IRS Rule: Guidance Under Section 529A – Qualified ABLE Programs

WASHINGTON, Nov. 20 -- The Internal Revenue Service has issued a rule (26 CFR Parts of 1, 25, 26, 301 and 602), published in the Federal Register on Nov. 19, entitled: "Guidance Under Section 529A: Qualified ABLE Programs".

The rule was issued by Sunita Lough, Deputy Commissioner for Services and Enforcement and David J. Kautter, Assistant Secretary of the Treasury (Tax Policy).

DATES: Effective date: These final regulations are effective November 19, 2020. Applicability dates: For dates of applicability, see Sections 1.511-2(e)(2), 1.513-(g), 1.529A-1(c), 1.529A-2(q), 1.529A-3(h), 1.529A-4(e), 1.529A-5(g), 1.529A-6(f), 1.529A-7(b), 1.529A-8(a), and 301.6011-2(g).

FOR FURTHER INFORMATION CONTACT: Concerning the final regulations under section 529A, Taina Edlund, (202) 317-4541, or Julia Parnell, (202) 317-4086; concerning the estate and gift tax regulations, Lorraine Gardner, (202) 317-4645, or Daniel Gespass, (202) 317-4632; concerning the reporting provisions under section 529A, Isaac Brooks, (202) 317-6844 (not toll-free numbers).

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This document contains final regulations that provide guidance regarding programs under the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act).

The ABLE Act provides rules under which 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.

In addition, these final regulations provide corresponding amendments to the unrelated business income tax regulations, the gift and generation-skipping transfer tax regulations, and the electronic filing requirements regulations.

These regulations affect eligible individuals that are designated beneficiaries of accounts established and maintained under the ABLE Act.

SUPPLEMENTARY INFORMATION:

Background

This document contains final regulations amending 26 CFR parts 1, 25, 26 and 301, to provide guidance under section 529A of the Internal Revenue Code (Code). Section 529A provides rules under which States or State agencies or instrumentalities may establish and maintain a Federal tax-favored savings program through which contributions may be made to the account of an eligible individual with a disability to meet qualified disability expenses.

1. The ABLE Act

Section 529A was added to the Code on December 19, 2014, by the ABLE Act, which was enacted as part of the Tax Increase Prevention Act of 2014, Public Law 113-295 (128 Stat. 4010). The statutory requirements of section 529A apply to taxable years beginning after December 31, 2014.

Congress recognized the special financial burdens borne by families raising children with disabilities and the fact that increased financial needs generally continue throughout the lifetime of an individual with a disability. Section 101 of the ABLE Act confirms that one of the ABLE Act's purposes is to "provide secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits" otherwise available to those individuals, whether through private sources, employment, public programs, or otherwise. Before the enactment of the ABLE Act, various types of Federal tax-advantaged savings arrangements existed, but none adequately served the goal of promoting saving for those supplemental financial needs.

Section 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.

Section 103 of the ABLE Act, while not a tax provision, is critical to achieving the goal of the ABLE Act of providing financial resources for the benefit of individuals with disabilities. Because so many of the programs that provide essential financial, occupational, and other resources and services to individuals with disabilities are available only to persons whose resources and income do not exceed relatively low dollar limits, section 103 generally disregards a designated beneficiary's ABLE account (specifically, the account balance, contributions to the account, and distributions from the account) for purposes of determining the designated beneficiary's eligibility for, and the amount of any assistance or benefits provided under, certain means-tested Federal programs. However, in the case of the Supplemental Security Income (SSI) program under title XVI of the Social Security Act, distributions for certain housing expenses are not disregarded, and the balance (including earnings) in an ABLE account is considered a resource of the designated beneficiary to the extent it exceeds $100,000. Section 103 also addresses the impact of an excess balance in an ABLE account on the designated beneficiary's eligibility for benefits under the SSI program and Medicaid.

Finally, section 104 of the ABLE Act addresses the treatment of ABLE accounts in bankruptcy proceedings.

2. Guidance

A. Notice 2015-18

Shortly after the ABLE Act was enacted, the Department of the Treasury (Treasury Department) and the IRS were advised that several state legislatures were in the process of enacting enabling legislation, and ABLE programs might be in operation in some states before guidance under section 529A could be issued by the Treasury Department and the IRS. In order to prevent the lack of regulatory guidance from discouraging states to enact enabling legislation and create ABLE programs, the Treasury Department and the IRS issued Notice 2015-18, 2015-12 I.R.B. 765 (March 23, 2015). The Notice provided that future section 529A guidance would confirm that the owner of an ABLE account is the designated beneficiary of the account, and that a person with signature authority over the account (if other than the account's designated beneficiary) may neither have nor acquire any beneficial interest in the ABLE account and must administer the account for the designated beneficiary of the account. The Notice further provided that, in the event that State legislation creating an ABLE program enacted in accordance with section 529A prior to the issuance of guidance does not fully comport with the guidance when issued, the Treasury Department and the IRS intended to provide transition relief to give the States sufficient time to implement the changes necessary to avoid the disqualification of the program and of the ABLE accounts already established under the program.

B. 2015 Proposed Regulations

On June 22, 2015, the Treasury Department and the IRS published a notice of proposed rulemaking (NPRM) in the Federal Register (REG-102837-15; 80 FR 35602) proposing regulations under section 529A regarding programs under the ABLE Act (2015 proposed regulations). The 2015 proposed regulations set forth 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 section 529A. They covered the requirements for establishing an ABLE account (including those that an individual must satisfy to be an eligible individual qualified to be the designated beneficiary of an ABLE account) and the requirements concerning contributions to an ABLE account (including the limitations on the amount and investment of such contributions). In addition, the 2015 proposed regulations addressed the gift and generation-skipping transfer (GST) tax consequences of contributions to an ABLE account, as well as the Federal income, gift, and estate tax consequences of distributions from, and changes in the designated beneficiary of, an ABLE account. The 2015 proposed regulations also provided guidance on requirements with respect to rollovers and program-to-program transfers from one ABLE account to another and on the recordkeeping and reporting requirements of a qualified ABLE program. Finally, the 2015 proposed regulations provided corresponding amendments to regulations under sections 511 and 513 (with respect to unrelated business taxable income), sections 2501, 2503, 2511, 2642, and 2652 (with respect to gift and GST taxes), and section 6011 (with respect to electronic filing requirements).

C. Notice 2015-81

More than 200 written comments were received in response to the 2015 proposed regulations and a public hearing was held on October 14, 2015. Numerous commenters asked the Treasury Department and the IRS to issue interim guidance to address three requirements under the proposed regulations that they said would create significant barriers to the development of qualified ABLE programs by the States: (i) The requirement to establish safeguards to categorize distributions from an ABLE account; (ii) the requirement to request the taxpayer identification number (TIN) of every contributor to an ABLE account; and (iii) the requirement to process disability certifications with signed physicians' diagnoses.

In response to the request for interim guidance, the Treasury Department and the IRS published Notice 2015-81, 2015-49 I.R.B. 784 (Dec. 7, 2015), advising that the final regulations would address these requirements in the following manner: First, the final regulations would eliminate the requirement that a qualified ABLE program distinguish between types of expenses. Second, the final regulations would eliminate the requirement that a qualified ABLE program must request the TIN of each contributor at the time a contribution is made if the program has a system in place to identify and reject excess contributions and excess aggregate contributions before they are deposited into an ABLE account. Third, the final regulations would permit a certification of eligibility to satisfy the requirement for filing a disability certification. A certification of eligibility is a certification, under penalties of perjury, that the individual (or the individual's agent under a power of attorney or a parent or legal guardian of the individual) has a signed physician's diagnosis, and that the signed diagnosis will be retained and provided to the ABLE program or the IRS on request.

3. The PATH Act Amendment

On December 18, 2015, Section 303 of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), was enacted as part of the Consolidated Appropriations Act, 2016, Public Law 114-113 (129 Stat. 2242). The PATH Act amended section 529A(b)(1), effective for taxable years beginning after December 31, 2014, by removing 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.

4. The TCJA

The contribution limits and other provisions of section 529A were modified by the Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat. 2054, (2017) (TCJA), signed into law on December 22, 2017. The TCJA amended section 529A(b)(2)(B) to allow an employed designated beneficiary described in new section 529A(b)(7) to contribute, prior to January 1, 2026, an additional amount in excess of the limit in section 529A(b)(2)(B)(i) (the annual gift tax exclusion amount in section 2503(b), formerly set forth in section 529A(b)(2)(B)). This additional permissible contribution is subject to its own limit as described in section 529A(b)(2)(B)(ii). Specifically, this additional contributed amount may not exceed the lesser of (i) the designated beneficiary's compensation as defined by section 219(f)(1) for the taxable 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 taxable year begins. The TCJA also amended the section 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 section 529A(b)(2)(B)(ii) are met.

New section 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 taxable year to: A defined contribution plan meeting the requirements of sections 401(a) or 403(a); an annuity contract described in section 403(b); or an eligible deferred contribution plan under section 457(b). Section 529A(b)(7)(B) defines the term "poverty line" as having the meaning provided in section 673 of the Community Services Block Grant Act (42 U.S.C. 9902).

The TCJA also amended section 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 section 529 qualified tuition program (QTP) account or from the QTP account of certain family members. The TCJA added section 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 section 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 taxable year, does not exceed the contribution limit for the ABLE account under section 529A(b)(2)(B)(i), that is, the annual gift tax exclusion amount under section 2503(b). This limited rollover is described in more detail in Notice 2018-58, 2018-33 I.R.B. 305 (Aug. 13, 2018).

A. Notice 2018-62

To address the TCJA modifications to section 529A, the Treasury Department and the IRS published Notice 2018-62, 2018-34 I.R.B. 316 (Aug. 20, 2018), which announced the intent of the Treasury Department and the IRS to issue proposed regulations to implement these changes and describes the anticipated rules to implement the statutory changes. No comments were received in response to the Notice.

B. 2019 Proposed Regulations

On October 10, 2019, the Treasury Department and the IRS published an NPRM in the Federal Register (REG-128246-18; 84 FR 54529) to address the TCJA modifications to section 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 section 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 section 529A(b)(7) and that his or her contributions of compensation do not exceed the limit set forth in section 529A(b)(2)(B)(ii).

The 2019 proposed regulations also clarified that the poverty line in section 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 under the authority of 42 U.S.C. 9902(2). Those guidelines vary based on locality. Specifically, there are separate guidelines for (1) the contiguous 48 states and the District of Columbia, (2) Alaska, and (3) Hawaii. Because the Treasury Department and the IRS concluded that the poverty guideline that most closely reflects the employed designated beneficiary's cost of living is the most relevant for determining the contribution limit, the 2019 proposed regulations provided that a designated beneficiary's contribution limit is to be determined using the poverty guideline applicable in the state of the designated beneficiary's residence.

Because section 529A(b)(2) provides that rules similar to those set forth in section 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 section 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 section 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 section 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.

Six comments were received in response to the 2019 proposed regulations. No public hearing was requested or held.

The document is published in the Federal Register: https://www.federalregister.gov/documents/2020/11/19/2020-22144/guidance-under-section-529a-qualified-able-programs

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