Further News on ABLE Accounts
The proposed regulations provided other helpful guidance which was not discussed in yesterday's blog.
2. Income Tax Consequences.
If distributions from an ABLE account do not exceed the designated beneficiary's A qualified disability expenses,@ no amount of the distribution is includable in the designated beneficiary=s gross income. Otherwise, the earnings portion of the excess distributions from the ABLE account are includable in the gross income and subject to a ten (10%) percent excise tax.
3. Gift Tax Consequences.
Contributions to an ABLE account can be made by any person, including the designated beneficiary. Contributions are limited to the annual gift tax exclusion amount (currently $14,000); and they are considered a gift of a A present interest@ so that when made they are not subject to a Federal Gift Tax (there is no Gift Tax imposed by New York State). In other words, the contribution to an ABLE account is a non-taxable event; provided that, no other gifts are made to the designated beneficiary in a calendar year.
4. "Qualified Disability Expense."
The proposed regulations provide that "qualified disability expenses" are expenses that: (i) relate to the designated beneficiary's blindness or disability; and (ii) are for the benefit of that designated beneficiary in maintaining or improving his or her health, independence, or quality of life. Expenses incurred at a time when a designated beneficiary is neither disabled nor blind are not "qualified disability expenses." Among the expenses considered "qualified disability expenses" include the following (among others)::
employment training and support transportation
assistive technology personal support services
health, prevention and wellness financial management
administrative services expenses for oversight and monitoring
legal fees funeral and burial expenses; and
other expenses that may be identified from time to time in future guidance published by the IRS.
The proposed regulations were written taking into account the legislative purpose of assisting eligible individuals in maintaining or improving their health, independence, or quality of life. Most importantly, they conclude that the term "qualified disability expenses" should be broadly construed to permit the inclusion of basic living expenses and should not be limited to expenses: (i) for items for which there is a medical necessity; or (ii) which provide no benefits to others in addition to the benefit to the eligible individual. For example, expenses for common items such as smart phones could be considered "qualified disability expenses" if they are an effective and safe communication or navigation aid for a child with autism. The Treasury Department and the IRS has requested comments from those in the field regarding what types of expenses should be considered "qualified disability expenses" and under what circumstances. This may make ABLE accounts more the preferred savings vehicle since "qualified disability expenses" need not be made for the "sole benefit" of the beneficiary, and they can indirectly benefit others and be made for purposes which are not considered medically necessary.
5. Only one ABLE Account per Designated Beneficiary.
Once an ABLE account has been established for a designated beneficiary, no account subsequently established for that same designated beneficiary may qualify as an ABLE account. Further, there are residency requirements. An ABLE account may be established only for an eligible individual under a qualified ABLE program of the State in which the eligible individual is a resident.
A State may choose different methods of ensuring a designated beneficiary's status as an eligible individual and may impose different periodic re-certification requirements for different types of impairments. In developing its rules on re-certification, the State may take into consideration whether an impairment is incurable and, if so, the likelihood that a cure may be found in the future. For example, a qualified ABLE program may provide that the initial certification will be deemed to be valid for a stated number of years, which may vary with the type of impairment.
7. Pay-Back to the State.
Upon the designated beneficiary's death, the State may file a claim (either with the person with signature authority over the ABLE account or the executor of the designated beneficiary's estate) for the amount of the total medical assistance paid for the designated beneficiary under the State's Medicaid plan after the establishment of the ABLE account. The amount paid in satisfaction of such a claim is not a taxable distribution from the ABLE account. Further, the amount is to be paid only after the payment of all outstanding payments due for the qualified disability expenses of the designated beneficiary.