The ABLE Act, passed in December of 2015, added §529A to the Internal Revenue Code allowing for states to establish ABLE Accounts. These tax advantaged accounts will be available to pay disability related expenses of qualified individuals. If used in that manner the earnings of the account will never be subject to tax.
However the accounts must be enabled by the states who either establish such a program or contract with another state to establish such a program. This will generally require enabling legislation to create the program, allow for the management of other state’s programs and/or allow a state to contract with another state to manage that state’s program.
Many state legislature do not stay in session continuously, but rather are in session for a limited period of time, often starting at the beginning of the year. Thus, in such states, enabling legislation can’t wait for IRS guidance that may not come for many months if residents are going to be able to advantage of such accounts in 2015.
But how can the state establish a program where the details of the program are not known at this time? State legislators are not keen on discovering that their “error” of not properly anticipating the IRS means their legislation is flawed, requiring either waiting until the legislature is back in session to fix the problem or, if state law allows, going through the time and effort of coming back for a special session. In such a case a legislature could conclude that the best thing to do is to put the issue off until next year—eliminating the ability of their residents to establish such accounts in 2015.
The IRS issued Notice 2015-18 to attempt to address this concern.
The notice begins with following observation:
The Treasury Department and the IRS do not want the lack of guidance to discourage states from enacting their enabling legislation and creating their ABLE programs, which could delay the ability of the families of disabled individuals or others to begin to fund ABLE accounts for those disabled individuals. Therefore, the Treasury Department and the IRS are assuring states that enact legislation creating an ABLE program in accordance with section 529A, and those individuals establishing ABLE accounts in accordance with such legislation, that they will not fail to receive the benefits of section 529A merely because the legislation or the account documents do not fully comport with the guidance when it is issued. The Treasury Department and the IRS intend to provide transition relief with regard to necessary changes to ensure that the state programs and accounts meet the requirements in the guidance, including providing sufficient time after issuance of the guidance in order for changes to be implemented. For those states that are moving forward before the issuance of additional guidance, this notice provides advance notice of certain important ways in which future section 529A guidance is expected to differ from the section 529 proposed regulations so that states promulgating rules may appropriately reflect a fundamental statutory requirement.
The Notice goes on in Section 3 to give limited additional guidance. While observing that the legislation was modeled on the §529 qualified tuition programs, there are some important differences in this account.
The IRS notes that because of this, the guidance for ABLE (§529A) accounts will differ from that for qualified tuition programs (§529). The IRS specifically indicates that:
- The owner of the §529A will be the designated beneficiary of the account and
- For a §529A account where the designated beneficiary does not have signature authority over the account, the person with signature authority
May neither have nor acquire a beneficial interest in the account and
Must administer the account for benefit of the designated beneficiary of the account
Advisers will need to keep up with developments in states applicable to their clients regarding the establishment of such accounts. But this notice may allow enabling legislation in at least some states to move forward and taxpayers to have assurance that they will not discover after the fact that their accounts will not qualify for tax advantaged treatment.