Paul L. Caron

Thursday, October 22, 2015

Hoffer: New Section 529A Is Much More Than A Tax Break

Hoffer (2015)TaxProf Blog op-ed:  New Section 529A Is Much More Than a Tax Break, by Stephanie Hoffer (Ohio State):

Passage of the Achieving a Better Life Experience Act of 2014 (the ABLE Act), which created new § 529A, was a watershed moment for many individuals with serious disabilities.  The new law permits states to create tax-preferred savings programs similar to § 529 college savings programs.  To date, thirty-three states have passed enabling legislation and six more have introduced bills.  With proposed regulations and a notice and comment period  already on the books, § 529A is well on its way to becoming a recognized feature of the federal and state income tax landscape.  Interestingly, though, the program’s tax preference is ancillary to its primary benefit, which is preservation of a beneficiary’s eligibility for Medicaid and other government-funded support systems.

Under § 529A, an individual is eligible to open an ABLE account if she has a severe disability with an onset date prior to age 26.  Each eligible beneficiary can have only one account, and while deposits to the account are not deductible for federal income tax purposes, investment earnings inside of the account are excluded from gross income.  Contribution limits apply, so the opportunity for deferral is not endless.  But deferral is not the account’s most important feature.  Rather, it allows beneficiaries to spend their own funds on costs that previously would have disqualified them from Medicaid.  Like other tax-preferred accounts, an ABLE account can make tax-free distributions for sanctioned expenses, or it can make taxable distributions subject to a 10% penalty for non-sanctioned expenses.  Expenses sanctioned by the ABLE Act are referred to as “qualified disability expenses,” and they are defined broadly as “any expenses related to the eligible individual’s blindness or disability.”  They include education, housing, transportation, personal support, health & wellness expenses, and a number of other items listed in the statute.  Proposed regulations note that even everyday expenses may qualify.  For instance, a “smart phone” could be disability-related because it is “an effective and safe communication or navigation aid for a child with autism.”

The real meat of the new law comes not from its tax-preferred expenses, though.  Rather, contributions to, the corpus of, and qualified distributions from an ABLE account are disregarded for the purpose of means tests applicable to government benefits.  This exclusion of ABLE dollars from government means testing is crucial.  Most individuals with qualifying disabilities require social services and supports to live and work in the community, and because of a thin private market, most of these services and supports are coordinated or provided by government programs.  Medicaid, in particular, covers a large portion of these services through programs referred to as “waiver” programs, and its disability-related coverage is available only to individuals who fall below strict income and asset limitations.  Notably, individuals who qualify for Medicaid under the Affordable Care Act (ACA) expansion are not eligible for waiver programs but instead must satisfy the much stricter pre-ACA rules.  By working around income and asset limitations imposed by means testing, § 529A helps individuals with disabilities enter the workplace without losing access to Medicaid waiver programs and other government supports. 

Section 529A is undoubtedly a huge improvement over the law prior to its passage.  It allows individuals with disabilities to cover their own expenses—something that was much more difficult under the old rules—and it helps them save.  In the interest of full disclosure, let me note that I advocated for the law’s passage in my home state of Ohio, and I was thrilled when it passed.  But like any social benefit that takes the form of a tax expenditure, ABLE is subject to substantial criticism on access and distributive justice grounds.  For instance, as I detail in a forthcoming paper, the new law does very little for families who have no liquidity, and because contribution limits apply to the account, it fails to create parity for financial planning between families who have a loved one with a qualifying disability and those without. 

The statutory contribution limits on the account are particularly puzzling in light of the fact that an ABLE beneficiary cannot take advantage of other tax-preferred savings accounts without losing access to Medicaid waiver programs and other disability-related programs.  Because college savings accounts and retirement accounts are countable assets for purposes of means testing, the ABLE account not only must cover disability-related expenses but also must accommodate savings for higher education and the beneficiary’s golden years.  Yet an ABLE account can accept no more than the § 2503 gift exempt amount per year ($14,000 in 2015), and over the account’s lifetime, it can receive no more than the state’s applicable ceiling for contributions to § 529 college savings accounts (typically in the range of $300,000 - $400,000).  Notably, these amounts are not related in any way to the cost of living one’s life with a disability.  And an individual’s need for waiver program services, which are often habilitative in nature, does not necessarily correspond to her ability or desire to attend college, have a productive job, or save for retirement. 

Placing contribution limits on the ABLE account, which protects access to services needed for independence and work, makes very little sense in a society that values those things.  A better solution would have been to remove the account’s contribution limits and adjust the tax deferral potential accordingly.  Or better yet, Congress could have moved away from the public/private partnership required to make the ABLE account work by crafting a fully public solution.  Ending means testing of access to disability-related services would address impediments present in a society created by and for typically-abled individuals.  It would provide assistance families who may have assets, like a home, but no liquidity for savings.  By cutting across the income spectrum, it would go further toward inclusion of individuals with disabilities in the community and workplace, and it may even save the government some money through the disaggregation of disability-related services and other government supports.  So while the ABLE Act was a tremendous step forward for some individuals with disabilities, more work remains to be done.

Scholarship, Tax | Permalink


Thanks for the article; but, as you point out, Gen 1 is not going to be of much help. The poor have Medicaid. For the wealthy, a carefully drafted "special needs" trust is the answer. And then, $14k a year will not benefit the middle, even for the ones who can afford it, to any great degree.

Maybe Gen 2 will work.

However, the real answer is to fix Medicaid's spend-down rules, which only punishes those in the middle.

Posted by: Dale Spradling | Oct 23, 2015 7:39:36 AM

Thank you, Paul. The law provides two options. A beneficiary who establishes an account in one state and then moves to another may either retain the original account despite having moved, or he can roll the corpus of the old account over into a new account in his new state of residence. So once opened, the account is portable.

Posted by: Stephanie Hoffer | Oct 22, 2015 2:08:16 PM

Great article! It answered several questions that I had. I have a brother with Down's Syndrome and I have been following the progress of the Ohio 529A program for several months. One lingering question that I have pertains to portability. As our parents age my brother is likely to relocate to Virginia or Florida to be near a sibling. What impact would this have on his Ohio 529A plan?

Posted by: Paul D. Allen | Oct 22, 2015 9:01:08 AM