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New IRS Rules for ABLE Accounts

Oct 15, 2021Trusts

What is an ABLE Account?

ABLE accounts were authorized by the Achieving a Better Life Experience (ABLE) Act of 2014. They can be an excellent resource for individuals in need of disability benefits, but can also be confusing. In order to clarify certain aspects, the IRS recently issued new rulings.

This information covers what these accounts are, how they can benefit certain individuals with disabilities, and some new regulations issued by the Internal Revenue Service (IRS).

Who is eligible to open an ABLE account?

To be eligible to open an ABLE account, an individual must be a U.S. citizen or legal resident with a significant disability that began before age twenty-six. This individual is termed the designated beneficiary of the ABLE account. The designated beneficiary can be of any age when the account is opened, but the disability had to have onset before age twenty-six.

If the individual receives Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), that individual is already eligible to open an ABLE account. If the individual isn’t receiving SSI or SSDI, they must receive a disability certification from a doctor and meet the Social Security Administration’s definition of significant functional limitation.

Finally, each eligible designated beneficiary can only have one ABLE account.

Who can contribute to an ABLE account? 

Anyone can contribute to an ABLE account. The account owner, or designated beneficiary, can contribute to the account, as can their family or friends. 

How much can one contribute to an ABLE account? 

There are limits on how much can be contributed to an ABLE account. As of 2020, the annual limit for each contributor is $15,000. Eligible designated beneficiaries can make additional contributions to their ABLE account. That amount can be up to the amount equal to their state’s poverty limit or the federal poverty line, whichever is less. This is consistent with the Tax Cuts and the Jobs Act.

However, if the eligible designated beneficiary’s employer contributes to a workplace retirement plan, the individual cannot make these additional contributions. There are also lifetime caps set by individual states. Many such lifetime limits are as much as $300,000.  

What are the advantages of an ABLE account?

These accounts allow those with disabilities and their families to save money in a tax beneficial way. Contributions to an ABLE account are not tax-deductible and are made with post-tax earnings. Additionally, withdrawals and investment income earned will not be taxed. 

Possibly the best advantage of an ABLE account is that the money held in this account is not considered when applying for needs-based public benefits. These needs-based programs have strict asset limits, sometimes as low as $2,000. 

Through an ABLE account, the individual can have extra funds set aside for their care and maintenance without jeopardizing their eligibility for needs-based government benefits. The funds in an ABLE account will not impact Medicaid, FAFSA, HUD, or SNAP eligibility.

There could, however, be limits regarding how much ABLE account funds will be a non-countable asset. For example, the amount up to that state’s 529 plan savings limit may be the amount exempt for Medicaid eligibility purposes.  Finally, the first $100,000 in ABLE account funds is exempt when qualifying for SSI. 

What can ABLE account funds be spent on?

Distributions from the account are tax-free if used for any disability related expense. These expenses include healthcare costs, living expenses, housing, transportation, assistive technology, legal fees, and education. To be tax-free, the distribution must be made for a qualified disability expense, which is defined as follows:

“Qualified disability expenses mean any expenses incurred at a time when the designated beneficiary is an eligible individual that relates to the blindness or disability of the designated beneficiary of an ABLE account, including expenses that are for the benefit of the designated beneficiary in maintaining or improving his or her health, independence, or quality of life. See §1.529A-2(h).

However, any expenses incurred at a time when a designated beneficiary is neither disabled nor blind within the meaning of §1.529A-1(b)(8)(i) or §1.529A-2(e)(1)(i), even if the designated beneficiary is an eligible individual for that entire taxable year, do not relate to blindness or disability and therefore are not qualified disability expenses.”

Who administers ABLE accounts?

Although ABLE accounts are sanctioned by federal law, the ABLE account programs are operated by individual states. Many states have their own ABLE account programs, but some states may not have programs available. 

The good news is some state programs, such as Nebraska, Ohio, and Tennessee, are open to residents of other states. Individuals should shop around and really understand each program’s terms to analyze whether it is the right one for them.

What are the new IRS regulations? 

The final regulations issued by the IRS in October 2020 amend 26 CFR parts 1, 25, 26, and 301. The purpose of the new regulations is to provide guidance under section 529A of the Internal Revenue Code, which authorized states to create ABLE account programs. These new regulations finalize two proposed regulations, the first proposed in 2015 and the other proposed in 2019. 

Below are some key takeaways from the new final regulations:

  • Funds from qualified tuition programs (529 plans) may be rolled over into ABLE accounts.
  • After the death of the account beneficiary, any payments to eliminate outstanding debt or disability or burial related expenses from the ABLE Account are not included in the designated beneficiary’s estate.
  • A change of a designated beneficiary is not treated as a distribution if the successor beneficiary is an eligible individual and a family member of the designated beneficiary. A member of the family includes any “sibling, whether by blood or adoption, and includes a brother, sister, stepbrother, stepsister, half-brother, and half-sister.”

(If a change in designated beneficiary is to someone other than an eligible individual who is a family member of the designated beneficiary, then the change is considered a distribution to the former designated beneficiary.) 

  • A contribution in excess of the annual contributions limit is subject to an excise tax of 6% of the excess contribution.

Here are some of the new regulations that are effective as of  January 1, 2021:

  • Contributions to an ABLE account, other than a designated beneficiary’s contribution, are considered a completed gift for gift tax purposes. 
  • If a contribution is a nontaxable gift for Federal gift tax purposes, the inclusion ratio for GST-tax purposes will be zero.
  • Funds in the ABLE account are included in the designated beneficiary’s estate for estate tax purposes.

To Summarize

ABLE accounts can be an excellent resource for those who are disabled. They are also a great way for families to be able to make meaningful contributions. Advocates such as attorneys and financial planners should arm themselves with the knowledge about what ABLE accounts are, as it is important to understand how they work for their clients’ benefit. Moreover, these advocates must stay abreast of how the laws regarding the accounts evolve. With a working knowledge of these new guidelines, practitioners can be more confident when advising clients regarding the complexities of ABLE accounts. 


Disabled youth and family | ABLE laws | J.L. Williamson Law Group

J.L. Williamson Law Group Can Help

Individuals who are in need of this type of assistance should find qualified advocates and legal representation. It is critical to have someone guiding them along the path who understands the complexities of the process and can help them make the best decisions for their loved one(s).

The J.L. Williamson Law Group has helped clients just like you ensure that loved ones with disabilities will have security for the future. We can help you, too. 

With offices in Savannah and Statesboro, we are here to serve you. 


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About the Author

Jeffrey L. Williamson | Founder

Jeffrey L. Williamson is the founder of J. L. Williamson Law Group, LLC. The Firm specializes in asset protection, elder law, tax planning, and tax controversy.