New Law Creates Tax-Favored Savings Accounts for Disabled Taxpayers

As part of the larger tax extender legislation passed on Tuesday, Congress approved the Achieving a Better Life Experience (ABLE) Act of 2014 (H.R. 647), which will allow disabled individuals to save money to pay for their disability expenses in tax-favored accounts, called ABLE accounts. The House of Representatives passed the measure on Dec. 3, by a vote of 404–17, and it now goes to President Barack Obama for his signature.

The purpose of the bill is “[t]o encourage and assist individuals and families in saving private funds for the purpose of supporting individuals with disabilities to maintain health, independence, and quality of life” and “[t]o provide secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance,” Medicaid, and other sources (H.R. 647, §101).

The bill adds a new Sec. 529A to the Code, under which a qualified ABLE program will be exempt from taxation (except for unrelated business income tax). A qualified ABLE program is a program run by a state that allows a person to make contributions for a tax year, for the benefit of an eligible individual, to an ABLE account established for the purpose of meeting the qualified disability expenses of the designated beneficiary of the account. A state’s ABLE program must limit designated beneficiaries to one account and must allow accounts to be opened only for residents of that state or a contracting state.

Eligible individuals must file a disability certification with the IRS or meet certain criteria for blindness or disability under the Social Security Act (42 U.S.C. §1382).

Contributions must be made in cash, and the program must limit annual contributions to the amount of the annual gift tax exclusion in effect for that tax year.

The ABLE program must provide separate accounting for each designated beneficiary, and designated beneficiaries and contributors must not be able to direct the investment of contributions or earnings in the account.

Distributions from the account will not be included in the designated beneficiary’s gross income as long as they do not exceed the beneficiary’s qualified disability expenses. If they do exceed the beneficiary’s qualified disability expenses, the amount otherwise includible in gross income will be reduced by an amount bearing the same ratio to that amount as the expenses bear to the distributions.

Funds in ABLE accounts will also be disregarded for purposes of various federal means-tested programs.

Once signed by the president, the bill will take effect for tax years beginning after Dec. 31, 2014.