In December, the Achieving a Better Life Experience (ABLE) Act was signed into law, paving the way for disabled people and their families to set up accounts similar to 529 plans where they can save for disability-related expenses that won’t be included in their eligibility for Medicaid or Supplemental Security Income Benefits.
In June, the IRS proposed additional guidance for how those programs should be established and managed. The IRS will accept comments on the proposal until Sept. 21, and a public hearing to discuss those comments will be held Oct. 14.
However, unlike their fairly straightforward counterparts, 529A plans, as the ABLE accounts are denoted in the Internal Revenue Code, introduce many questions that states are struggling to answer, according to Jamie Canup, a partner in the Richmond, Virginia, office of Hirschler Fleischer and chairman of the firm’s tax practice.
“All of the states currently are scrambling to figure out, first of all, who is going to administer the ABLE program in their state,” he told ThinkAdvisor. In fact, he said, the first question they have to answer is whether they are “going to be a contracting state, in the sense that they contract with another state to run an ABLE program, or are they going to actually host an ABLE program?”
States will have to identify how much of a need they have for an ABLE program. Using data from the 2013 American Community Survey, Cornell University found 12.6% of Americans are disabled, including almost 11% who are between 21 and 64. More than half of disabled people in 2013 were 75 or older.
“I don’t know that there’s a need for 50 programs,” Canup said. “Who those states are going to be is a different story.”
States that have passed or enacted ABLE legislation as of July 21, according to The Arc, an advocate for people with intellectual or developmental disabilities, include Alabama, Arkansas, Colorado, Connecticut, Delaware, Florida, Hawaii, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Rhode Island, Oregon, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia and Wisconsin.
Canup did say that in Florida “it’s pretty clear that they intend to be a player in this area. They have a very large prepaid 529 plan; I think they feel they’ve got the ability to run one of these programs for other states, too.”
However, Canup said he isn’t aware of any states that have a full-fledged program up and running for disabled individuals to begin saving in. “Anyone who has a disabled loved one is not able to open an account today. I would guess that probably won’t happen until sometime in 2016,” he predicted.
Once the accounts are established, individuals will be able to make after-tax contributions to 529A plans up to $14,000 a year. The first $100,000 of contributions will be excluded from means testing. Distributions on qualified expenses will be tax-free and can be taken throughout the life of the beneficiary. Qualified expenses include education, housing, transportation, health care expense, employment training and support, and financial management.
To be eligible for a 529A plan, the designated beneficiary has to have become disabled prior to their 26th birthday, and their disability must have lasted for at least a year or be expected to last at least a year.
Like a traditional 529 plan, non-qualified distributions from 529A plans are taxed at a 10% rate. Unlike a traditional plan, though, beneficiaries can only have one plan in their name.
Another important distinction between traditional 529 plans and 529A plans is that in tuition plans, “it’s the taxpayer who is responsible for determining whether or not their expenses are qualified higher education expenses,” Canup said. “In the 529A account arena, the proposed regs put the onus on states that run these programs, and that’ll mean on their advisors that they hire to run these programs, to determine whether or not the distribution that’s being requested is for a qualified disability expense.”
That could add to the expense of the plan if that means states need to have a dedicated person “become an expert at classifying what a disability expense is and all the medical terminology.”