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 A 529A plan is similar to a 529 plan in that earnings on the contributions are tax deferred and tax-free when withdrawn to pay for qualified expenses for an eligible individual.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. The signing of the PATH Act in 2015 removed residency requirements from 529 ABLE accounts, giving individuals the option of using any state's plan.

There can be only one 529A plan for a beneficiary (eligible individual), and total contributions in a year are generally limited to the annual exclusion amount under the gift tax laws. But, starting in 2018, if the beneficiary works, the beneficiary can also contribute part or all of what they make to their ABLE account (limits apply). States must apply the same limit on aggregate accumulations to their 529A plan that they apply to their 529 plans.

Qualified ABLE program
529A plans must be established and administered by the individual states. This is similar to the administration of 529 savings plan programs. The plans can only accept cash contributions and are forbidden to be used as a security for a loan.

Designated beneficiaries are limited to having only one 529A plan. There are no residency requirements from 529 ABLE accounts, giving individuals the option of using any state's plan. However, some state plans are restricted to state residents, and some states provide tax incentives to state residents.

529A plans allow tax-free rollovers from one state plan to another should the designated beneficiary move to a different state.

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. Unlike a 529 plan, the owner and beneficiary of a 529A plan are one and the same.

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.

Effect of 2017 tax reform
The 2017 Tax Reform (Tax Cuts and Jobs Act) introduced three changes to 529A plans.

Starting 2018, the designated beneficiary can contributed funds beyond the annual gift-tax exclusion limit. This additional contribution is limited to the poverty-line amount for a one-person household. The designated beneficiary is not, however, eligible to make this additional contribution if their employer contributes to a workplace retirement plan on their behalf.

Also, starting in 2018, 529A account beneficiaries can qualify for the Saver’s Credit based on contributions they make to their 529A accounts.

Finally, starting 2018, some funds may be rolled into a 529A account from the designated beneficiary’s own 529 plan or from the 529 plan of certain family members.

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 beneficiary are subject to federal income tax.

Tax on excess contributions
If an excess contribution to a 529A account is not withdrawn, the account owner 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
The 529A plan allows a designated beneficiary to retain access to means-tested federal aid programs such as Supplemental Security Income (SSI), and medicaid. However, there are limitations that can result in the lowering or suspension of SSI benefits. These limiting factors include:
 * 1) A distribution for housing expenses. Housing costs are included in SSI countable income. Countable income is subtracted from the maximum Federal Benefit to arrive at a net SSI benefit.
 * 2) SSI benefits are suspended whenever the 529A plan assets exceed $100,000; benefits resume once plan assets fall back to $100,000 or less.

A 529A plan will have no impact on medicaid eligibility.

Upon the death of the designated beneficiary, the state will have a creditor claim for the repayment of any net medical assistance received from medicaid, after the establishment of the account.

Bankruptcy
529A plans are afforded asset protection against bankruptcy claims. Contributions to a plan are not subject to creditor claims if they were made 721 days prior to the filing of bankruptcy proceedings. Contributions made up to 364 days before the filing are subject to creditor claims. For contributions made between 365 and 720 days inclusive prior to filing, a maximum of $6,225 is exempt from creditor claims. For an individual under the supervision of the bankruptcy code, contributions to a 529A plan can continue to be paid as a part of a debtor's allowable monthly expenses, as long as they are not excess contributions and the designated beneficiary of the account is a child, stepchild, grandchild, or stepgrandchild of the debtor.

Investment direction for 529-A plans
529A accounts enable participants to make twice-yearly investment changes.

State 529-A plans
The table below provides access to state 529-A plans.