529-ABLE plan

The “Achieving a Better Life Experience” (ABLE) Act was passed into law on December 19, 2014, as part of H.R.5771. The law created Section 529A of the Internal Revenue Code (26 U.S. Code §529A), and established the , a tax-preferred savings plan for the disabled. A 529A plan is similar to a 529 plan in that earnings on the contributions are tax deferred and tax-free when withdrawn to pay for qualified expenses for an eligible individual. A 529A plan (qualified ABLE program) must be sponsored by a state.

There can be only one 529A plan for a beneficiary (eligible individual), and total contributions in a year are limited to the annual exclusion amount under the gift tax laws. States must apply the same limit on aggregate accumulations to their 529A plan that they apply to their 529 plans. A plan can be established for a beneficiary only as part of the qualified ABLE program of the state (or contracted state) in which the beneficiary is resident.

Eligible individual and designated beneficiary
An eligible individual is someone who became blind or disabled before the age of 26 and is entitled to benefits because of blindness or disability either from Social Security or a state plan authorized under Title XVI of the Social Security Act. Someone can also be certified eligible if a claim is made based on a physician's diagnosis that the impairment began before the age of 26 and will result in death or has lasted or will last at least 12 months.

The designated beneficiary of a plan is the eligible individual who established the plan and is the owner of the plan.

Qualified expense
Qualified disability expenses are defined as any expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary.

Qualifying expenses include the following:
 * Education;
 * Housing;
 * Transportation;
 * Employment training and support;
 * Assistive technology and personal support services:
 * Health, prevention and wellness;
 * Financial management and administrative services:
 * Legal fees, expenses for oversight and monitoring;
 * Funeral and burial expenses;
 * Other approved expenses.

Contribution limits
The annual contribution limit to a 529A plan is the annual gift tax exclusion limit. In 2015. this limit is $14,000. The annual limit amount is an aggregate of all contributions to an account during the year. Thus, for example, a grandparent and a parent can contribute to a plan, but the combined contributions cannot exceed the annual limit. The contributions are treated as a completed gift to the designated beneficiary.

In addition, 529A plans will share the same maximum account accumulation limits that states have set for their 529 savings plans.

Tax considerations
529A accounts provide for valuable tax benefits, but there are also tax penalties imposed on both non-qualifying account distributions and on excess account contributions.

Federal tax benefits
Contributions to a 529A account are made with after-tax dollars, but the investment inside the account grows without annual taxation. Qualified disability withdrawals are free from federal taxation.

Federal tax penalties
529A accounts are subject to two federal tax penalties: a penalty tax on non-qualified distributions, and an excise tax on excess contributions.

Tax on non-qualified distributions
Distributions in excess of qualified disablility expenses will be subject to income tax and a 10 percent penalty tax. The amount includible in gross income is the excess amount reduced by an amount in the same ratio as the expenses bear to the distributions.

"Example: A qualified ABLE account with a balance of $100,000 (of which $50,000 consists of contributions) distributes $10,000 to a beneficiary who has incurred $6,000 of qualified disability expenses. The $5,000 ($10,000 - $5,000 basis) amount otherwise includible in gross income is reduced by $3,000 ($6,000 / $10,000 multiplied by $5,000), so the includible amount is $2,000. An additional tax of $200 (10 percent of $2,000) is imposed on the distribution."

The 10 percent penalty does not apply if the payment or distribution is made to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Any earnings distributed to the estate or the beneficary are subject to federal income tax.

Tax on excess contributions
If you do not withdraw an excess contribution to a 529A account, you will be accessed a 6 percent excise tax. The excise tax can be negated if a corrective distribution of the excess contribution is made on or before the day (including extensions of time) for filing the account owner's individual tax return for that tax year. The corrective distribution must include any earnings attributable to the contribution. These earnings will be subject to income tax, but will not be accessed the 10 percent penalty tax.

Effects on Social Security and Medicaid

 * Section 103

Bankruptcy

 * Section 104

Investment direction for 529 plans

 * Section 105

Becomes effective for tax years after December 31, 2014.