United States: IRS's Proposed Section 529A Regulations For ABLE Programs: A Mixed Bag

Last Updated: June 22 2015
Article by Leonard Weiser-Varon

The IRS today published, right on deadline, its proposed regulations relating to Section 529A state-sponsored "qualified ABLE programs," under which  tax-advantaged investment accounts may be established to fund future "qualified disability expenses" of eligible disabled individuals.

The regulations are detailed and this posting will not attempt to summarize them in their entirety. Rather, a few provisions of the proposed regulations are highlighted below, along with some initial reactions.

Applicability: The regulations are issued as proposed regulations, and therefore technically are not in effect. Comments are due within 90 days of the publication date in the Federal Register, and a public hearing on the regulations will be held on October 14, 2015. The preamble to the regulations indicates taxpayers and state programs can rely on the proposed regulations until final regulations are adopted. Somewhat perplexingly, the preamble also indicates that the final regulations will be applicable to taxable years beginning after December 31, 2014. To the extent this suggests that the final regulations will be applicable retroactively, it appears inconsistent with the promise made in IRS Notice 2015-18 that "[t]he Treasury Department and the IRS intend to provide transition relief with regard to necessary changes to ensure that the state programs and accounts meet the requirements in the [regulatory] guidance, including providing sufficient time after issuance of the guidance in order for changes to be implemented." One hopes that the IRS will clarify that such a transition period will be provided after final regulations are adopted, versus retroactive application of such final regulations to any taxpayer or program that has not complied with the proposed regulations; otherwise, programs and taxpayers may be forced to comply with the proposed regulations even though they are not legally effective.

Who May Establish an ABLE Account: Section 529A requires that the tax owner of any ABLE account be the eligible disabled beneficiary. The proposed regulations provide that if the beneficiary cannot establish the account on his or her own, it may be established on the disabled beneficiary's behalf by an agent under power of attorney or, if there is no such agent, by a parent or legal guardian. This narrows the field of potential relatives who can establish an ABLE account for a disabled individual, and eliminates the ability of a non-parent to establish such an account unless he/she has a power of attorney or is a legal guardian. It also appears to preclude, or at least not acknowledge, the use of custodial accounts, such as an UTMA account, which is surprising.

Eligible individual determination: The proposed regulations are disappointing from the perspective of administrative ease and clarity on the key question of what documentation is required to establish and maintain an ABLE account. As an initial matter, the regulations cast the responsibility for verifying eligibility status on the state programs. The regulations indicate that a "qualified ABLE program must specify the documentation that an individual must provide, both at the time an ABLE account is established for that individual and thereafter, in order to ensure that the designated beneficiary of the ABLE account is, and continues to be, an eligible individual."

There are two statutory methods for an individual to qualify as eligible for an ABLE account. One is the filing of a disability certification with the Secretary of the Treasury that certifies that the individual has a qualifying disability or is blind and that such disability or blindness occurred before the individual's 26th birthday; the certification must include a physician-signed diagnosis of the relevant disability or blindness. The proposed regulations provide that "a disability certification will be deemed to be filed with the Secretary once the qualified ABLE program has received the disability certification." The regulations are silent on what level of diligence the state program must engage in, if any, to establish that papers that purport to be a disability certification comply with the substantive requirements (including type of diagnosis) of the regulatory definition of a disability certification. This provision is likely to be perceived as problematic by state programs and to provoke a high level of pushback during the comment period from state administrators who believe that eligibility status should be between the taxpayer and the federal government, not something that a state has any role in verifying.

An alternative statutory basis for ABLE account eligibility is eligibility for Social Security Act benefits based on blindness or disability that occurred before the individual's 26th birthday. The proposed regulations are silent on a state's role in verifying this type of eligibility. The preamble to the proposed regulations states that "for example, a qualified ABLE program could require the individual to provide a copy of a benefit verification letter from the Social Security Administration and allow the individual to certify, under penalties of perjury, that the blindness or disability occurred before the individual's 26th birthday." While this non-regulatory example appears potentially less onerous in terms of state verification responsibility than the unclear role of a state program under the proposed regulations upon its receipt of a disability certification, it still raises some potentially thorny questions, such as, for example, whether a program is required to make a competency determination before relying upon a declaration signed by a disabled individual.

The proposed regulations' treatment of eligibility determinations for years following the year in which an account is established is even vaguer. The regulations provide that "a qualified ABLE program may choose different methods of ensuring a designated beneficiary's status as an eligible individual and may impose different periodic recertification requirements for different types of impairments." The proposed regulations suggest that, with respect to the frequency of annual recertifications, ABLE programs "may take into consideration whether an impairment is incurable and, if so, the likelihood that a cure may be found in the future," a suggestion that casts state officials entrusted with administering a financing program in the combined role of physicians and Nostradamus. The proposed regulations further suggest that a state program may establish a sliding scale of frequency of recertification based on the type of impairment. Less fantastically, the regulations suggest that "[i]f the qualified ABLE program imposes an enforceable obligation on the designated beneficiary or other person with signature authority over the ABLE account to promptly report changes in the designated beneficiary's condition that would result in the designated beneficiary's failing to satisfy the definition of eligible individual, the program also may provide that a certification is valid until the end of the taxable year in which the change in the designated beneficiary's condition occurred." This type of presumption that an individual continues to be eligible unless the program receives notice to the contrary is on the right track, but what constitutes an "enforceable obligation" by a disabled individual or his or her agent, parent or guardian to report a change in condition is anybody's guess.

Residency requirement: Consistent with Section 529A, the proposed regulations require that, at the time an ABLE account is established, the designated beneficiary must be a resident of the state offering the program or a resident of a state without a program that has contracted with such other state for purposes of making its residents eligible to participate in such program. The proposed regulations state that for purposes of such residency requirement residency is determined under the law of the designated beneficiary's state of residence. There is no guidance on whether any proof of residency is required or whether a state may rely on a certification made by or on behalf of the beneficiary as his or her state of residency. The proposed regulations confirm that a change in the beneficiary's state of residency after an ABLE account is established does not affect the beneficiary's right to continue to use the applicable ABLE account.

Cumulative contributions limit: The proposed regulations affirm that for purposes of the statutory cumulative contributions limit, which equals the cumulative limit imposed by the applicable state under its Section 529 qualified tuition program, it is permissible for the program to refuse additional contributions that would cause the limit to be exceeded (versus tracking the lifetime contributions to the account, irrespective of investment gains or losses.) This methodology is used by many Section 529 programs but had not been officially blessed by the IRS in that context.

Qualified disability expenses: The proposed regulations provide a hoped-for generous definition of "qualified disability expenses" which states that such term "includes basic living expenses and [is] not limited to items for which there is a medical necessity or which solely benefit a disabled individual."

State role regarding qualified disability expenses: Quite unexpectedly, the proposed regulations state that "[a] qualified ABLE program must establish safeguards to distinguish between distributions used for the payment of qualified disability expenses and other distributions, and to permit the identification of amounts distributed for housing expenses as that term is defined for purposes of the Supplemental Security Income program." This purported duty of state programs to monitor the use of distributions from ABLE accounts has no basis in the Section 529A statutory language, is inconsistent with the manner in which similar language in Section 529 has been construed by the IRS, and is at odds with other provisions of the proposed regulations that provide for qualified distribution expenses to be determined by the taxpayer on an annual basis, not by tracing of particular distributions to particular expenses. This provision is highly problematic from a practical as well as a legal perspective and will likely provoke a high level of pushback during the comment period.

Medicaid lien: The proposed regulations state that an ABLE program "must provide that a portion or all of the balance remaining in an ABLE account of a deceased designated beneficiary must be distributed to a State that files a claim against the designated beneficiary or the ABLE account itself with respect to benefits provided to the designated beneficiary under the State's Medicaid plan ... after ... the date on which the ABLE account, or any ABLE account from which amounts were rolled over or transferred to the ABLE account of the same designated beneficiary, was opened...." The proposed regulations provide no guidance on whether the program must keep an ABLE account open for a particular period of time following a designated beneficiary's death, or whether the beneficiary's estate can direct closure of the account at any time and distribution to the estate of all amounts remaining in the account.

Reporting: The proposed regulations include detailed reporting requirements for ABLE programs, including references to new forms to be used by state programs in reporting data regarding the establishment of ABLE accounts (Form 5498-QA) and in reporting distribution data (Form 1099-QA). The preamble to the proposed regulations also references a Congressional report "that States should work with the Commissioner of Social Security to identify data elements for the monthly reports [required to be submitted to the Commissioner of Social Security], including the type of qualified disability expenses." As noted above, the suggestion that States will have a duty to report types of qualified disability expenses is both legally and practically problematic.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions