This month we are continuing our article from November explaining the ABLE Act that was passed last year. If you need the first installment resent, please let us know.
The law creates a new type of tax-advantaged savings program, known as a qualified ABLE program. A qualified ABLE program is established and maintained by a State, state agency, or state authorized entity. A qualified ABLE program must meet the following conditions:
(1) Contributions may be made to an account (an "ABLE account'') established for the purpose of meeting the qualified disability expenses of the designated beneficiary of the account;
(2) The program must limit a designated beneficiary to one ABLE account;
(3) The program must allow for the establishment of ABLE accounts only for designated beneficiaries who are either residents of the State maintaining the ABLE program (a "program State'') or residents of a State that has not established an ABLE program (a "contracting State'') which has entered into a contract with a program State to allow the contracting State's residents access to the program State's ABLE program; and
(4) The program must meet certain other requirements discussed below.
A qualified ABLE program is generally exempt from income tax, but is otherwise subject to the taxes imposed on the unrelated business income of tax-exempt organizations.
Designated Beneficiary: The designated beneficiary of an ABLE account must be an eligible individual (defined below) who is designated at the commencement of participation in the qualified ABLE program as the beneficiary of amounts paid (or to be paid) into the program. In situations such as rollovers, a designated beneficiary may be a brother, sister, stepbrother, or stepsister of the former designated beneficiary of the ABLE account, provided the new designated beneficiary is also an eligible individual.
Cash Contributions: Contributions to an ABLE account must be made in cash and are not deductible for federal income tax purposes. Except in the case of a rollover contribution from another account, an ABLE account must provide that it may not receive aggregate contributions during a taxable year in excess of the annual gift tax exclusion amount ($14,000 for 2015)2. In addition, a qualified ABLE program must provide adequate safeguards to ensure that ABLE account contributions do not exceed the limit imposed on accounts under the qualified tuition program of the State maintaining the qualified ABLE program, taking into account contributions under any prior qualified ABLE program. Amounts in the account accumulate on a tax-deferred basis (i.e., income on accounts in the plan is not subject to current income tax).
Limited Investment of Account Contributions and Earnings: A qualified ABLE program must permit the designated beneficiary to direct (directly or indirectly) the investment of any contributions (or earnings thereon), no more than two times per year. A qualified ABLE program must provide separate accounting for each designated beneficiary and may not allow any interest in the program (or any portion thereof) to be used as security for a loan.
Distributions and Non-Qualified Expenditures: Amounts distributed from a qualified ABLE account are includible in the gross income of the distributee as provided in Section 72 (relating to annuities) to the extent not otherwise excluded from gross income. If the distributions from a qualified ABLE account do not exceed the qualified distribution expenses of the designated beneficiary, no amount is includible in gross income. If the distributions exceed the qualified distribution expenses, the amount otherwise includible in gross income is reduced by an amount which bears the same ratio to the distributed amount as the qualified disability expenses bear to that amount. The portion of any distribution that is includible in
gross income is subject to an additional 10-percent tax unless made after the death of the beneficiary.
Rollovers: Amounts in an ABLE account may be rolled over without income tax liability to another ABLE account for the same beneficiary3 or to another ABLE account for the designated beneficiary's brother, sister, stepbrother, or stepsister who is also an eligible individual.
Limitation to One Account: If an ABLE account is established for a designated beneficiary, no account subsequently established for such beneficiary shall be treated as an ABLE account. In this case, the designated beneficiary of the non-qualifying account shall be treated as having received a distribution of the fair market value of all the non-qualifying account's assets on the first day of such taxable year. The Secretary of the Treasury is required to prescribe regulations to enforce the one ABLE account limitation.
Gift Tax Rules: A contribution to an ABLE account is treated as a completed gift of a present interest to the beneficiary of the account and, therefore, the contribution qualifies for the per-donee annual gift tax exclusion ($14,000 for 2015) and, to the extent of the exclusion, is exempt from the generation skipping transfer ("GST'') tax. A distribution from an ABLE account generally is not subject to gift tax or GST tax. These taxes may apply, however, to a change of designated beneficiary during any taxable year unless, as of the beginning of the year, the new beneficiary is both an eligible individual for the taxable year and a brother, sister, stepbrother, or stepsister of the former beneficiary.