National Special Needs Law Month: New Rules for ABLE Accounts

By Jill Roamer J.D.

With National Special Needs Law Month coming to a close, let’s take a look at recent final regulations issued by the Internal Revenue Service (IRS). The new regulations clarify rules regarding ABLE accounts.
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ABLE accounts were authorized by the Achieving a Better Life Experience Act of 2014. To be eligible to open an ABLE account, you must be an individual with a significant disability that began before age twenty-six. Such accounts allow those with disabilities and their families to save money in a tax-beneficial way. Contributions to an ABLE account are not tax deductible and are done with post-tax earnings, but withdrawals and investment income earned will not be taxed.

Possibly the best advantage of an ABLE account is that the balance therein will not be a countable resource when applying for needs-based public benefits, such as Supplemental Security Income. There are limits on how much can be deposited into an ABLE account – for 2020, the annual limit for each contributor is $15,000. There are also lifetime caps, set by individual states. Many such lifetime limits are as much as $300,000. Withdraws from the account can be used for any expense that related to living with a disability, including healthcare costs, living expenses, and education.

The final regulations issued by the IRS this month amends 26 CFR parts 1, 25, 26 and 301. The purpose of the new regulations is to provide guidance under section 529A of the Internal Revenue Code, which authorized states to create ABLE account programs. These new regulations finalize two proposed regulations, the first proposed in 2015 and the other proposed in 2019. Here are some key take-aways from the new final regulations:

• Eligible individuals can make additional contributions to their ABLE account, up to the amount equal to the state’s poverty limit.
• Funds from qualified tuition programs (529 plans) may be rolled over into ABLE accounts.
• Contributors who qualify as low income may qualify for the Saver’s Credit.
• Funds in the ABLE account are included in the designated beneficiary’s estate for estate tax purposes.
• Distributions after death that are made for outstanding debts for qualified disability expenses, or for the funeral or burial expenses of the designated beneficiary, are not included in the designated beneficiary’s estate.
• Contributions to an ABLE account, other than a contribution made by a designated beneficiary, is a completed gift for gift tax purposes.
• A change of a designated beneficiary is not treated as a distribution if the successor beneficiary is an eligible individual and a family member of the designated beneficiary.

ABLE accounts can be a great resource for folks who are disabled, and a great way for their families to be able to contribute in a meaningful way. And with this new guidance, practitioners can be more confident when advising clients about the ins-and-outs of ABLE accounts. Practicing with those who have special needs and their families can be very rewarding. Happy National Special Needs Law Month!