Understanding the ABLE Act

1. Understanding the ABLE Act January 08, 2015

2. Presenters • Bradley J. Frigon, CELA, CAP, NAELA President • Bob Brogan, Esq., CELA, CAP, Chair: NAELA ABLE Act Task Force • Mary Alice Jackson, Esq., Member: NAELA ABLE Act Task Force Moderator: David Goldfarb, NAELA Public Policy Manager

3. Understanding the ABLE Act • Part I: History and Overview of the ABLE Act • Part II: Analysis of ABLE Accounts • Part III: State Role and Incorporating ABLE Accounts Into Your Practice • Part IV: Questions and Answers

4. Presenter: Bob Brogan, Esq., CELA, CAP Part I: history and Overview of the ABLE Act

5. Achieving a Better Life Experience? The Achieving a Better Life Experience Act commonly called the ABLE Act has Passed We need to educate families & providers. We can incorporate its use as another tool in our belt of advice for our clients. We need to understand how the Act differs from what the Bill originally promised.

6. This Bill Started as a “Kill All The Lawyers” Legislation Congressional Changes needed to make it affordable gutted it and will leave attorneys in the process

7. Original vs. Final Version • SSI Eligibility Lost if Account Exceeds $100K • Medicaid Eligibility Continues Even if Account Exceeds $100K • Only One ABLE Act Account Permitted Per Person • No Limitation on Age of Beneficiary • Contribution Capped at 529 Limits (up to about $400K in some states) • GAO Estimated Cost: $19B over 10 years • SSI Eligibility Lost if Account Exceeds $100K • Medicaid Eligibility Continues Even if Account Exceeds $100K • Only One ABLE Act Account Permitted Per Person • Disability of Beneficiary Must Be Established by 26 • Annual Contribution Limit of $14K. (State Cap totals also apply) • GAO Estimated Cost: $2Bover 10 years

8. The practical implications of the final modifications were that they morphed the bill from its originally intended panacea for individuals with special needs into a tool of much more limited utility. Also, the final Congressional mark-up only occurred in July 2014, so many groups you speak with may be caught unaware of how restrictive the Act is compared to what they anticipated it would be. Personal Autonomy Was the Unfulfilled Promise As originally drafted, the Act amended Section 529 of the Internal Revenue Code and provided for thresholds tied to that section’s permitted amounts in each state. This meant that, in states with high Section 529 limits, a person could potentially have funded their ABLE Act Account with hundreds of thousands of dollars. Disability advocates wanted a way to provide independence without needing those funds to be in a special needs trust, nor needing the participation of legal counsel, the courts, nor a trustee to create and manage the funds. The anticipated budgetary costs for such an approach exceeded the political will to pass it in its original form.

9. Mechanics of the Account “Qualified Disability Expenses” [Permitted Distributions include] any expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary, including the following expenses: education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other expenses, which are approved by the Secretary under regulations and consistent with the purposes of this section. Contribution must be in cash unless it is an in-kind rollover. Rollover of $14K or less from a prior 529 Account permitted No tax deduction for deposit Growth in the Account accrues with income tax exemption An Unpermitted Distribution will cause the Account to LOSE Its Exempt ABLE Act Status for Medicaid purposes & be subject to a 10% penalty for income tax purposes

10. Eligible Individual For those under 19, you must establish that you were either blind or disabled under the Social Security Act definitions; or under a new Disability Certification criteria set forth in Section 529A(e)(2) of the Act. For those older than 19, you must establish that you were either blind or disabled under the Social Security Act definitions AND establish such blindness or disability occurred before the date on which the individual attained age 26. Each eligible individual may only have ONE ABLE Act account each year.

11. Medicaid Payback Similar to (d)(4)(a) A Huge Issue for ABLE Act Accounts Created For Others Many parents and grandparents of children with special needs have more than one child or grandchild. Arguably, to avoid the payback, a 3P SNT would be a better option over an ABLE Act Account. • Just like a First Party Special Needs Trust, Able Act Accounts must require repayment to the feds and the states any funds remaining in the account on death for benefits received.

12. NAELA will continue to monitor implementation of the Able Act as it is incorporated into the 529 Plans of the various states. There will be a presentation on ABLE at the Summit, and the ABLE Act Taskforce will be working to provide these and other tools for all NAELA members to have at their disposal to answer the many questions they are sure to be getting from families interested in ABLE. One Practical Suggestion: Anticipate that as you go into the communities and educate folks as to what the Act does, especially when telling them how it is more limited than originally drafted, you may be facing groups who were never told about the payback provision, or who did not know about the Age 26 limitations or the $14K annual contribution cap. Be prepared for some push-back. Thousands of folks spent years writing letters generating remarkable co-sponsorship of the bill. They may be very disappointed how much Congress changed it in order to get it passed. Text of the ABLE ACT :https://www.congress.gov/bill/113th-congress/house-bill/647/text

13. Bradley J. Frigon, CELA, CAP PART II: Analysis of ABLE Accounts

14. ABLE Accounts Individuals would be limited to one ABLE account, and total annual contributions by all individuals to any one account for each year cannot exceed the gift tax annual exclusion ($14,000 in 2015).

15. ABLE Accounts Short Summary (cont.) Aggregate contributions to an ABLE account would be subject to an overall limit matching the State limit for Section 529 accounts.

16. ABLE Accounts Short Summary (cont.) Other key features: • Contributions into an ABLE account could be made by any person; • Unlike a contribution to an IRA, contributions to an ABLE account are NOT tax deductible; • Income earned by the accounts would not be taxed; We will discuss exceptions to tax free growth of earnings; • Account withdrawals, including portions attributable to investment earnings generated by the account, for qualified expenses would not be taxable.

17. What Can be Contributed to an ABLE Account (2) CASH CONTRIBUTIONS.—A program shall not be treated as a qualified ABLE program unless it provides that no contribution will be accepted— (A) unless it is in cash, or (B) except in the case of contributions under subsection (c)(1)(C), (rollovers to another beneficiary who is a family member of the designated beneficiary) of an ABLE Account to another disabled beneficiary if such contribution to an ABLE account would result in aggregate contributions from all contributors to the ABLE account for the taxable year exceeding the amount in effect under section 2503(b) for the calendar year in which the taxable year begins.

18. What Can be Contributed to an ABLE Account (cont.) Basically, what this means is that if the total amount of contributions to an ABLE Account in a year exceed the annual gift-tax exemption amount ($14,000 for 2015) then the account no longer qualify as an ABLE Account.

19. Tax Treatment • (1) DISTRIBUTIONS.— ‘‘(A) IN GENERAL.—Any distribution under a qualified ABLE program shall be includible in the gross income of the distributee in the manner as provided under section 72 to the extent not excluded from gross income under any other provision of this chapter. • (B) DISTRIBUTIONS FOR QUALIFIED DISABILITY EXPENSES.—For purposes of this paragraph, if distributions from a qualified ABLE program • (i) do not exceed the qualified disability expenses of the designated beneficiary, no amount shall be includible in gross income, and • (ii) in any other case, the amount otherwise includible in gross income shall be reduced by an amount which bears the same ratio to such amount as such expenses bear to such distributions.

20. Qualified Disability Expenses • Qualified disability expenses are any expenses made for the designated beneficiary related to their disability, including: • education, • housing, • transportation, • employment training and support, • assistive technology and personal support services, health, • prevention and wellness, • financial management and administrative services, • legal fees, • expenses for oversight and • monitoring, funeral and burial expenses.

21. Tax Free Growth and Penalties if Used for Non Qualified Expenses For example, assume a qualified ABLE account with a balance of $100,000 (of which $50,000 consists of contributions) distributes $10,000 to a beneficiary who has incurred $6,000 of qualified disability expenses. Under IRC Section 72, one-half of the distribution ($5,000) is includible in gross income. Under the bill, the $5,000 amount otherwise includible in gross income is reduced by $3,000 ($6,0000/$10,000 multiplied by $5,000) to $2,000. An additional tax of $200 (ten percent of $2,000) is imposed on the distribution.

22. Separate Account Required • A program shall not be treated as a qualified ABLE program unless it provides separate accounting for each designated beneficiary.

23. Limited Investment Direction A program shall not be treated as a qualified ABLE program unless it provides that any designated beneficiary under such program may, directly or indirectly, direct the investment of any contributions to the program (or any earnings thereon) no more than 2 times in any calendar year.

24. Limited Investment Direction (cont.) Accounts would be administered on a voluntary basis by the States in a similar manner as 529 college savings accounts. As with 529 college savings accounts, the range of investment options available for ABLE accounts would be determined by the States.

25. Tax Free Growth and Penalties if Used for Non Qualified Expenses • Contributions are in after-tax dollars but earnings would grow tax-free just like with 529 college savings accounts (Roth style). • Withdrawals must be for qualified expenses or else the earning portion would be subject to regular income tax and a 10% penalty (state penalties could also apply).

26. ADDITIONAL TAX FOR DISTRIBUTIONS NOT USED FOR DISABILITY EXPENSES • ‘‘(A) IN GENERAL.—The tax imposed by this chapter for any taxable year on any taxpayer who receives a distribution from a qualified ABLE program which is includible in gross income shall be increased by 10 percent of the amount which is so includible. • (B) EXCEPTION.—Subparagraph (A) shall not apply if the payment or distribution is made to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. • (C) CONTRIBUTIONS RETURNED BEFORECERTAIN DATE.—Subparagraph (A) shall not apply to the distribution of any contribution made during a taxable year on behalf of the designated beneficiary if— • (i) such distribution is received on or before the day prescribed by law (including extensions of time) for filing such designated beneficiary’s return for such taxable year, and • (ii) such distribution is accompanied by the amount of net income attributable to such excess contribution. Any net income described in clause (ii) shall be included in gross income for the taxable year in which such excess contribution was made

27. ABLE Accounts Must Be Opened in the State Beneficiary Resides Qualified individuals or their families must open ABLE account in the state in which the beneficiary resides or in a state that has a memorandum of understanding with another state to provide accounts. There is a limit of one ABLE account per eligible individual.

28. The ABLE Act – and Gift Taxes The ABLE Act states in part ‘‘(A) CONTRIBUTIONS.— Any contribution to a qualified ABLE program on behalf of any designated beneficiary— ‘‘(i) shall be treated as a completed gift to such designated beneficiary which is not a future interest in property, and ‘‘(ii) shall not be treated as a qualified transfer under section 2503(e).”

29. ‘‘SECTION 102(c.)(1)(C) CHANGE IN DESIGNATED BENEFICIARIES OR PROGRAMS ‘‘(i) ROLLOVERS FROM ABLE ACCOUNTS.—Subparagraph (A) shall not apply to any amount paid or distributed from an ABLE account to the extent that the amount received is paid, not later than the 60th day after the date of such payment or distribution, into another ABLE account for the benefit of the same designated beneficiary or an eligible individual who is a family member of the designated beneficiary. (ii) CHANGE IN DESIGNATED BENEFICIARIES.—Any change in the designated beneficiary of an interest in a qualified ABLE program during a taxable year shall not be treated as a distribution for purposes of subparagraph (A) if the new beneficiary is an eligible individual for such taxable year and a member of the family of the former beneficiary.

30. ‘‘SECTION 102(c.)(1)(C) CHANGE IN DESIGNATED BENEFICIARIES OR PROGRAMS Rollovers from one ABLE account are limited to another to a “family member” as defined in IRS code 152(d)(2)(B).

31. Mary Alice Jackson, Esq. Part III: State Role and Incorporating ABLE Accounts into your practice

32. Qualified Able Programs • 26 U.S.C. 529A – Tax Code; SSA involvement • ABLE Account – established and maintained under a QAP • State sponsored investment accounts f/b/o any “Eligible Individual” [26 USC 529A(e)] • States have the option to participate • Non-participating states can contract with states which have ABLE plan (“contracting state” is the state without a program)

33. State Role: Establish Qualified Able Program • QAP established and maintained by State, Agency, or instrumentality thereof; • Must keep separate accounting for ABLE account in state program • Must provide adequate safeguards to prevent excess contributions • 529 Plan Program Examples: • Texas Prepaid Higher Education Tuition Board • Chaired by State Comptroller • Ohio Tuition Trust Authority (OTTA) • Subset of College Tuition 529 Savings Plan for the state • Education Trust Board of New Mexico • New Mexico Higher Education Department

34. Additional Requirements Plan administrator provide adequate safeguard to insure no excess contributions If more than one account established, only the first account treated as qualified account Contributions of parent/grandparent protected from bankruptcy if made 365 days in advance Contributors may not directly or indirectly direct the investment of contributions May not be used as collateral for loans

35. Regulations and Reporting • Feds to write regulations, including: • Information required to open an ABLE acct • Generally define qualified disability expenses • Relating to disability certifications • Allow for interstate transfers if Beneficiary moves • Trustee of an ABLE account submits notice to the Secretary upon establishment of account • Must contain name and state of residence of beneficiary • Monthly electronic submission of distributions and account balances to SSA

36. Client Pitfalls Payback, payback, payback More than one account established; overfunding Failing to ensure paying qualified disability expense Failing to report to state Loss of SSI relationship to Medicaid Educated choice between alternatives Confusion between SNT and ABLE rules – distribution of cash from ABLE account to benefit on SSI? Protection from fraud, undue influence, exploitation Child support?

37. Planning: Where ABLE Might Fit • Mix and Match – assume $ within range: • Small amounts of 1st party monies • Control for competent beneficiaries • Accumulation of wages over time • Transfer of UTMA accounts at 18 to qualify for SSI/Medicaid • Save for purchase of home or car or wedding expenses.. • Disability has potential to resolve • No available or competent d4C entity

38. Planning: Where ABLE Might Fit Avoid testamentary trust reformation Not quite ready to spend down – waiting for new van to be custom made Low income beneficiary savings plan States with onerous oversight of SNT rules In conjunction with larger SNT or pending litigation result Where $$ are small and clients will never understand SNT rules When rules are promulgated, fleshed out, tried out and the ABLE account option fits the facts

39. Understanding the ABLE Act Part IV: Questions?