The IRS recently issued regulations to clarify rules for accounts established under the Achieving a Better Life Experience (ABLE) Act of 2014. ABLE accounts were created last year to allow family members of persons with long-term disabilities to be able to set aside funds to help them maintain their quality of life. The ABLE Act was hailed as the most significant disabilities legislation since the Americans with Disabilities Act of 1990.
The IRS regulations allow states to finalize their own rules on how ABLE accounts will operate in their state. The accounts are modeled after 529 college savings plans and are expected to operate in much the same way. Family members will be allowed to contribute $14,000 per year to the account. The contributions are non-deductible and can only be made in cash. The accounts cannot be funded with securities. Contributions will be treated as gifts and will count toward the reportable gift limit for the beneficiary. The contribution limit will be adjusted each year by inflation. An individual can have only one qualifying ABLE account at a time.
Distributions of earnings from the account will be tax-free if the funds are used for housing, transportation, education, job training and the like. The IRS has determined the expenses need not be medically necessary. Tax-free distributions can be made from the account for basic living expenses to help a beneficiary improve their quality of life.
Each state is responsible for establishing and operating an ABLE program and the actual rules will vary slightly from state to state. It is expected states will begin accepting applications to establish ABLE accounts by the end of 2015 now that the IRS has issued their final regulations. You can read more information in the June 4, 2015 newsletter “Newly Passed ABLE Act Allows Tax-exempt Saving for People With Disabilities.”