still something of an impediment to assist disabled or blind individuals with their expenses, yet the idea that the existence of the ABLE account will not interfere with the owner’s eligibility to receive SSI or SSDI benefits is why more ABLE accounts should seriously be considered.