Estate Planners Alert, 12/01/2015
IRS Relaxes Requirements for Tax-Favored ABLE Accounts for the Disabled
In a notice, IRS has relaxed requirements set out in recently issued proposed regs that would require a qualified Achieving a Better Life Experience (ABLE) program to establish safeguards to categorize distributions (including identifying amounts distributed for housing expenses), collect taxpayer identification numbers (TINs) from contributors, and process disability certifications with signed physicians’ diagnoses. IRS has determined that these requirements would impose substantial administrative and cost burdens on the states administering these programs. Taxpayers may rely upon the notice until final regs-which will incorporate these changes-are issued. ( Notice 2015-81, 2015-49 IRB , IR 2015-130 )
Background. Under Code Sec. 529A -which was added by the Achieving a Better Life Experience Act of 2014 (ABLE Act), which was part of the Tax Increase Prevention Act of 2014 (TIPA, PL 113-295,12/19/2014)-for tax years beginning after December 31, 2014, states may establish qualified ABLE programs under which contributions may be made to an ABLE account that is established for the purpose of meeting the qualified disability expenses of the designated beneficiary (beneficiary) of the account who is a resident of that state and who is disabled. ( Code Sec. 529A(b)(1) )
A qualified ABLE program must provide that non-cash contributions and contributions that exceed the annual contribution limits won’t be accepted. (Non-cash contributions won’t violate this rule if they are returned before the return due date.) Except in the case of a rollover contribution from another account, an ABLE program must limit the aggregate contributions from contributors for a tax year to the amount of the annual inflation-adjusted Code Sec. 2503(b) gift tax exclusion for that tax year ($14,000 for 2015
and 2016). ( Code Sec. 529A(b)(2) ) In addition, the aggregate amount of contributions to an ABLE account must not exceed the limit established by the state under Code Sec. 529(b)(6) (the limit on contributions to a qualified tuition program). ( Code Sec. 529A(b)(6) )
The beneficiary of an ABLE account is an eligible individual who established the account and is its owner. ( Code Sec. 529A(e)(3) ) An individual is an eligible individual for a tax year if, during that tax year: (1) the individual is entitled to benefits based on blindness or disability under the Social Security disability insurance program or the Supplemental Security Income for the Aged, Blind, and Disabled (SSI) program, and that blindness or disability occurred before the date on which the individual reached age 26; ( Code Sec. 529A(e)(1)(A) ) or (2) a “disability certification” for the individual has been filed with
IRS for the tax year. ( Code Sec. 529A(e)(1)(B) )
A disability certification is one made by the eligible individual, or his parent or guardian, that certifies that: (a) the individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, or is blind; ( Code Sec. 529A(e)(2)(A)(i)(I) ), and (b) that blindness or disability occurred before the date on which the individual attained age 26. ( Code Sec. 529A(e)(2)(A)(i)(II) )
No amount of a distribution from an ABLE account is includible in gross income if distributions from the account don’t exceed the beneficiary’s “qualified disability expenses.” ( Code Sec. 529A(c)(1)(B)(i) ) Qualified disability expenses are any expenses related to the eligible individual’s blindness or disability that are made for the benefit of the beneficiary. ( Code Sec. 529A(e)(5) ) If the distributions exceed the qualified disability expenses, then the amount otherwise includible in gross income is reduced by an amount that bears the same ratio to that amount as the qualified disability expenses bear to such
distributions. ( Code Sec. 529A(c)(1)(B)(ii) )
A taxpayer who receives a distribution from a qualified ABLE account that’s includible in gross income is generally subject to an additional 10% excess distribution tax on the includible part. ( Code Sec. 529A(c)(3)(A) )
Proposed regs. In June of 2015, IRS issued proposed regs to implement the ABLE programs. Until the issuance of final regs, taxpayers and qualified ABLE programs established by the states could rely on the proposed regs.
Commentators noted that three requirements for qualified ABLE programs in the proposed regs would create significant barriers to the establishment of such programs:
(a) Prop Reg § 1.529A-2(h)(1) provides that a qualified ABLE program must establish safeguards to allow the ABLE program to distinguish between distributions used to pay for qualified disability expenses and other distributions, and to permit the identification of amounts distributed for housing expenses, as defined for purposes of the Supplemental Security Income program of the Social Security Administration. (b) Prop Reg § 1.529A-6(d) requires a qualified ABLE program to request the TIN (i.e., the Social Security number, for most people) for each contributor to the ABLE account at the time a contribution is made if the program doesn’t already have a record of that person’s correct TIN. (c) Prop Reg § 1.529A-2(e) defines the disability certification that may be filed with the Secretary of the Treasury as including the required certifications and a copy of the signed diagnosis, and also provides for certain conditions to be deemed to meet the requirements of filing a disability certification.
New guidance. In order to facilitate the establishment of qualified ABLE programs by the states, IRS issued interim guidance in Notice 2015-81 on the three requirements noted above. (1) Categorization of distributions not required. Notice 2015-81 provides that ABLE programs need not include safeguards to determine which distributions are for qualified disability expenses, nor are they required to specifically identify those used for housing expenses. Commentators had noted that such a requirement would be unduly burdensome and that the eventual use of a distribution may not be known at the time it is made. And, the identification of housing expenses was relevant only for purposes of determining eligibility for certain Social Security benefits and has no relevance for federal income tax purposes. Notice 2015-81 provides, however, that designated beneficiaries will still need to categorize distributions to determine their federal income tax obligations. (2) Contributors’ TINs not required. Notice 2015-81 provides that ABLE programs will not be required to request the TINs of contributors to the ABLE account at the time when the contributions are made, if the program has a system in place to reject contributions that exceed the annual contribution limits. However, if an excess contribution is deposited into a designated beneficiary’s ABLE account, the program will need to request the contributor’s TIN. Commentators had noted that such a requirement would be burdensome because it’s likely that contributions will come from multiple sources and will be made in a variety of ways (payroll deduction, check, debit, automated clearing house (ACH) transfers, or others), making it difficult as a practical matter to obtain the TIN of the contributor. Commentators had stated that some contributors, especially those making small gifts, may be reluctant to make a contribution if a TIN were required to be provided. (3) Disability diagnosis certification permitted. Notice 2015-81 provides that 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 the signed physician’s diagnosis, and that the signed diagnosis will be retained and provided to the ABLE program or IRS upon request, is adequate to satisfy IRS with regard to the Code Sec. 529A(e)(1)(B)’s and Code Sec. 529A(e)(2)(A) ‘s certification requirements. A designated beneficiary can open an ABLE account by certifying, under penalties of perjury, that they meet the qualification standards, including their receipt of a signed physician’s diagnosis if necessary, and that they will retain that diagnosis and provide it to the program or IRS upon request. Eligible individuals with disabilities will not need to provide the written diagnosis when opening the ABLE account, and ABLE programs will not need to receive, retain, or evaluate detailed medical records. States and potential qualified ABLE program administrators had expressed concerns about their responsibilities and potential liabilities for receiving and safeguarding medical information contained in a signed diagnosis. Commentators had been concerned that qualified ABLE programs would incur unmanageable costs and burdens in trying to comply with applicable laws imposing system and other requirements on those in possession of medical records, as well as in implementing systems to receive and store paper documentation. In Notice 2015-81 , IRS noted that if a certification used to open a qualified ABLE account before the issuance of final regs is consistent with Notice 2015-81 , but does not contain other information required by the final regs, the account will not lose its qualification as an ABLE account solely for that reason. To the extent that additional information is required by the final regs, the final regs will provide a transitionperiod to facilitate compliance with the additional requirements. © 2015 Thomson Reuters/Tax & Accounting. All Rights Reserved.