The Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act), one of the few recent examples of bipartisan cooperation on a new category of tax and budget expenditure, is both well-intentioned in its principles and cumbersome in its details, another example of the proposition that a camel is a horse designed by a committee. Recent and imminent actions by regulators at the United States Treasury and Social Security Administration evidence commendable dedication to sanding off some of the rougher edges of the ABLE legislation. Such beneficial regulatory guidance reflects, in both substance and timing, extraordinary attention by federal regulators to concerns raised by the state instrumentalities charged with establishing and administering ABLE programs and by disability advocacy groups that have pushed and prodded to make this new form of savings and investment account for individuals with severe disabilities a reality. Aided by this healthy cooperation among regulators, administrators and beneficiaries and the developments described below, ABLE programs should become available in various states during 2016.
Treasury Issues Favorable Advance Guidance for ABLE Program Administrators
Treasury issued proposed ABLE regulations on June 29, 2015, has received comments on those regulations and is expected to publish a revised version of such regulations as final regulations when feasible taking into account the regulatory process. It is anticipated that some ABLE programs will be launched in advance of the issuance of such final regulations. However, the National Association of State Treasurers' College Savings Plan Network (CSPN) (which now includes entities involved in establishing Section 529A ABLE programs as well as entities involved with Section 529 college savings programs) had requested advance guidance from Treasury on three points which, if not resolved by Treasury prior to its issuance of final regulations, could have delayed the structuring and launching of ABLE programs. On November 20, 2015, Treasury issued Notice 2015-81, providing such expedited advance guidance and agreeing with CSPN's requested resolution on each of the three points.
In particular. Notice 2015-81 affirms that, notwithstanding contrary language in the proposed regulations, the final regulations under Internal Revenue Code Section 529A will provide that:
- An ABLE program will not be required to track or report the use of distributions from an ABLE account. Although an ABLE program will need to report the amount of distributions and allocate distribution amounts to earnings or return of basis, it will not need to determine the amount of each distribution used by the account beneficiary for, respectively, non-housing qualified disability expenses, housing-related qualified disability expenses, or expenses that are not qualified disability expenses. The ABLE account beneficiary, however, will need to maintain records sufficient to allocate ABLE account distributions to qualified or non-qualified expenditures for tax purposes, and, in certain instances as discussed below, to qualified non-housing, qualified housing or nonqualified expenditures for Supplemental Security Income (SSI) eligibility purposes.
- An ABLE program will not be required to request the social security number or other tax identification number (TIN) of each third party contributor to an ABLE account at the time a contribution is made, if (as will be the case for most if not all programs) the program has a system in place to identify and reject excess contributions and excess aggregate contributions before they are deposited into an ABLE account. (If, however, an excess contribution or excess aggregate contribution is deposited into an ABLE account, the qualified ABLE program will be required to request the TIN of the contributor making the excess contribution or excess aggregate contribution.)
- In instances where the ABLE statute conditions ABLE eligibility on the filing of a signed physician's diagnosis of the relevant disability, an ABLE program will not be required to collect or review such physician diagnosis, but can rely on a certification under penalties of perjury that the individual (or the individual's agent under a power of attorney or a parent or legal guardian of the individual) has the signed physician's diagnosis, and that the signed diagnosis will be retained and provided to the ABLE program or the IRS upon request. Notice 2015-81 indicates that the final regulations will "likely" require that such certification include the name and address of the diagnosing physician and the date of the diagnosis, and "may also provide" that the certification "may" include information provided by the physician as to the "categorization of the disability" that could determine, under the particular state's program, the appropriate frequency of required recertification. (The need for annual recertification is another sensitive topic from the perspective of state ABLE program administrators, but the proposed regulations suggest that the final regulations will be sufficiently flexible that states that do not wish to require annual recertification will not be obligated to do so.) The Notice helpfully states that if the final regulations require more as to the signed physician diagnosis than the certification of its possession by the provider of the certification and that the diagnosis will be retained and provided to the ABLE program or the IRS upon request, such additional requirements will not apply to certifications obtained by an ABLE program prior to the effective date of such final regulations.
Appreciation is due to Catherine Hughes at Treasury and to Terri Harris and Sean Barnett at IRS for their attentiveness and responsiveness to the request for such advance guidance.
Social Security Administration Expected to Issue Favorable Guidance for ABLE Beneficiaries
For SSI benefit recipients, the beneficial treatment of ABLE account balances and distributions for SSI eligibility purposes is at least as important as their beneficial tax treatment. Although the Social Security Administration has yet to issue formal guidance clarifying that treatment, it is expected to do so through an update to its Program Operations Manual System (POMS) before the end of 2015. Based on informal communications with and by SSA officials, the treatment is expected to facilitate the use of ABLE accounts without adverse impact on SSI benefits.
Broadly speaking, SSI benefits eligibility is reduced and may be eliminated to the extent the applicable beneficiary has countable assets or countable income in excess of extremely modest amounts. However, the ABLE Act provides that ABLE account balances are disregarded for SSI purposes except to the extent they exceed $100,000, and that ABLE account distributions for qualified disability expenses also are disregarded except in the case of distributions for housing expenses.
The statutory exclusions leave some ambiguity as to the timing and methodology of determinations that particular ABLE account distributions are excluded from SSI benefits determinations. The treatment expected to be described in the POMS update is as follows: Distributions of ABLE account balances of $100,000 or less will not constitute countable income, as such amounts already are owned by the SSI beneficiary at the time of the distribution. Distributions from ABLE accounts will not constitute countable assets if expended within the same month as the distribution is received by the beneficiary from the account, irrespective of the nature of the expenditure. Distributions from ABLE accounts that are not expended within the same month as the distribution is received by the beneficiary will not be counted as a countable asset if ultimately expended on a qualified disability expense that is not a housing expense. An ABLE account distribution expended on a housing expense or non-qualified expense in a later month than the month in which the distribution is received may be treated retroactively as a countable asset in all months between distribution and expenditure, potentially requiring the beneficiary to refund SSI benefits received during that period.
Bottom line: An SSI recipient should not experience any adverse impact from the existence of an ABLE account as long as the account balance is kept at or below $100,000 (probably measured as of each month end), and, subject to confirmation when the relevant POMS update is published by SSA, as long as distributions from the ABLE account are expended in the month of receipt. Expending ABLE account distributions in a month subsequent to the month of receipt will not produce an adverse result if the expenditure is a qualified disability expense that is not a housing expense, but may create some risk to SSI benefits if the documentation of the expenditure is inadequate or the classification of the expenditure is debatable.
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.