Section 529A ABLE Accounts Opening Throughout the United States

The below article originally appeared in the Illinois State Bar Association's Trusts & Estates June 2016 Newsletter.

On December 19, 2014, THE STEPHEN BECK, JR., ACHIEVING A BETTER LIFE EXPERIENCE ACT OF 2014 (“ABLE Act”) was enacted as part of The Tax Increase Prevention Act of 2014. The ABLE Act added section 529A to the Internal Revenue Code (“Code”) after Congress recognized the increased financial burdens families raising children with disabilities incur throughout a disabled person’s lifetime. Section 529A of the Code now permits a state (or agency or instrumentality thereof) to establish and maintain a new type of tax-advantaged savings program (“ABLE Program”), similar to traditional section 529 plans, under which a separate qualified account (“ABLE Account”) may be established in order to provide secure, tax deferred funding for disability-related expenses on behalf of a designated beneficiary.


On June 22, 2015, the Treasury Department released their interim “Guidance Under Section 529A: Qualified ABLE Programs” for states enacting legislation and implementing programs prior to the release of the Treasury Department’s final regulations.  Generally, contributions to ABLE accounts are made on an after-tax basis, and must not exceed the amount of the annual per-donee gift tax exclusion under section 2503(b) in effect for that calendar year (currently $14,000). Contributions to the account may be made by any person (the account beneficiary, family and friends) and may or may not be tax deductible depending on the specifics of the state ABLE law. Total contributions cannot exceed the 2503(b) limit in any given year regardless of the number of contributors. Distributions made from an ABLE account for qualified disability expenses are not included in the designated beneficiary’s gross income and earnings from ABLE funds grow tax-deferred and are tax-free if used for qualified disability expenses.  

For purposes of public benefits, up to $100,000 in ABLE account funds will be exempted from the Social Security Income (“SSI”) resource limit. When an ABLE account exceeds $100,000, the beneficiary will be suspended from eligibility for SSI benefits and the beneficiary will no longer receive monthly income, but SSI benefits will be reactivated after the beneficiary spends down the account to under $100,000. Importantly, Medicaid eligibility will remain intact even if the ABLE account exceeds $100,000. 

Pursuant to subparagraph (e) of section 529A, an individual is an eligible individual if (A) the individual is entitled to benefits based on blindness or disability under title II or XVI of the Social Security Act, and such blindness or disability occurred before the date on which the individual attained age 26, or (B) a disability certification with respect to such individual is filed with the Secretary.  

The second certification requirement was relaxed on November 20, 2015 with Treasury Department Notice 2015-81, which indicated that designated beneficiaries can open an ABLE account by certifying, under penalties of perjury, that they meet the qualification standards, including their receipt of a signed physician’s diagnosis. A designated beneficiary must retain that diagnosis and provide it to the program or the IRS upon request. This means that eligible individuals with disabilities will not need to provide the written diagnosis when opening the ABLE account, and ABLE programs will not need to receive, retain, or evaluate detailed medical records. 


Although it is unknown when the final regulations for the administration of ABLE Accounts will be released by the Treasury Department, the absence of final regulations has not deterred many states from working towards implementation. On June 1, 2016, the State of Ohio became the first state to begin accepting ABLE Accounts.  Other states are similarly preparing for the implementation of their programs. Florida and Nebraska appear to be close to having operational programs and both state programs are expected to launch during Summer 2016. 

States have felt encouraged to begin accepting ABLE Accounts prior to final guidance primarily because the Treasury Department and the IRS have indicated that enacting states, and individuals establishing ABLE accounts therein, will not be prejudiced if a specific state’s program does not fully comport to the final regulations when issued.  The Treasury Department and the IRS have further stated that they will provide transitionary relief to states with nonconforming plans and accounts.   

Alternatively, nine states, including Alaska, Iowa, Kansas, Minnesota, Missouri, Nevada, Pennsylvania, Rhode Island, and Illinois, have agreed to work together in the creation of a unified qualified ABLE program (“Nine State Consortium Plan”) with a projected launch date of January 1, 2017. To this point, Illinois has indicated that it will not accept contributions for ABLE accounts until the Internal Revenue Service has issued its final regulations thereon. 


Because section 529A was modeled after Qualified Tuition Programs created under section 529 of the Code, parents and guardians thinking of creating an ABLE Account should conduct an analysis similar to a parent or guardian’s analysis of traditional section 529 plans, paying particular attention to (1) state income tax deductions and credits, along with (2) fees and performance of historical state 529 plans.

For example, according to Ohio’s STABLE Program and the Plan Disclosure Statement found on its website, contributions to Ohio’s STABLE Plan are not deductible for state income tax purposes.  On the other hand, Missouri State Treasurer indicated that ABLE Accounts created under the previously mentioned Nine State Consortium Plan will come with advantages similar to 529 savings programs, stating “for Missourians, those advantages include a [state income] tax deduction of up to $8,000, or $16,000 if married and filing jointly.”  

Similarly, the Illinois State Treasurer, who is anchoring the Nine State Consortium Plan, indicated that “the consortium will manage a tax-advantage investment portfolio similar to those currently used to save for college, such as Illinois’ Bright Start or Bright Directions program.”  Although a state income tax deduction is not currently written into Illinois’ ABLE legislation, according to Bright Directions website, “individuals who file individual Illinois state income tax returns can deduct up to $10,000 per tax year ($20,000 if filing jointly) for their total, combined contributions to the Bright Directions College Savings Program, the Bright Start College Savings Program, and CollegeIllinois! during that tax year.”  

If states, like Illinois and Missouri, enact legislation which allows an income tax deduction for contributions, a significant long-term and short-term tax advantage will occur. In the long-term, funds contributed to an ABLE Account grow tax-deferred and are distributed tax-free at the time of distribution if used for qualified expenses. In the short-term, parents and guardians could contribute the current year's limit ($14,000 in 2016) in order to qualify for the state income tax deduction, and a day later withdraw the funds to pay for qualified disability expenses of the designated beneficiary. Hypothetically, so long as the distribution is taken to pay for qualified disability expenses, the parents will qualify for the state income tax deduction. Most states that have adopted ABLE legislation do not have a waiting period on withdrawals and distributions.

With regard to fees, if you are an Ohio resident, your STABLE account will be charged a monthly Account Maintenance Fee of $2.50. You will also be charged an annual asset-based fee of between 0.19% and 0.34%, depending on which Investment Options you select. If you are not an Ohio resident, your STABLE account will be charged a monthly Account Maintenance Fee of $5.00. You will also be charged an annual asset-based fee of between 0.45% and 0.60%, depending on which Investment Options you select.  

Although the proposed fees for the Nine State Consortium Plan have yet to be released, the Illinois State Treasurer commented that “without the consortium, individual states would lack the market share to ensure low cost and high quality investment options.”  The Treasurer further indicated, “individual states typically do not have enough potential participants to solicit a competitively priced and structured program. However, with states working together and leveraging resources, an economy of scale is created to drive down cost and attract quality investment products.”  The Treasurer went on to state, “by working together with other states, we can accomplish what would be impossible if we were to go it alone.” 

According to Connecticut ABLE Advisory Committee meeting minutes from March 29, 2016, Kerry Alexander, Director of Educational Savings at TIAA-CREF which manages 10 state 529 plans, predicted that with the implementation of the Protecting American from Tax Hikes Act (“PATH Act”) of 2015 and the home state requirement under section 529A being lifted, 12-18 states will likely launch ABLE Programs, however, only 6-8 of these programs will last.  Connecticut as a result, and similar to many other states, has erred on the side of caution and expressed its desire to study the programs as they are implemented and then direct its citizens to the strongest plan on the market. The Connecticut State Treasurer went on to comment that because final regulations have not been released, there is a fear that some state ABLE Programs will struggle to remain in compliance. Ultimately, only time will tell which ABLE Programs will be most successful.  


According to the National Disability Institute, there are 58 million individuals with disabilities in the United States and at least 10% of these individuals would qualify for the creation of an ABLE Account under the current eligibility requirements.  Accordingly, implementation of ABLE Programs across the United States will have an extremely beneficial effect on families raising a child with disabilities regardless of the state a family chooses to establish an account in. Prior to the enactment of the ABLE Act, various types of tax-advantaged savings arrangements and disability trust instruments existed, but none adequately served the goal of promoting savings while also being affordable to middle- and low-income families. With the introduction of ABLE Programs and ABLE Accounts, the Department of the Treasury and the IRS now believe that families raising a child with disabilities will be better equipped to deal with the financial burden placed on them.