IRS Releases Proposed Regulations on Changes to the Limits on Contributions to ABLE Accounts

The IRS released proposed regulations regarding changes to limits on contributions to Achieving a Better Life Experience (ABLE) accounts. The new proposed regulations seek to clarify changes made to ABLE account rules by the Tax Cuts and Jobs Act (TCJA).

The proposed regulations clarify rules on:

• Additional contributions by an employed designated beneficiary before 2026
• The definition of poverty line for additional contributions before 2026 and
• The return of excess contributions to a designated beneficiary.

The TCJA made major changes to ABLE accounts.  Those changes allowed eligible individuals to put more money in to their ABLE accounts and allowed them to roll money from their qualified tuition programs (529 plans) into their ABLE accounts.  It also allowed certain contributions made to ABLE accounts by low and moderate income workers eligible for the Saver’s Credit.

ABLE accounts are established to help people with disabilities pay for qualified disability expenses, such as housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services.  None of these expenses is covered by Medicaid or other government programs.  It allows the beneficiary to save money in a tax deferred account and can be withdrawn tax-free if used for qualified expenses.

Prior to the changes by the TCJA, contributions up to $15,000, the annual gift-tax exclusion amount, could be made to an ABLE account for the designated beneficiary.  After the TCJA, if the beneficiary works, the beneficiary can also contribute part or all of their income to their ABLE account. For years 2018 through 2025, the additional contribution made can be the lesser of (1) his or her compensation includible in gross income or (2) the federal poverty line for a one-person household for the year.  Also, the employed designated beneficiary, or the person acting on his or her behalf is solely responsible for seeing that the requirements for the additional contributions are met. 

The proposed regulations also clarified the definition of the applicable poverty line for determining the limit on additional contributions and indicated that the poverty line used is based on the beneficiary’s residence and not the state where the ABLE account is established.

And finally, the proposed regulations indicated that it is the responsibility of the employed designated beneficiary to identify and request the return of the contributions that exceed the additional contribution limits in 2018 to 2025.  The return of the contributions must be made by the due date of the return of the beneficiary, including extensions.