In December 2014, the Achieving a Better Life Experience (ABLE) Act was passed by the US Senate and House and approved by the President. The ABLE Act will amend Section 529 of the Internal Revenue Code to create a tax-free savings account for certain individuals who had significant disabilities before turning age 26. (The accounts are not limited to persons under age 26, so long as the onset of disabilities was before the age of 26.) Section 529 accounts have existed for almost 20 years, allowing states to administer programs that provide tax benefits for saving for college. The 529A accounts will likewise be administered by the states, but are not aimed at college expenses, rather the accounts are aimed at helping with the significant costs of living with a disability that may exceed benefits provided with private insurance or public benefits. Possibly the most important part of the new section 529A is that the accounts will not affect eligibility for SSI, Medicaid, or other public benefits (subject to some limitations). Similarly to 529 Plans, it is anticipated that plans will be set up by each state and that income earned in the account would not be taxed.
The problem? States are already working on legislation to ensure their citizens may create ABLE accounts during 2015, but the IRS is not expected to release regulations or other guidance on how to implement the new Section 529A until June. Earlier this month the IRS issued Notice 2015-18, providing some comfort (but not necessarily guidance) to states. The Notice states the IRS is aware states want to create ABLE accounts, and is assuring those states that enact legislation prior to the IRS issuing its guidance that participants under those plans will not fail to receive benefits merely because the legislation or account does not fully comply with the guidance once it is issued. The IRS also intends to provide transitional relief for those states that enact legislation that turns out to not comply with the IRS guidance. The guidance also pointed out to states an anticipated key difference from the 529 plans that will be included in the regulations--the IRS anticipates the beneficiary of the account will be considered the owner.
So what is the solution? For now, states can move forward with enacting their own legislation based on the Act as passed, and if needed, can amend the legislation once the regulations are issued in June (or sometime thereafter...). This hopefully will allow individuals to receive the benefits of the accounts this year. What if your state doesn't adopt legislation? Your state may choose not to participate, and instead contract with another state to allow you to open an ABLE account with that other state.