The released Notice 2018-62 that describes regulations the IRS plans to issue to clarify the rules on increased contribution limits to ABLE accounts enacted as part of the Tax Cuts and Jobs Act.
The Notice describes these changes as follows:
The contribution limits and other provisions of section 529A were modified by the 2017 Act. Specifically, the 2017 Act amended § 529A(b)(2)(B) to allow a designated beneficiary described in § 529A(b)(7) to contribute, prior to January 1, 2026, an additional amount in excess of the limit in § 529A(b)(2)(B)(i) (the annual gift tax exclusion amount in § 2503(b), formerly set forth in § 529A(b)(2)(B)). This additional amount is set forth in § 529A(b)(2)(B)(ii) and is equal to the lesser of
(I) the designated beneficiary’s compensation as defined by § 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 2017 Act also amended the § 529A(b)(2) flush language by adding that the designated beneficiary, or a person acting on behalf of the designated beneficiary, is required to maintain adequate records to ensure, and is responsible for ensuring, that the requirements of § 529A(b)(2)(B)(ii) are met.
The 2017 Act added § 529A(b)(7)(A) to identify a designated beneficiary eligible to make such an 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 the following:
a defined contribution plan meeting the requirements of §§ 401(a) or 403(a);
an annuity contract described in § 403(b); or
an eligible deferred contribution plan under § 457(b).
The 2017 Act also added § 529A(b)(7)(B) to the Code, which states that the term poverty line has the meaning given in section 673 of the Community Services Block Grant Act (42 U.S.C. 9902).
The Notice indicates that the beneficiary, and not the ABLE custodian, will be the party responsible for assuring that this contribution limit is not exceeded. The Notice states:
Consistent with § 529A(b)(2), as amended by the 2017 Act, the Treasury Department and the IRS intend to issue proposed regulations that confirm that the employed designated beneficiary, or the person acting on his or her behalf, is solely responsible for ensuring that the requirements in § 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 proposed regulations are expected to provide that ABLE programs may allow a designated beneficiary to certify under penalties of perjury that he or she is a designated beneficiary described in § 529A(b)(7) and that his or her contributions do not exceed the limit set forth in § 529A(b)(2)(B)(ii).
The IRS also announced that the regulations will clarify the poverty line definition found in the law as follows:
The Treasury Department and the IRS intend to issue proposed regulations to clarify that this reference to the poverty line means 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). In addition, the poverty guidelines differ by geography; there are separate guidelines for (1) the 48 contiguous states and the District of Columbia, (2) Alaska, and (3) Hawaii. Because the poverty guideline that most closely relates to the designated beneficiary’s cost of living appears to be the most relevant for the purpose of determining the contribution limit, the Treasury Department and the IRS anticipate that the proposed regulations will provide that a designated beneficiary’s contribution limit should be determined using the poverty guideline applicable in the state of the designated beneficiary’s residence, rather than the guideline applicable in the state in which the designated beneficiary’s ABLE account is established, or elsewhere.
What happens if beneficiary ends up making an excess contribution to the plan? Given that this is likely to happen since the ABLE program itself can’t know that number and, under the regulations, would not be responsible for attempting to do so, the IRS provides:
With the addition by the 2017 Act to allow certain contributions of the designated beneficiary’s compensation income, the Treasury Department and the IRS intend to issue proposed regulations to also apply the proposed required return of excess contributions to any excess contributions of the designated beneficiary’s compensation income. Specifically, the proposed regulations are expected to provide that the qualified ABLE program should use the rules set forth in § 1.408-11 to return any excess contribution, including any contributions in excess of the limit in § 529A(b)(2)(B)(ii). However, because § 529A(b)(2), as amended by the Act, imposes on the designated beneficiary (rather than on the qualified ABLE program) the responsibility for ensuring compliance with the limitation on the amount of the designated beneficiary’s contributions of compensation income under § 529A(b)(2)(B)(ii), the proposed regulations are expected to provide that: (i) 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; and (ii) for purposes of determining the limit on contributions made under § 529A(b)(2)(B)(ii), the qualified ABLE program may rely on self-certifications, made under penalties of perjury, of the designated beneficiary or the person acting on his or her behalf.
Given that ABLE programs are created by the various states, the IRS will issue transition rules to allow time for the states to take necessary steps (including, if necessary, the passage of legislation) to change their programs. The Notice states:
The Treasury Department and the IRS are aware that, once final regulations are issued, qualified ABLE programs may need to adjust their systems and account documents to be in compliance with regulatory requirements. The Treasury Department and the IRS also are aware that, in some cases, a necessary change may require state legislative action. Therefore, the regulations are expected to provide transition relief with respect to any necessary changes to ensure that the state programs and accounts meet the requirements in the regulations, including providing sufficient time after issuance of the final regulations in order for changes to be implemented.
The Notice also provides that taxpayers, pending the issuance of final regulations, may rely on the provisions of the Notice related to:
- Additional Contributions by an Employed Designated Beneficiary;
- Applicable Poverty Line; and
- Excess Contributions from the Designated Beneficiary