It’s going to happen. We have been waiting since the ABLE Act was enacted almost a year ago to learn how the ABLE Acts accounts were actually going to work. Now the IRS has issued new guidelines that resolve our basic concerns, and it looks like ABLE Accounts will soon be a helpful tool in the special needs arsenal. The regulations clarify several confusing parts of the ABLE legislation and provide a road map for practitioners dealing with ABLE accounts and SSI benefits. The regulations, POMS Section SI 01130.740, can be read here.
A significant part of the POMS section deals with the SSA’s treatment of distributions from an ABLE account. As you may know, recipients of SSI cannot have more than $2000 in assets, and income to the recipient usually decreases the SSI payments. However, the regulations state that distributions from an ABLE account for non-housing-related qualified disability expenses are not counted as income and are excluded from the beneficiary’s resource calculation even if they are retained for months following the distribution. In the example used in the POMS, a beneficiary takes a $500 cash distribution from an ABLE account in June to pay for a medical bill due in September. The beneficiary keeps the $500 in his bank account for two months until paying the medical bill. According to the POMS section, this distribution is neither income nor a resource because it is being used to pay for a non-housing-related qualified disability expense. (If the same cash distribution were made from a special needs trust, it would be considered unearned income in the month received and it would be counted as a resource in the following months.) In a second example, if the same distribution was put into her checking account in May and was used to pay rent on June 3, it would be included as a beneficiary’s resource because it was part of her checking account balance as of the first of the month in June.
By way of background, the ABLE Act was enacted to allow parents of children with significant disabilities to help pay their children’s expenses, similar to a 529 Account for college savings for typical children. An ABLE account (called a 529A Account) allows donors to put up to $14,000 into the account per year, to grow tax-free. (The money transferred into the account is post-tax, but any earnings on the money in the account is not taxed, and all distributions are tax-free, so long as the distribution is a qualified expense.) In addition to the tax benefits, another good thing is that the account value, up to $100,000, will be disregarded in determining eligibility for Supplemental Security Income (“SSI”) and Medicaid. In other words, a person can have up to $100,000 in an Able Account and still be considered to have less than $2000 in assets, thereby qualifying for SSI and Medicaid. The new regulations discuss other things, such as what happens if an ABLE account is over-funded.
The new guidance addresses our primary concern: what investment company would agree to administer the program, given the burdensome regulations it entailed? If the mutual funds holding the money were required, for example, to confirm that every distribution from an ABLE Act account was “qualified,” would they agree to take this on?
Responding to feedback about this, last week the IRS came out with new rulings that state that the mutual funds and other entities implementing the ABLE programs will not be required to distinguish between distributions used for qualified expenses and other distributions. It will be left to the beneficiaries to categorize the distributions properly when they file their income tax returns.
The new ruling removes two other requirements that might have made the accounts too burdensome to implement: now the ABLE provider will not have to obtain the Tax ID numbers of all contributors to the accounts, and they will not have to obtain a medical certificate of disability – a certification from the beneficiary or the beneficiary’s guardian, under penalties of perjury, that the individual has a signed physician’s diagnosis of disability, will be sufficient.
As a result of these new rulings, we think the major roadblocks of the ABLE Act accounts have been removed, and we should see them begin to open in Massachusetts in 2016. We will continue to provide updates as work on establishing ABLE Accounts progresses.