IRS eases up on ABLE account regulations

As I reported earlier this year, Congress passed legislation in 2014 authorizing the establishment of tax-free ABLE accounts (acronym for "Achieving a Better Life Experience"). The ABLE program permits a disabled individual to maintain assets above $2,000, the current limit in order to qualify for federal benefits such as SSI and Medicaid. 

Up to $100,000 may be placed in an ABLE account. Funds must be used for services and items not covered by federal programs. Anyone can contribute to the account. To qualify, the individual must have developed the disability before the age of 26. Read my original February 2015 post for details on eligibility rules.

Since the law's passage, the IRS has been drafting regulations that will serve as guidelines for the states to implement their own programs. Some of the proposed regulations have come under fire from the states and disability advocates as being overly burdensome and impractical, and the IRS has backed off. For example:

• The IRS originally required the financial institution housing the ABLE account to procure the taxpayer ID of each person who contributed to the account. This requirement has been scrapped, although the institution must put controls in place to prevent overfunding of the account.

• The initial regulations required a disabled person seeking to establish an ABLE account to provide a doctor's note documenting the individual's diagnosis. The revised rules require that the individual must sign an oath, under penalty of perjury, indicating that he/she possesses such a note and is eligible to open an ABLE account. 

• The financial institution housing the account will not be required to document distributions, as the original regulations required. Instead, the beneficiary must provide documentation that the funds have been used for disability-related expenses.

Read the IRS' revised interim regulations here. 

Read the Social Security Administration's detailed program instructions (POMS, Program Operations Manual System here.) 

Update 12/20/15: Under the new federal budget bill just signed into law by President Obama, the residency requirement for ABLE accounts has been abolished. This means that you may establish an ABLE account in any state that authorizes such accounts. The states may differ in their fee structures, investment options, etc., and thus, you will be able to select the states where ABLE regulations best suit your needs. The Florida ABLE program should be up and running sometime in 2016.