Since The ABLE Act created IRC 529A in 2014, 49 states have passed legislation to implement ABLE and ABLE accounts have become popular financial and settlement planning tools for qualifying disabled individuals.
Although the statutory foundation for ABLE programs and ABLE accounts exists within the Internal Revenue Code, ABLE account benefits encompass both income tax and social security related advantages.
ABLE Account Benefits
ABLE accounts are designed to help people with disabilities and their families save and pay for disability-related expenses. Like special needs trusts (SNTs), ABLE accounts represent statutory “safe harbors” that should be considered as part of the settlement strategy for many serious personal injury lawsuits when there is a need to preserve SSI and Medicaid. Distributions from ABLE accounts, including earning, are tax-free if used to pay for “qualified disability expenses.”
Because of their multiple benefits, ABLE accounts are also subject to multiple regulators including the Social Security Administration (SSA), state Medicaid agencies and the Internal Revenue Service. The SSA published updated Program Operation Manual System (POMS) guidance effective March 13, 2020. The IRS issued final ABLE regulations on October 1, 2020 which followed two previous sets of IRS regulations published in 2015 and 2019 respectively.
ABLE Accounts and Structured Settlements
As a prior Independent Life article pointed out, both the IRS final ABLE regulations and the revised ABLE POMS ignore structured settlements and continue to leave the question of whether structured settlements can directly fund ABLE accounts without jeopardizing “means-tested” government benefits unanswered.
The article also identified potential solutions for the “direct funding” issue: a legislative amendment to IRC 529A or, alternatively, an amendment to exclude structured settlement payments from the definition of Supplemental Security Income. Since POMS SI 00830.099 currently provides a list of 59 “unearned income exclusions,” an SSA regulatory solution (adding structured settlement payments as an additional exclusion) is also possible.
Regardless of the “direct funding” issue, structured settlement and settlement planning professionals, however, will now be expected to have a fundamental knowledge of ABLE accounts. A logical place to begin is to read IRC Section 529A as well as the updated ABLE POMS and the IRS Final ABLE Regulations.
An Overview of the IRS ABLE Regulations
As published, the IRS final ABLE regulations total 174 pages and consists of three primary sections:
- Background – providing a federal legislative and regulatory tax history of the ABLE Act.
- Summary of Comments and Explanation of Provisions – addressing more than 200 comments the IRS received in response to the 2015 and 2019 preliminary ABLE regulations and offering the IRS’ rationale for specific provisions of the final regulation, this section is the longest (93 pages) and (in this writer’s opinion) the most informative.
- Final ABLE Regulations – consisting of eight (8) sections totaling 60 pages.
Federal Tax History
The most important developments to note under the federal tax history section of the IRS final ABLE regulations are the amendments to the original ABLE Act which occurred under:
- The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), enacted as part of the Consolidated Appropriations Act, 2016.
- The Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017.
Note: however, that state specific ABLE legislation and ABLE legislative proposals have occurred and can be expected in the future as well as additional future amendments to the ABLE Act itself. For example, Senate Bill 651 would increase from 26 to 46 the age threshold for tax-favored ABLE accounts. Both the National Structured Settlement Trade Association (NSSTA) and the National Association of State Treasurers (NAST) have organized Task Forces to propose improvements to the ABLE Act.
Comments and Explanations
Among the 93 pages discussing over 200 comments and offering IRS rationale for final regulations, none mention structured settlements. The following excerpt (page 50), however, provides one example which, with Independent Life’s analysis, might especially interest structured settlement and settlement planning professionals:"3. Contributions to an ABLE Account
A. Source and nature
“Like the 2015 proposed regulations, the final regulations provide that any person may make contributions to an ABLE account, subject to annual and aggregate contribution limits. One commenter suggested that the final regulations explicitly define the word “person” with reference to the definition of “person” under section 7701...The Treasury Department and the IRS note that the definition of “person” in section 7701 applies throughout the Code unless explicitly provided otherwise or where manifestly incompatible with the statutory intent and is thus applicable in this context. The Treasury Department and the IRS also note that a “person” under section 7701 includes both trusts and tax-exempt organizations. Therefore, the final regulations do not adopt these comments.”
Independent Life Analysis
From this IRS commentary, it would seem apparent that IRC section 130 assignees (qualified and non-qualified), as well as special needs trusts (SNTs) are clearly encompassed by the word “person” and therefore permitted to directly fund ABLE accounts. IRS commentary confirms this interpretation for SNTs on page 56 stating: “[t]he Treasury Department and the IRS note that section 529A does not prevent a transfer from a special needs trust to an ABLE account subject to the annual and aggregate contribution limits of sections 529A(b)(2)(B) and 529A(b)(6).”
However, as previously stated, the IRS final ABLE regulations do not specifically mention structured settlements – or IRC section 130 assignees. And that creates a problem. Unlike Congress, which can legislate across multiple regulatory jurisdictions, the Treasury and the IRS cannot. As the IRS final ABLE regulations state on page 87: “because the Treasury Department and the IRS have no authority with regard to any program administered by the SSA, it is up to the SSA to decide whether or not to adjust SSA’s definitions.”
The “direct funding” issue depends upon whether direct funding of ABLE accounts with structured settlements constitutes Supplemental Security Income (SSI) countable income. And without legislative clarification, the SSA makes that determination. However, as previously stated, the SSA ABLE POMS likewise do not specifically mention structured settlements.
Instead, Section C of the ABLE POMS states: “Examples of payments that might be direct-deposited into an ABLE account, but still are counted as income as they otherwise would be, include:
- “Benefit payments (Title II, Veterans Administration, pensions, etc.); and
- “Mandatory Support payments (child support or alimony).”
The SSA and some state Medicaid agencies have interpreted these examples as analogous to structured settlements. As a result, direct payment of structured settlements into an ABLE account risks disqualifying a beneficiary from receiving Medicaid and other means-tested public benefits.
The most frequently used, current work-around solution is to have the structured settlement payments made to a pass through SNT, with the trustee then issuing payments to the ABLE account. Attorney David Lillesand has suggested another alternative.
For all of the above these reasons, the IRS final ABLE regulations not only represent essential reading in their entirety for structured settlement and settlement planning professionals, they also highlight the need for legislative action to address the “direct funding” issue and thereby expand the use of ABLE accounts by qualified disabled individuals who receive personal injury awards.