ABLE Accounts are Closer to Realization in New York
Section 529A of the Internal Revenue Code (the “Code”) 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 a disabled individual who is the designated beneficiary and owner of that account. Contributions to an ABLE account are subject to both an annual and a cumulative limit; and, when made by a person other than the designated beneficiary, are treated as non-taxable gifts to the designated beneficiary. Distributions made from an ABLE account for “qualified disability expenses” of the designated beneficiary are not included in the designated beneficiary’s gross income. Most importantly, amounts in the ABLE Account are not considered an available resource for purposes of means tested government benefits (i.e., Supplemental Security Income (SSI) and Medicaid). However; the SSI benefits of a designated beneficiary of an ABLE account will be suspended if the cumulative balance in the ABLE account exceeds $100,000.
2. Recent Developments.
On June 19, 2015 the Treasury Department issued proposed regulations interpreting and explaining many important provisions affecting ABLE accounts. This is a welcome development as New York begins to establish an ABLE program and practioners begin to plan for their clients and consumers who have a disability.
On June 18, 2015 the New York State Legislature passed enabling legislation paving the way for an ABLE ACT program to be established in New York. It has been sent to the Governor for his signature. In large measure, the New York enabling legislation derives its substance by reference to section 529A of the Code. For example the definitions of key terms such as “eligible individual” and “qualified expenses” relate back to the text of Code §529A, and are not independently defined in the New York legislation.
3. The ABLE Program in New York.
The enabling legislation in New York charges the Comptroller with the responsibility to implement the NY ABLE account program through the use of third party vendors as administrators of such accounts, and financial organizations as account depositories and managers. Under the program, individuals may establish accounts directly with an account depository. The legislation directs the Comptroller to solicit proposals from financial organizations to act as depositories and managers for the program. Financial organizations submitting proposals must describe the investment instrument which will be held in accounts. The comptroller may select as program depositories and managers the financial organization that demonstrates the most advantageous combination to potential program participants.
In this regard, the proposed regulations name as a favored organization “Community Development Financial Institutions” (CDFI’s) which commonly serve disabled individuals and their families to provide one or more required services under a State ABLE program. The proposed regulations posit the following example. A CDFI could provide screening and verification of disabilities, certification of the qualified purpose of distributions, debit card services to facilitate distributions, and social data collection and reporting. A CDFI also may be able to obtain grants to defray the cost of administering the program. In general, if certified by the Treasury Department, a CDFI may receive a financial assistance award from the CDFI Fund that was established within the Treasury Department in 1994 to promote community development in economically distressed communities through investments in CDFI’s across the country.
4. ABLE Accounts may be opened and managed by a Parent or Guardian.
When writing the proposed regulations, the Treasury Department and the IRS recognized that certain eligible individuals may be unable to establish an ABLE account themselves. The proposed regulations clarify that, if the eligible individual cannot establish the account, the eligible individual’s agent under a power of attorney or, if none, his or her parent or legal guardian may establish the ABLE account for that eligible individual. Because an agent, parent or guardian will be acting on behalf of the designated beneficiary, any references in the proposed regulations to actions of the designated beneficiary, such as opening or managing the ABLE account, are deemed to include the actions of any other such individual with signature authority over the ABLE account.
5. ABLE Accounts Limited to $100,000 in New York.
As part of the ABLE program, the New York comptroller will promulgate rules or regulations to prevent contributions to an ABLE account on behalf of a designated beneficiary in excess of “an amount that would cause the aggregate account balance for all accounts for a designated beneficiary to exceed a maximum account balance, as established from time to time by the comptroller.” The enabling legislation provides further, that this maximum amount must “reflect reasonable expenditures.” However; the enabling legislation limits the cumulative balance in an ABLE account to $100,000 for each designated beneficiary.
6. Timing of Withdrawals from an ABLE Account.
The enabling legislation in New York allows an account owner to withdraw all or part of the balance from an account on sixty (60) days’ notice or such shorter period as may be authorized under rules governing the ABLE program. The rules governing the ABLE program must include provisions that will generally enable the determination as to whether a withdrawal is a non-qualified withdrawal or a qualified withdrawal. This makes it certain that an ABLE account will not be a “checking” account allowing instant access; rather, each request for withdrawal will be scrutinized before funds are disbursed.
7. Investment Management.
The enabling legislation in New York will allow an ABLE Account owner to direct the investment of any contributions to an ABLE account or the earnings of the account up to twice a calendar year.
8. Annual Statements.
The enabling legislation provides that statements must be provided to each account owner at least once each year within sixty (60) days after the end of the accounting period. The statement will: (i) identify the contributions made during a preceding twelve month period; (ii) the total contributions made to the account through the end of the period; (iii) the value of the account at the end of such period; (iv) distributions made during such period; and (v) “any other information that the comptroller requires to be reported to the account owner.
9. Pay-back to the State.
The New York enabling legislation and section 529A of the Code provide that, subject to any outstanding payments due for qualified disability expenses, upon the death of the designated beneficiary all amounts remaining in the ABLE account will be subject to state recovery for medical assistance payments made on behalf of the beneficiary after the date of establishment of the ABLE account.