Notice 2015-81, the final regulations provide that a qualified ABLE program may

establish entitlement with a certification, under penalties of perjury, by the individual establishing the ABLE account that the designated beneficiary of that account is eligible for benefits under title II or XVI of the Social Security Act and that the blindness or disability that qualifies the designated beneficiary for those benefits occurred before the date on which he or she attained age 26.

The other method of satisfying the definition of an eligible individual is by obtaining a disability certification and filing it with the Secretary. Consistent with section 529A(e)(2)(A), the 2015 proposed regulations provided that a disability certification is a certification deemed sufficient by the Secretary, signed under penalties of perjury, that an individual has a severe physical or mental impairment that can be expected to result in death or that has lasted (or can be expected to last) for a continuous period of not less than 12 months, or that the individual is blind, and that the blindness or impairment occurred before age 26, which certification is accompanied by a copy of a physician’s diagnosis relating to the blindness or impairment. One commenter asked that the final regulations clarify that a disability certification that meets the requirements of the final regulations will be “deemed sufficient by the Secretary.” The Treasury Department and the IRS agree, and the final regulations affirm that a certification that meets the requirements of a disability certification as set forth in the final regulations is sufficient to establish the requisite level of physical or mental impairment described in § 1.529A-2(e)(2).

The final regulations, like the 2015 proposed regulations, also provide that a disability certification is deemed to be filed with the Secretary once the qualified ABLE program has received the disability certification or a disability certification is deemed to have been received under the rules of the qualified ABLE program, about which receipt the qualified ABLE program must file information with the IRS.

As was stated in Notice 2015-81, numerous commenters, including States and potential qualified ABLE program administrators, expressed concerns about their

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responsibilities and potential liabilities for receiving and safeguarding medical information contained in a signed diagnosis, particularly because they do not anticipate having the expertise or ability to evaluate that medical information. The commenters emphasized that qualified ABLE programs would incur unmanageable costs and burdens in trying to comply with applicable laws imposing system and other requirements on those in possession of medical records, as well as in implementing systems to receive and store paper documentation. The commenters also expressed the concern that, if these costs and burdens are not minimized, some States might not proceed with the implementation of qualified ABLE programs for their residents. The commenters recommended that a qualified ABLE program be permitted to establish an ABLE account on the basis of a certification by the person establishing the ABLE account, signed under penalties of perjury, that the individual who is to be the designated beneficiary of the account has a qualifying condition and otherwise satisfies the definition of an eligible individual, and that a diagnosis signed by a physician regarding the relevant impairment or impairments has been obtained. To facilitate the establishment of qualified ABLE programs by the States, commenters requested interim guidance addressing the issue.

After consideration of these comments, the Treasury Department and the IRS issued Notice 2015-81, stating that a certification under penalties of perjury that the individual (or the individual’s agent under a power of attorney or legal guardian of the individual) has a signed physician’s diagnosis, and that the signed diagnosis will be retained and provided to the qualified ABLE program or the IRS upon request, would be adequate under the final regulations to satisfy the requirements pertaining to the filing of a disability certification to establish eligibility for an ABLE account.

One commenter stated that the degree of flexibility given to each state with respect to the specific documentation that will need to be filed to establish proof of eligibility will place an undue burden on the process and will create confusion within the disability community. This commenter and others asked that the IRS provide standard forms to document eligi

bility. Another commenter recommended that the final regulations establish a maximum amount of required information and documentation to make it easier for those attempting to establish an ABLE account to ensure they have everything required. Other commenters asked that qualified ABLE program administrators be required to collect only information concerning the basis of eligibility and a statement that the blindness or disability occurred before age 26. These commenters recommended the use of an application with “check-off” boxes allowing the applicant to indicate whether his or her eligibility for an ABLE account is based on SSI eligibility, SSDI eligibility, or the filing of a disability certification. The commenters would require the eligible individual to maintain records and documentation supporting the category of eligibility indicated on the application form, and to sign the application form under penalties of perjury.

The Treasury Department and the IRS understand and appreciate the benefits of a consistent and predictable disability documentation process, while recognizing that a qualified ABLE program should be accorded the flexibility to meet its own particular needs. Therefore, consistent with Notice 2015-81, the Treasury Department and the IRS added a safe harbor to the final regulations. The safe harbor provides that a qualified ABLE program may establish that an individual is an eligible individual if the individual (or the person with authority to establish that individual’s account) certifies under penalties of perjury: (i) the basis for the individual’s status as an eligible individual under § 1.529A-1(b)(8) (entitlement for benefits based on blindness or disability under title II or XVI of the Social Security Act, or a disability certification); (ii) that the individual is blind or has a medically determinable physical or mental impairment as described in the final regulations; (iii) that such blindness or disability occurred before the date on which the individual attained age 26 (and, for this purpose, an individual is deemed to attain age 26 on his or her 26th birthday); (iv) if the basis of the individual’s eligibility is a disability certification, that the individual has obtained and will retain a copy of the written diagnosis relating to the disability, accompanied by the name and address of the diagnosing physician

and the date of the written diagnosis; (v) that the individual has provided the applicable diagnostic code from those listed on Form 5498-QA that applies with respect to the designated beneficiary’s disability; (vi) that the person establishing the account is the individual who will be the designated beneficiary of the account or is the person authorized under § 1.529A-2(c) (1)(i) to establish the account; and (vi) if required by the qualified ABLE program, that the individual has provided the information from a physician as to the categorization of the disability that may be used to determine, under the particular State’s program, the appropriate frequency of required recertifications.

A few commenters, observing that persons with developmental disabilities are often diagnosed by licensed psychologists, clinical therapists, or certified vocational rehabilitation counselors, requested that the final regulations authorize such professionals to sign the individual’s diagnosis. While the Treasury Department and the IRS understand the commenters’ concerns, the final regulations do not incorporate these suggestions. Section 529A(e)(2)(A)(ii) requires the individual’s diagnosis to be signed by a physician meeting the criteria of section 1861(r)(1) of the Social Security Act, which means a doctor of medicine or osteopathy, a doctor of dental surgery or dental medicine, and, for some purposes, a doctor of podiatric medicine, a doctor of optometry, or a chiropractor.

In the case of a program-to-program transfer, several commenters requested that the final regulations allow the recipient qualified ABLE program to assume at the time of the transfer (in reliance on the obligations of the transferor program) that the designated beneficiary of the recipient ABLE account is an eligible individual. The final regulations do not incorporate this suggestion because the Treasury Department and the IRS concluded that the obligation of a qualified ABLE program to establish an account only for an eligible individual is not delegable. Thus, the same requirements for establishing an ABLE account apply, regardless of whether the account is funded initially with a program-to-program transfer or otherwise, including permitting a qualified ABLE program to allow the designated benefi

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ciary to certify that he or she is an eligible individual.

E. Disability standard

As directed in the ABLE Act, the Treasury Department and the IRS consulted with the Commissioner of Social Security in developing the medical standards relating to disability certifications and determinations of disability. The final regulations, like the 2015 proposed regulations, provide that a person signing (under penalties of perjury) a disability certification with respect to an individual is certifying that such individual has a medically determinable physical or mental impairment that results in marked and severe functional limitations and that can be expected to result in death or has lasted or can be expected to last for a continuous period of not less than 12 months, or is blind. The disability certification also is a certification that such blindness or disability occurred before the date on which the individual attained age 26.

Consistent with section 529A(e)(2)(A), the 2015 proposed regulations defined the phrase “marked and severe functional limitations” as the standard of disability in the Social Security Act for children claiming benefits under the SSI program based on disability, but without regard to the age of the individual. Citing 20 CFR 416.906, the 2015 proposed regulations clarified that this definition refers to a level of severity of an impairment that meets, medically equals, or functionally equals the listings in the Listing of Impairments in appendix 1 of subpart P of 20 CFR part 404. An impairment is medically equivalent to a listing if it is at least equal in severity and duration to the severity and duration of any listing. An impairment that does not meet or medically equal any listing may result in limitations that functionally equal the listings if it results in marked limitations in two domains of functioning or an extreme limitation in one domain of functioning, as explained in 20 CFR 416.926a. Several commenters commended the proposed regulation’s use of this disability standard, saying that it achieves the intended statutory result.

One commenter questioned whether physicians would accurately interpret and apply the standard, and asked wheth

er training for physicians would be provided. The Treasury Department and the IRS note that, while the physician is to provide the diagnosis, it is the designated beneficiary or other person establishing the ABLE account who is responsible for certifying satisfaction of the standard of medical disability, so no special training of physicians by the SSA, the Treasury Department, or the IRS is contemplated.

A few commenters noted that the definition of “marked and severe functional limitations” under 20 CFR 416.906 includes the statement that “if you file a new application for benefits and you are engaging in substantial gainful activity, we will not consider you disabled.” These commenters questioned whether that statement suggests that a person is disqualified from having an ABLE account if he or she is gainfully employed. The Treasury Department and the IRS agree that the citation to the SSI regulation, without any further clarification, may lead to confusion. Therefore, the final regulations adopt the proposed regulation’s definition of “marked and severe functional limitations,” but also provide that the standard of disability under section 529A is applied without regard to either the individual’s age or whether the individual is engaged in substantial gainful activity.

Some commenters requested that the final regulations provide that a person who does not meet the definition of an eligible individual before attaining age 26, but who subsequently will develop blindness or a disability of sufficient severity to satisfy that definition as a result of either a genetic disorder present at birth or a condition that is diagnosed before attaining age 26 may qualify as an eligible individual. One commenter asserted that such an individual should be allowed to prepare for a known future disability by establishing an ABLE account. The Treasury Department and the IRS also have considered whether such an individual should be able to qualify as an eligible individual once the disorder or condition causes blindness or a disability of sufficient severity. While sympathetic to this request, the Treasury Department and the IRS concluded that the statutory requirement that the blindness or disability have “occurred” before age 26 is not consistent with the broader interpretations requested

or considered. There is no indication in the statute or legislative history of the ABLE Act that Congress intended to permit what could be a significant expansion of the definition of an eligible individual by including a person who may never develop the disability or whose condition is cured or significantly alleviated by subsequent medical discoveries. Accordingly, the final regulations do not incorporate this suggested change.

The 2015 proposed regulations provided that a condition listed in the “List of Compassionate Allowances Conditions” maintained by the SSA (currently at www. socialsecurity.gov/compassionateallowances/conditions.htm) would be deemed to meet the requirements of a condition sufficient for a disability certification without a physician’s diagnosis if the condition was present before the date on which the individual attained age 26. In the preamble to the 2015 proposed regulations, the Treasury Department and the IRS requested comments on other conditions that might also be deemed sufficient for a disability certification without the need of a physician’s diagnosis.

Some commenters proposed that a few additional specific conditions should be treated similarly as qualifying disabilities. One commenter suggested that three additional types of spinal muscular atrophy, a permanent disability that can occur after age 26, should so qualify, in addition to the two types already on the List of Compassionate Allowances Conditions. Another commenter suggested that polymicrogyria qualifies under certain conditions, while yet another commenter pointed out that autism is typically a lifelong condition. One commenter suggested that the regulations incorporate what was described as the “non-exhaustive list of impairments presumed to be disabilities under the updated EEOC Title I regulations of the Americans with Disabilities Act (76 FR 16978).” While sympathetic to the suggestions of these commenters, the Treasury Department and the IRS are not qualified to make the kind of decisions that are made by the SSA when compiling the List of Compassionate Allowances Conditions. For that reason, the final regulations adopt the provision in the 2015 proposed regulations without change. The Treasury Department and the IRS note

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that the SSA periodically updates the List of Compassionate Allowances Conditions, so these commenters may want to consider approaching the SSA with their requests. The Office of Disability Policy maintains a website and e-mail box for soliciting and evaluating compassionate allowance condition submissions from the public at https://www.ssa.gov/compassionateallowances/submit_potential_cal. html.

F. Recertification

The 2015 proposed regulations provided that a qualified ABLE program could choose different methods of ensuring a designated beneficiary’s status as an eligible individual. That might include, for example, imposing different periodic recertification requirements for different types of impairments, taking into consideration whether an impairment is incurable and the likelihood that a cure may be found. The 2015 proposed regulations explained that, while a qualified ABLE program generally must require an annual recertification that the designated beneficiary continues to satisfy the definition of an eligible individual, it may deem an annual recertification to have been provided in appropriate circumstances. For example, a qualified ABLE program could deem a one-time certification by an individual that he or she has a permanent disability as meeting the annual recertification requirement in subsequent years. In other cases, a program could require the same evidence that is required of an initial disability certification, or could incorporate some other method of ensuring that the designated beneficiary continuously qualifies as an eligible individual.

While most commenters supported the flexibility accorded qualified ABLE programs to impose different periodic recertification requirements for different types of impairments, several commenters recommended that there be as much uniformity among qualified ABLE programs as possible. Some of these commenters asked that the final regulations identify those illnesses or disabilities for which there is no known cure and then excuse them from any recertification requirement. Many of these commenters requested that the form used to establish

the ABLE account contain a box for the diagnosing physician to check if the disability is unlikely to change within five years, and require recertification only every five years thereafter. Other commenters suggested that there be a uniform certification form with which a physician could certify that an individual’s impairment is unlikely to improve, in which case the certification would be effective for a certain number of years (for example, 5 years or longer), after which time a new certification form could be filed for an additional number of years. Some commenters suggested that the certification of a “permanent,” “incurable,” or “severe and sustained” disability should be effective for a longer period of time than the certification of a “moderate” or “curable” disability, or that the disability be classified as “severe”, “moderate”, or “mild” with a different recertification frequency for each, and that those classifications would be certified when the account is established. Some commenters suggested that there be a presumption of continued eligibility until the designated beneficiary notifies the qualified ABLE program of his or her ineligibility. Other commenters suggested that recertification be waived as long as the designated beneficiary’s SSDI or SSI benefits qualify him or her for an ABLE account, while still other commenters requested that the annual recertification requirement be waived for anyone with an incurable illness or disability. One commenter suggested that the IRS partner with the SSA to maintain lists of recertification criteria. Other commenters pointed out that recertification may be too burdensome.

The final regulations retain the rule set forth in the 2015 proposed regulations that a determination of eligibility must be made annually unless the qualified ABLE program adopts a different method of ensuring a designated beneficiary’s continuing status as an eligible individual. This gives each qualified ABLE program broad discretion to devise its own recertification methods. This provision is broad enough to permit many of the approaches suggested by commenters, other than the suggestions regarding the elimination of the recertification requirement entirely. The final regulations specify that a permissible method may include a certification by the

designated beneficiary under penalties of perjury.

The final regulations, like the 2015 proposed regulations, also provide that even if a qualified ABLE program imposes an enforceable obligation on the designated beneficiary or other person with signature authority over the ABLE account to report promptly any changes in the designated beneficiary’s condition that would disqualify the designated beneficiary as an eligible individual, the qualified ABLE program may provide that a certification is valid until the end of the taxable year in which the change in the designated beneficiary’s condition occurred. One commenter asked for clarification that a qualified ABLE program that adopts this approach will not be deemed to be noncompliant with the annual recertification requirement for any year in which the designated beneficiary is no longer an eligible individual but fails to report a change in status to the program. The final regulations confirm that a qualified ABLE program that is compliant with the rules regarding recertification will not cease to be a qualified ABLE program if the designated beneficiary fails to report a change in status.

G. Change in eligible individual status

The Treasury Department and the IRS recognize that there will be instances when an individual’s impairment abates to the point that the individual no longer qualifies as an eligible individual, either temporarily or permanently. The 2015 proposed regulations provided that an existing ABLE account will remain the ABLE account of the designated beneficiary even during years in which the designated beneficiary does not qualify as an eligible individual. However, the 2015 proposed regulations also provided that, beginning with the year immediately following the year in which that qualification ceases, no additional contributions may be made into that ABLE account. The final regulations preserve these rules. However, the 2015 proposed regulations provided that, beginning with that same year, no amounts incurred would constitute a qualified disability expense, regardless of the nature of that expense. As explained in the following paragraphs, the final regulations continue to provide that, in this

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event, no expense will constitute a qualified disability expense, but further provide that this rule applies at all times when the designated beneficiary does not qualify as an eligible individual, including during the portion of the year remaining after that eligibility has been lost.

One commenter asked whether the ABLE account could be used to pay for medical treatments that may be necessary to sustain the designated beneficiary’s improved condition. Another commenter asked whether distributions from the ABLE account to pay for medically necessary procedures of a designated beneficiary who is not an eligible individual are subject to tax. One commenter suggested that an ABLE account should be closed if the designated beneficiary of the account no longer has the qualifying blindness or disability, and that the designated beneficiary then should be subjected to long term capital gains tax on the income portion of any remaining funds in that ABLE account, possibly payable over more than a single year.

A condition in remission subsequently can become active, so it is possible that the designated beneficiary could again satisfy the definition of an eligible individual in the future. In addition, even though a designated beneficiary may fail to qualify as an eligible individual for purposes of section 529A, that person still may be relying on public benefits that could be lost if the ABLE account were to lose its special exclusion under section 103 of the ABLE Act. For these reasons, the Treasury Department and the IRS concluded that it is appropriate to preserve the ABLE account for the benefit of the designated beneficiary, even after the designated beneficiary fails to qualify as an eligible individual, in case he or she once again becomes an eligible individual. Therefore, like the 2015 proposed regulations, the final regulations provide that, for any year during which a designated beneficiary no longer satisfies the definition of an eligible individual, his or her ABLE account remains an ABLE account, to which all of the non-tax provisions of the ABLE Act continue to apply, and to which all of the tax provisions continue to apply except as otherwise provided with regard to contributions and the tax treatment of distributions. The ABLE account does not

have to terminate, and there is no deemed distribution of the account balance for tax purposes. Beginning on the first day of the designated beneficiary’s first taxable year following the year in which the designated beneficiary no longer satisfies the definition of an eligible individual, no contributions to the ABLE account may be accepted by the qualified ABLE program. In addition, expenses will not be qualified disability expenses if they are incurred at a time when a designated beneficiary is neither an individual with a disability nor blind within the meaning of § 1.529A-1(b) (8)(i) or § 1.529A-2(e)(1)(i), even if the individual remains an eligible individual through the end of the year in which the individual ceases to be disabled or blind. Therefore, although distributions still may be made from an ABLE account to pay the expenses of the designated beneficiary incurred during periods when the designated beneficiary is no longer blind or disabled, none of those expenses are qualified disability expenses and thus the earnings included in those distributions are includible in the gross income of the designated beneficiary. If the designated beneficiary subsequently requalifies as an eligible individual, contributions to the designated beneficiary’s ABLE account again will be allowed, subject to the annual contribution limit under section 529A(b)(2)(B) and the aggregate contribution limit under section 529A(b)(6), and expenses again may constitute qualified disability expenses.

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. Another commenter requested clarification that contributors to an ABLE account may include charitable organizations described in section 501(c)(3) of the Code, as well as special needs trusts as described in 42 U.S.C. 1396p(d)(4) that can be excluded from a person’s assets for purposes of eligibility for certain Medic

aid benefits. 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. Accordingly, an express statement in the regulatory text is not necessary to achieve the commenter’s purpose. Therefore, the final regulations do not adopt these comments.

Like the 2015 proposed regulations, the final regulations provide that all contributions to an ABLE account must be made in cash, and that a qualified ABLE program may accept contributions in the form of cash, check, money order, credit card payment, electronic transfer, or other similar method of payment. Many commenters urged that the final regulations continue to allow a qualified ABLE program to accept contributions by credit card, and the final regulations do so. One commenter asked that the final regulations clarify that a qualified ABLE program may accept payroll deductions. The final regulations accordingly clarify that cash contributions may be made as after-tax payroll deductions.

One commenter asked that the final regulations clarify that a qualified ABLE program may accept contributions directly from a corporation, and that employers may contribute to the ABLE accounts of their employees through matching contribution programs. The Treasury Department and the IRS note that the final regulations provide that a qualified ABLE program may accept contributions in the form of after-tax payroll deductions and do not prohibit other forms of contributions from a corporation or employer. However, it is important to remember that contributions made by an employer to the ABLE account of its employee or of a family member of the employee are subject to the rules governing the taxation of compensation. The final regulations also clarify that the rules concerning the tax treatment of contributions to an ABLE account apply only for purposes of section 529A. No inference is intended with respect to the tax treatment of amounts contributed to ABLE accounts for other

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purposes of the Code, such as the tax treatment of compensation.

Several commenters requested that certain contributions be allowed without regard to other applicable tax provisions. For example, one commenter suggested that a parent be allowed to withdraw assets from his or her IRA and contribute the assets to his or her child’s ABLE account free of income tax on the IRA withdrawal. Although there is no limit on the permissible sources of contributions to an ABLE account, the regulatory authority of the Treasury Department and the IRS does not extend to negating the tax consequences that otherwise are applicable to amounts used to make contributions.

B. Annual and aggregate contribution limits

Consistent with section 529A(b)(2) (B), the 2015 proposed regulations provided that the total amount of contributions to an ABLE account during the designated beneficiary’s taxable year (excluding rollovers and program-to-program transfers) could not exceed the section 2503(b) gift tax annual exclusion amount ($14,000 in 2015, 2016, and 2017 and $15,000 in 2018, 2019, and 2020) (annual contribution limit). Although section 529A was effective for taxable year 2015, no qualified ABLE programs were operational in 2015. Several commenters asked that the final regulations allow a “make-up” contribution for 2015 to be made in 2016, so that, for 2016 only, the total amount that may be contributed to an ABLE account is $28,000. Setting the 2016 contribution limit at $28,000, these commenters said, would effectuate Congressional intent to enable eligible individuals to benefit from ABLE accounts beginning in 2015.

The final regulations do not incorporate this suggestion as the statute is explicit with regard to the annual contribution limit and does not permit a carryover. Section 529A(b)(2) states that, except in the case of a rollover, a qualified ABLE program may not accept a contribution to an ABLE account that would result in aggregate contributions from all contributors to the account for the taxable year exceeding the Federal gift tax exclusion amount in effect under section 2503(b) for that year.

One commenter asked that the final regulations expressly state that a change in the designated beneficiary of an ABLE account to a member of the family of the designated beneficiary effectuated without a rollover or program-to-program transfer is not a contribution subject to the annual contribution limit. The final regulations adopt this suggestion. The Treasury Department and the IRS view such a change of the designated beneficiary as the equivalent of a rollover or program-to-program transfer. Therefore, the annual contribution limit does not apply as long as the successor designated beneficiary is both an eligible individual and a sibling, stepsibling, or half-sibling of the designated beneficiary (collectively referred to as siblings).

Section 529A(b)(2) provides that, for purposes of applying the annual contribution limit imposed by that section, rules similar to the rules of section 408(d)(4), determined without regard to subparagraph (B) thereof, apply. Section 408(d) (4) generally provides that a distribution from an IRA is not taxable if it is the return of a contribution made during the taxable year, provided that the return of the contribution is received by the IRA owner on or before the due date (including extensions) of his or her income tax return for that year, and if the amount returned includes the earnings on the amount of the contribution. However, the earnings portion of the distribution is includible in the recipient’s gross income for the year in which the contribution was made.

One commenter suggested that the reference to section 408(d)(4) should be construed to calculate both the annual contribution limit and the aggregate contribution limit by not counting toward either limit the amount of each contribution withdrawn during that same year for qualified disability expenses. Under this view, total permissible contributions during any year would equal the sum of the annual contribution limit (currently $15,000) and the total withdrawals during that year for qualified disability expenses, thus giving the designated beneficiary the ability to save amounts in the ABLE account in excess of what is needed for current expenses.

The final regulations do not incorporate this suggestion. The Treasury Depart

ment and the IRS concluded that the mere reference in section 529A(b)(2) to section 408(d)(4) cannot be read to increase the permissible annual contributions by the amounts distributed out of the ABLE account in the same year. The reference to section 408(d)(4) provides a mechanism for correcting the receipt of a contribution in excess of the annual contribution limit. Under section 4973(h)(2), an excess annual contribution timely returned in accordance with the reference to section 408(d)(4) in section 529A(b)(2) is treated as an amount not contributed, and therefore avoids the imposition of a six percent excise tax under section 4973 on excess annual contributions that are not timely returned.

One commenter suggested that the final regulations should allow an individual’s benefits under the SSI program to be directly deposited or otherwise transferred to the ABLE account of which the individual is the designated beneficiary, without being counted against the annual contribution limit. Another commenter suggested that, in applying the annual contribution limit, the final regulations should disregard the amount of certain other items deposited into an ABLE account, such as the payment of retroactive SSDI benefits, the proceeds from a personal injury lawsuit, or a family inheritance. Noting that large sums of money received as a result of a lawsuit settlement or inheritance are often placed in special needs trusts, the commenter also recommended that the final regulations permit transfers from a special needs trust to an ABLE account. Another commenter asked that the final regulations not treat any earned income of the designated beneficiary that is deposited into his or her ABLE account as a contribution subject to the annual contribution limit because such a transfer is not treated as a completed gift for Federal tax purposes.

The final regulations do not incorporate these suggestions. The statute does not differentiate between contributions based on their nature or source. The Treasury Department and the IRS concluded that the statute is properly interpreted to include all amounts contributed to an ABLE account for the benefit of the designated beneficiary (other than a rollover, program-to-program transfer, or pursuant to a change of designated beneficiary) as

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a contribution subject to the annual limit, regardless of the source of the funds contributed. The 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).

The 2015 proposed regulations provided that a qualified ABLE program is required to provide adequate safeguards to prevent aggregate contributions on behalf of a designated beneficiary in excess of the limit established by the State on contributions to its qualified tuition program under section 529(b)(6) (aggregate contribution limit). The 2015 proposed regulations included a safe harbor providing that a qualified ABLE program satisfies the aggregate contribution limit requirement if it refuses to accept any additional contribution to an ABLE account once the balance in the account reaches that limit. Once the account balance falls below the aggregate contribution limit, additional contributions again may be accepted up to the aggregate contribution limit. The Treasury Department and the IRS concluded that this safe harbor and the permissible recommencement of contributions is appropriate based on the nature and purposes of a qualified ABLE program.

Most commenters were supportive of the proposed safe harbor, which is the same safe harbor in the proposed regulations addressing the cumulative limit on qualified tuition accounts under section 529. Some commenters also noted that the safe harbor would be consistent with the way most States administer their 529 programs, which would lower administrative costs. One commenter observed that the safe harbor avoids the disparities inherent in focusing solely on contributions, which penalizes savers experiencing financial market downturns while favoring those experiencing financial gains. Some commenters requested clarification that the safe harbor could be applied each time the account balance reaches the applicable limit, and is not limited to just one application. The final regulations, like the 2015 proposed regulations, provide that, once the account balance falls below the aggregate contribution limit, additional contributions again may be accepted, again subject to the aggregate contribution limit.

One commenter, however, expressed concerns that the proposed safe harbor, by substituting the account balance for the aggregate contribution limit, renders an ABLE account less attractive as a savings vehicle for the designated beneficiary. The commenter noted that earnings on contributions to the account may cause the account balance to reach the aggregate contribution limit long before aggregate contributions to the account rise to that limit. Therefore, the commenter recommended replacing the safe harbor in the 2015 proposed regulations with a sixmonth grace period during which a qualified ABLE program could identify and disgorge excess aggregate contributions.

The Treasury Department and the IRS are also concerned, however, with the opposite situation in which total contributions have reached the aggregate contribution limit but distributions and/or decreases in market value have reduced the account balance to below the aggregate contribution limit. In that case, without the safe harbor, all further contributions would be prohibited. Accordingly, the Treasury Department and the IRS continue to view the proposed safe harbor as potentially more favorable to the designated beneficiary than an approach focused on cumulative contributions. In addition, some commenters predicted that the safe harbor would reduce the administrative costs of qualified ABLE programs. Therefore, the final regulations retain the safe harbor provision but clarify that the safe harbor may be applied an unlimited number of times and that, once contributions recommence, they are subject to both the annual and aggregate contribution limits. The final regulations also change a cross-reference that caused some confusion among commenters.

The aggregate contribution limit is likely to be different for each qualified ABLE program because that limit is determined by the limit established by each particular State for contributions to its qualified tuition program under section 529(b)(6). One commenter asked that the final regulations permit rollovers and program-to-program transfers of amounts in excess of the transferee ABLE program’s aggregate contribution limit if such amount does not exceed the aggregate contribution limit of the transferor ABLE

program, or, if it does, that it exceeds that limit solely because of investment growth. The commenter suggested that the transferee ABLE program would reject additional contributions until the account balance falls below the aggregate contribution limit set by the transferee ABLE program. The final regulations adopt this suggestion and exclude rollovers, program-to-program transfers, and changes to a new designated beneficiary who is an eligible individual and a sibling of the former designated beneficiary for purposes of the aggregate contribution limit, provided that subsequent contributions are prohibited either under the general rule or the safe harbor. The Treasury Department and the IRS view this exclusion as consistent with the account balance safe harbor.

C. Additional contribution limit and applicable poverty line

Consistent with the TCJA amendment to section 529A(b)(2)(B), the 2019 proposed regulations provided that an employed or self-employed designated beneficiary described in section 529A(b) (7) may contribute to his or her ABLE account the lesser of the designated beneficiary’s compensation for the taxable year or an amount equal to the poverty line for a one-person household for the calendar year preceding the calendar year in which the designated beneficiary’s taxable year begins.

Section 529A(b)(7)(B) provides that the term poverty line referred to in section 529A(b)(2)(B)(ii) has the same meaning given to that term by section 673 of the Community Services Block Grant Act (42 U.S.C. 9902). Consistent with the 2019 proposed regulations, the final regulations provide that the poverty line in section 529A(b)(7)(B) is to be determined by using the poverty guidelines updated periodically in the Federal Register by the U.S. Department of Health and Human Services under the authority of 42 U.S.C. 9902(2). Those guidelines vary based on locality. Specifically, there are three separate guidelines: (1) the contiguous 48 states and the District of Columbia, (2) Alaska, and (3) Hawaii. The 2019 proposed regulations provided that a designated beneficiary’s contribution limit is to be determined using the poverty guideline

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applicable in the state of the designated beneficiary’s residence.

One commenter suggested that the final regulations should provide that the poverty line on which the designated beneficiary’s contribution limit is based should be uniform throughout the United States to avoid both confusion and an incentive for a move to a state with a higher poverty line. The Treasury Department and the IRS have concluded that the poverty guideline that most closely reflects the employed designated beneficiary’s cost of living is the most relevant for determining the contribution limit, and that a move to a state with a higher poverty line generally also would subject the designated beneficiary to a higher cost of living, thus effectively negating any incentive to move. Therefore, consistent with the 2019 proposed regulations, the final regulations provide that a designated beneficiary’s contribution limit is determined using the poverty guideline applicable in the state of the designated beneficiary’s residence, and that an employed or self-employed designated beneficiary described in section 529A(b) (7) may contribute to his or her ABLE account the lesser of the designated beneficiary’s compensation for the taxable year or an amount equal to the poverty line for a one-person household for the calendar year preceding the calendar year in which the designated beneficiary’s taxable year begins.

One commenter suggested that designated beneficiaries generally will not easily be able to determine the annual applicable poverty line and requested that the IRS require ABLE programs to provide notice to designated beneficiaries each year of the poverty line for each of the geographic areas applicable for that year. Two commenters also expressed concern about the statutory provision that makes the designated beneficiary responsible for ensuring that these contributions of compensation income do not exceed the applicable limit, and pointed out that an uncorrected excess contribution would be likely to jeopardize the designated beneficiary’s qualification for public benefits on which the designated beneficiary relies. They suggested that supplemental information is needed to assist the designated beneficiaries and their advisors, and recommended that ABLE programs be required not only to

provide annual updates on the applicable poverty limits, but also general information about the compensation contribution limit, as well as notice to each designated beneficiary when compensation contributions are approaching and/or have exceeded the applicable level, and when other contributions have reached the annual and cumulative limits. Finally, a commenter suggested that ABLE programs should allow ABLE beneficiaries to opt out of the compensation contribution limit to assist those designated beneficiaries who do not want to incur any risk of exceeding the applicable limit.

The final regulations do not incorporate these suggestions. The Treasury Department and the IRS note that the statute does not require qualified ABLE programs to provide any of the notices suggested by the commenter and, in fact, requires the designated beneficiary to be solely responsible for monitoring the increased limit. Furthermore, the Treasury Department and the IRS are concerned that requiring qualified ABLE programs to provide these notices would be unduly burdensome and would increase costs to the programs. Although the final regulations do not impose such notification requirements on qualified ABLE programs, the Treasury Department and the IRS acknowledge that it may be helpful and a real service to designated beneficiaries if the ABLE programs would make this information available to designated beneficiaries, whether by information posted online or otherwise, and suggest that ABLE programs are free to provide such a service if they wish. Finally, the Treasury Department and the IRS note that, because making the additional contribution of the designated beneficiary’s compensation income is voluntary, there is no need to opt out of the ability to make such a contribution.

Another commenter requested that the final regulations provide that an amount not in excess of the new compensation contribution limit may be contributed by a person other than the designated beneficiary. The commenter pointed out that many employed designated beneficiaries have to use their earned income to pay their living expenses, thus leaving little for saving in the ABLE account, and that, without such a provision, another person’s gift to match the designated beneficiary’s

earned income would have to be made through the designated beneficiary’s account, which could adversely impact qualification for public benefits. The Treasury Department and the IRS understand the potential problem but believe that such a provision would be contrary to the explicit language of the statute, requiring that such contributions be made by the designated beneficiary. Further, the legislative history of the TCJA, like the statute, explicitly states that additional amount must be contributed by the designated beneficiary. See H.R. Rep. No. 115-466, at 329 (2017) (Conf. Rep.). Therefore, the final regulations do not incorporate this suggestion.

The commenter also requested confirmation that a direct deposit of the designated beneficiary’s compensation income to his or her ABLE account is a contribution “by” the designated beneficiary, as well as confirmation that contributions subject to the new compensation contribution limit do not have to be made from the designated beneficiary’s compensation income. The Treasury Department and the IRS agree. Money is fungible. In addition, the statute does not require that the contributions come from the designated beneficiary’s earned income; rather, the designated beneficiary’s earned income is one measure used to determine the additional contribution limit applicable to an employed designated beneficiary’s own contributions. The final regulations clarify these two points.

One commenter asked whether a designated beneficiary’s compensation contributions count towards the compensation contribution limit even if the annual contribution limit has not been reached. If the new limit on compensation contributions has been reached, the designated beneficiary may continue to make additional contributions until the annual or cumulative contribution limits have been reached. The Treasury Department and the IRS believe each qualified ABLE program has the flexibility to determine how to identify contributions from the designated beneficiary that are compensation contributions subject to the new contribution limit.

Finally, one commenter requested clarification that, although contributions to and distributions from an ABLE account generally are not taken into account in determining the designated beneficiary’s

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qualification for certain public benefits, the earned income of a designated beneficiary that is deposited into his or her ABLE account nevertheless is earned income and, as such, may be counted in calculating “substantial gainful activity” of the designated beneficiary which, regardless of its deposit into an ABLE account, may have an impact for purposes of determining the designated beneficiary’s qualification for those benefits. This is not a tax issue and thus is beyond the scope of these regulations.

D. Application of gift tax and GST to contributions to an ABLE account

Contributions to an ABLE account are completed gifts to the designated beneficiary of that ABLE account. Gift tax consequences may arise from a contribution to an ABLE account even though the aggregate amount of contributions to that ABLE account from all contributors must not exceed the annual exclusion amount under section 2503(b) applicable to any single contributor. For example, if a contributor makes gifts to an individual in addition to that contributor’s contributions to the same individual’s ABLE account, the contributor’s total gifts to such individual in that year could give rise to a gift tax liability.

Contributions can be made by any person. The term person is defined in section 7701(a)(1) to include an individual, trust, estate, partnership, associations, company, or corporation. Therefore, for purposes of section 529A(b)(1)(A), a person includes an individual as well as each of the entities described in section 7701(a)(1). Although under section 2501(a)(1), the gift tax applies only to gifts by individuals, it applies to gifts made directly or indirectly. As a result, a gift made by a trust, estate, association, company, corporation, or partnership is treated for gift tax purposes as having been made by the owner(s) of that entity. For example, a gift from a corporation to a designated beneficiary is treated as a gift from the shareholders of the corporation to the designated beneficiary.

See § 25.2511-1(h)(1). Accordingly, the final regulations adopt unchanged the provisions of the 2015 proposed regulations and provide that, for purposes of section 529A, a contribution by a corporation is treated as a gift by its shareholders and a contribution by a partnership is treated as a gift by its partners. This rule also applies to trusts, estates, associations, and companies. See section 2511 and § 25.2511-1(c) and (h).

The legislative history of section 529A suggests that a “person” described in section 529A(b)(1)(A) who can make contributions to an ABLE account includes the designated beneficiary of an ABLE account. See 160 Cong. Rec. H7051, H8317, H8318, H8321, H8322 (2014). A person may transfer his or her own funds into an ABLE account of which that person is the designated beneficiary. Because an individual cannot make a gift to himself or herself, the final regulations, like the 2015 proposed regulations, provide that no contribution by a designated beneficiary to his or her own ABLE account is treated as a completed gift. See § 25.2511-2(b) and (c).

However, because the statute contemplates that the funds being deposited into an ABLE account are taxable gifts, and the contributions from the designated beneficiary into his or her own ABLE account were never treated as completed gifts to the designated beneficiary, the 2015 proposed regulations provided that, notwithstanding section 529A(c)(2)(C), which makes gift and GST taxes inapplicable to the change of beneficiary of an ABLE account if the transferee is both an eligible individual and a sibling of the former designated beneficiary, if the designated beneficiary transfers the funds in the account to any other person, including a sibling, the designated beneficiary making the transfer is the donor for gift tax purposes and the transferor for GST tax purposes to the extent of the funding provided by that designated beneficiary and the accumulated earnings thereon. Although the provisions of section 529A(c)(2)(C) would appear to apply to exclude the balance of

the account from gift and GST taxes if the transfer was to a sibling, one commenter asked why, in that case, the entire value of the account would not be a taxable gift. That commenter also objected to requiring ABLE programs to track contributions from the designated beneficiary for this purpose as being too burdensome. ²

In light of these comments, the Treasury Department and the IRS have reconsidered the approach of the 2015 proposed regulations, taking into account the comments describing the burden of separately tracking contributions from the designated beneficiary. The final regulations balance the treatment of contributions as a completed gift and the exclusion of gifts to a sibling of the designated beneficiary by taking the least burdensome approach, as requested by these commenters. Specifically, even though the portion of the account attributable to contributions from the designated beneficiary is the only part of the ABLE account that was not previously treated as a gift, the designated beneficiary is the owner of the entire account and the gift and GST tax properly applies to the entire account when there is a change of designated beneficiary, but those taxes are inapplicable if the new designated beneficiary is a sibling of the former designated beneficiary. Making this change makes it unnecessary for a qualified ABLE program to separately track contributions made by the designated beneficiary. The final regulations reflect this change.

E. Return of excess contributions and excess aggregate contributions

The 2015 proposed regulations define an “excess contribution” as the amount by which the amount contributed during the taxable year of the designated beneficiary to an ABLE account exceeds the limit in effect under section 2503(b) (the gift tax annual exclusion amount) for the calendar year in which the taxable year of the designated beneficiary begins (annual contribution limit). The 2015 proposed regulations defined an “excess aggregate contribution” as the amount contributed

2 Another commenter stated that requiring a qualified ABLE program to assign “earnings attributable to that contribution” would require the qualified ABLE program to track specific tax lots for each contribution, which would be unduly burdensome. Therefore, the commenter recommended that the phrase “any earnings attributable to that contribution” be deleted. It is not correct that earnings would have to be tracked to meet such a requirement, as the rules for calculating earnings attributable to a contribution would not need to require tracking earnings on a particular investment but could be based on the proportionate increase in value of the account over the relevant period. See § 1.408-11. However, given that the Treasury Department and the IRS agree that the entire account would be a taxable gift, it is not necessary to calculate earnings attributable to a contribution.

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during the taxable year of the designated beneficiary that causes the total amount contributed since the establishment of the ABLE account to exceed the limit in effect under section 529(b)(6) or, in the context of the safe harbor, a contribution that causes the account balance to exceed the limit in effect under section 529(b)(6) (aggregate contribution limit).

Consistent with section 529A(c)(3)(C), the 2015 proposed regulations provided that, if an excess contribution or an excess aggregate contribution is deposited into or allocated to the ABLE account of a designated beneficiary, a qualified ABLE program would be required to return that excess contribution or excess aggregate contribution, along with all net income attributable to the excess amount, to the person or persons who made the contribution. The 2015 proposed regulations provided rules for determining the net income attributable to a contribution made to an ABLE account, and also provided that excess contributions and excess aggregate contributions must be returned to their contributors on a last-in-first-out (LIFO) basis. The 2015 proposed regulations also required that a returned contribution be received by the contributor on or before the due date (including extensions) for the Federal income tax return of the designated beneficiary for the taxable year in which the excess contribution or excess aggregate contribution was made. Failure to return an excess contribution within that time period will result in the imposition on the designated beneficiary of a 6 percent excise tax under section 4973(a) (6) on the amount of the excess contribution. See section 4973(a)(6) and (h)(2). However, the 2015 proposed regulations impose an affirmative obligation on the qualified ABLE program to ensure that these excess contributions are returned on a timely basis so that the excise tax never will be imposed on the designated beneficiary.

The 2015 proposed regulations also provided that, if an excess contribution or excess aggregate contribution and the net income attributable to such contribution are returned to a contributor other than the designated beneficiary, the qualified ABLE program is to notify the designated beneficiary of such return at the time of the return.

One commenter objected to the requirement that an excess contribution or excess aggregate contribution be returned to the person or persons who made the contribution, which, according to the commenter, places a burden on the qualified ABLE program to track the source, amount, and date of each contribution. The commenter suggested that it would be less burdensome if excess contributions and excess aggregate contributions were returned instead to the designated beneficiary who, in turn, would then be responsible for returning the contribution to the appropriate contributor. The Treasury Department and the IRS decline to adopt this suggestion. Requiring the designated beneficiary to return contributions would be unduly burdensome to the designated beneficiary, the person for whom many commenters requested as much simplification as possible. More importantly, contributions returned to the designated beneficiary are likely to be counted as a resource of the designated beneficiary for purposes of determining his or her eligibility for benefits under certain means-tested government programs, thus potentially causing the designated beneficiary to lose eligibility for those critical benefits.

Another commenter asked that the final regulations eliminate the requirement to return any earnings on an excess contribution or excess aggregate contribution to the contributor, citing the cost and other burdens of creating an automated process to track individual contributions and calculate the earnings thereon. The Treasury Department and the IRS decline to adopt this suggestion because section 529A(c) (3)(C)(ii) requires the return of the net income attributable to an excess contribution. The statute also requires that the net income attributable to an excess contribution be determined in the same manner as in the case of withdrawn excess contributions to IRAs. In addition, because this determination is based on the change in value of the account, it does not require the tracking of earnings attributable to each contribution. For more information on how to determine the net income attributable to an excess contribution, see Publication 590-A, “Contribution to Individual Retirement Arrangements (IRAs)”, Worksheet 1-4, “Determining the Amount of Net Income Due To an IRA Contribu

tion and Total Amount To Be Withdrawn From the IRA.” See also § 1.408-11.

A few commenters also recommended that the final regulations explicitly state that a qualified ABLE program need not notify the designated beneficiary when it rejects and returns an excess contribution or excess aggregate contribution from another contributor to the designated beneficiary’s ABLE account as long as such contribution was not deposited into or allocated to the ABLE account. Because such a contribution could not have generated any earnings in the ABLE account, the Treasury Department and the IRS concluded that there is no need for such a contribution to generate any reporting requirement. The final regulations clarify that notification is not required if amounts are rejected by the qualified ABLE program before they are deposited into or allocated to the designated beneficiary’s ABLE account.

Another commenter criticized the requirement that excess contributions be returned on a LIFO basis, stating that a LIFO approach could result in the return of contributions made by the designated beneficiary before contributions made by another person, thereby making an ABLE account less attractive as a financial planning tool for the designated beneficiary. The commenter recommended that the final regulations require that the qualified ABLE program return contributions made by persons other than the designated beneficiary before returning any contribution made by the designated beneficiary. The Treasury Department and the IRS decline to adopt this recommendation in the final regulations. The Treasury Department and the IRS note that a qualified ABLE program may allow the designated beneficiary or person with signature authority over an ABLE account to place restrictions on the contributors and/or the amounts contributed to the account if the designated beneficiary is concerned about the impact of the unwanted contributions on financial planning. In addition, adopting the suggestion would impose additional burdens on the qualified ABLE programs, that then would be required to separately track contributions from the designated beneficiary (which several commenters opposed). Moreover, many states have designed their programs and administrative systems

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to stop accepting contributions once the total contributions or value of the account reaches the applicable limit. Such a system is not consistent with a rule other than a LIFO rule.

F. Return of excess compensation contribution

The 2019 proposed regulations defined an excess compensation contribution as the amount by which the amount contributed during the taxable year of an employed designated beneficiary to the designated beneficiary’s ABLE account exceeds the limit in effect under section 529A(b)(2)(B)(ii) for the calendar year in which that taxable year of the employed designated beneficiary begins.

Consistent with section 529A(b)(2) and the 2019 proposed regulations, if an excess compensation contribution is deposited into or allocated to the ABLE account of a designated beneficiary, the qualified ABLE program must return the excess contribution, along with all net income attributable to the excess contribution, as determined under the rules set forth in § 1.408-11 (treating references to an IRA as references to an ABLE account, and references to returned contributions under section 408(d)(4) as references to excess compensation contributions), to the employed designated beneficiary. Also consistent with section 529A(b)(2) and the 2019 proposed regulations, the final regulations provide that it will be the sole responsibility of the designated beneficiary (or the person acting on the designated beneficiary’s behalf) to identify and request the return of any excess contribution of such compensation income. Such returns of excess compensation contributions must be received by the employed designated beneficiary on or before the due date (including extensions) of the designated beneficiary’s income tax return for the year in which the excess compensation contributions were made. A failure to return excess compensation contributions within this time period will result in the imposition on the designated beneficiary of a 6 percent excise tax under section 4973(a)(6) on the amount of excess compensation contributions.

Additionally, in order to minimize administrative burdens for the designated

beneficiary and the qualified ABLE program, for purposes of ensuring that the limit on contributions made under section 529A(b)(2)(B)(ii) is not exceeded, the final regulations, like the 2019 proposed regulations, provide that the qualified ABLE program may rely on self-certifications, made under penalties of perjury, of the designated beneficiary or the person acting on the designated beneficiary’s behalf.

G. Request for the TIN of a contributor

Because a qualified ABLE program is required to return to the contributor any excess contribution or excess aggregate contribution that is deposited into or allocated to an ABLE account (along with any net income attributable to the contribution), the 2015 proposed regulations required a qualified ABLE program to request the TIN of each contributor to the ABLE account at the time a contribution was made if the qualified ABLE program did not already have a record of that person’s correct TIN.

Numerous commenters expressed concerns about the substantial burdens that they anticipate this provision would place upon qualified ABLE programs. Commenters noted that contributions are likely to come from many sources and be made in various ways (for example, payroll deduction, check, debit, automated clearing house (ACH) transfers, and others), making it difficult as a practical matter to obtain the TIN of the contributor. Commenters also conjectured that some contributors, especially those making small gifts, might be reluctant to make a contribution if they were required to provide their TIN.

As an alternative to the provision in the 2015 proposed regulations, one commenter suggested that the final regulations require the qualified ABLE program to pay an excess contribution to the designated beneficiary rather than the contributor, thereby obviating the need to procure the contributor’s TIN. As noted previously, the Treasury Department and the IRS do not agree with this suggestion, because the designated beneficiary’s receipt of such an excess amount could put the designated beneficiary at risk of being disqualified for his or her Federal benefits that are income

or resource based, a result that would be inconsistent with the purposes of section 529A. Other commenters suggested that a qualified ABLE program be required to collect a contributor’s TIN only if the program does not have a system in place to prevent an excess contribution or excess aggregate contribution from being deposited into an ABLE account. The commenters expect that most qualified ABLE programs will adopt the automated systems currently used by section 529 qualified tuition programs either to reject such excess contributions before they are deposited into a particular ABLE account, or to escrow and immediately refund the excess contributions, again before being deposited into or allocated to a particular account. With such a system in place, qualified ABLE programs should not need to return net earnings on contributions, and thus would not need the contributor’s TIN. Other commenters recommended that the obligation to request a contributor’s TIN should arise only in the unlikely circumstance in which an excess contribution or excess aggregate contribution has been deposited into an individual’s ABLE account and has accrued earnings or losses. One commenter suggested eliminating the TIN requirement altogether, while another suggested the collection of TINs should be required only in the case of contributions of more than a specified dollar amount.

Commenters requested interim guidance on this issue to facilitate the establishment of qualified ABLE programs by the States. In response, the Treasury Department and the IRS issued Notice 2015-81, advising that it was anticipated that the final regulations would modify the requirement that a qualified ABLE program request the TIN of a contributor at the time of the contribution. That modification, which is adopted in the final regulations, requires a qualified ABLE program to request the TIN of a contributor at the time a contribution is made (assuming the qualified ABLE program does not already have a record of the contributor’s correct TIN) only if the qualified ABLE program does not have a system in place to identify and reject excess contributions and excess aggregate contributions before they are deposited into or allocated to an ABLE account. In

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the event that a qualified ABLE program has such a system in place but an excess contribution or excess aggregate contribution, nevertheless, is deposited into or allocated to an ABLE account, the qualified ABLE program then must request the TIN of the contributor who made the excess contribution or excess aggregate contribution in order to permit the ABLE program to file accurate and complete required reporting of the earnings attributable thereto. A return of contributions and earnings from the ABLE account is a distribution, so the IRS and the contributor must receive a Form 1099-QA, “Distributions from ABLE Accounts”, showing the contributor’s TIN.

4. Investment Direction

Consistent with section 529A(b)(4), the 2015 proposed regulations provided that a qualified ABLE program may not allow the designated beneficiary of an ABLE account to direct, either directly or indirectly, the investment of any contributions to his or her account (or any earnings thereon) more often than twice in any calendar year. The 2015 proposed regulations provided that a program does not violate this requirement merely because it permits a designated beneficiary or a person with signature authority over a designated beneficiary’s account to serve as one of the program’s board members or employees, or as a board member or employee of a contractor that the program hires to perform administrative services.

One commenter inquired whether the designated beneficiary would be allowed to direct investments of contributions more than twice a year due to a change in the investment climate. Another commenter suggested that the designated beneficiary be allowed to direct the investment of contributions in his or her ABLE account at least monthly, while yet another commenter recommended up to four permitted changes per year. Because section 529A(b)(4) requires a qualified ABLE program to limit the number of times any designated beneficiary may, directly or indirectly, direct the investment of any contribution to no more than two times in any calendar year, the Treasury Department and the IRS do not adopt these suggestions in the final regulations.

Some commenters asked that the final regulations clarify that an investment direction does not include the transfer of account assets from the investment portion of an ABLE account to a money market account or similar vehicle maintained by the qualified ABLE program to process a requested distribution. The Treasury Department and the IRS agree with these commenters that moving funds from an investment fund into a cash fund within the ABLE account in order to process a distribution is not the kind of change in investment direction addressed by the statutory limit, and have made the requested clarification in the final regulations.

Another commenter suggested that the final regulations clarify that a reallocation of the assets in an ABLE account among different broad-based investment strategies offered on the qualified ABLE program’s investment menu (such as a reallocation from a diversified large cap fund to a diversified bond fund, or from a small cap fund to a target date fund) does not constitute investment direction. In the commenter’s view, the reallocation of a portion of an ABLE account’s assets among a set of broad-based investment options offered by the qualified ABLE program, such as diversified mutual funds, age-based target date funds, or Federally-insured CDs, is not investment direction because the designated beneficiary is not exercising control over the underlying investments, as would be the case if he or she were allowed to invest in specific stocks or funds not offered as part of the qualified ABLE program’s menu of broadbased strategies. The commenter asserted that, by offering a limited menu of broadbased investment options, the qualified ABLE program effectively makes the investment decisions and that giving the designated beneficiary the authority to make periodic reallocations among these options is not sufficient control to be considered an investment direction.

The Treasury Department and the IRS do not agree with this commenter. The Treasury Department and the IRS concluded that a reallocation of an account’s assets among different investment vehicles or types of funds constitutes an investment direction within the meaning of section 529A(b)(4), with two exceptions. As addressed earlier in this section 4, the

first exception is the transfer of assets within an ABLE account to a cash fund. The second exception is an automatic rebalancing of the assets in an ABLE account merely to maintain a particular asset allocation. The Treasury Department and the IRS concluded that such an adjustment is not a change in investment direction; instead, it is to preserve and effectuate an investment allocation or direction selected at some previous time that is needed because of the frequent fluctuations in market values of investments. Accordingly, the final regulations provide that neither of these adjustments is a change in investment direction for purposes of section 529A(b)(4). Some commenters asked how the annual limit on investment direction applies to a successor designated beneficiary in the year in which he or she first succeeds to the ABLE account of the former designated beneficiary. The Treasury Department and the IRS understand that the former and successor designated beneficiaries may have different financial situations, and, therefore, different investment needs. These final regulations apply the contribution limits separately to each designated beneficiary, and the Treasury Department and the IRS concluded that it would be most consistent with the purpose of section 529A and its other provisions to provide that the investment change limitation also applies separately to each designated beneficiary. As a result, the final regulations provide that the successor designated beneficiary is allowed to direct the investment of contributions and earnings in the ABLE account up to two times in the calendar year in which he or she becomes the designated beneficiary of the ABLE account, regardless of whether the former designated beneficiary previously had done so in the same calendar year.

5. No Pledging of Interest as Security for a Loan

Consistent with section 529A(b)(5), the 2015 proposed regulations provided that a program will not be treated as a qualified ABLE program unless the terms of the program, or a state statute or regulation that governs the program, prohibit any interest in the program or any portion thereof from being used as security for a loan.

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A few commenters observed that many ABLE accounts are likely to be transactional in nature. One commenter asked whether a checking account or a debit or credit card can be issued to a designated beneficiary and linked to his or her ABLE account. Another commenter asked that the final regulations clarify that advancing funds from an ABLE account to the designated beneficiary – such as through a checking account or debit card privileges connected to the ABLE account – is neither a loan nor security for a loan. Another commenter, observing that checking accounts and debit cards likely will be associated with ABLE accounts, noted that it is unlikely that a qualified ABLE program will be able to convert an account’s underlying investments into cash on the same day as the transaction to be funded occurs. In other contexts, these transactional capabilities generally are effected by an issuer’s zero interest advance for a short period in order to fund the account or debit card, followed by a reimbursement of the issuer when the cash generated by the liquidation of the investment is received by the issuer. The commenter further observed that these short-term advances are distinguishable from third party loans and requested that the final regulations clarify that these short-term advances are not loans. Similarly, the commenter requested that the final regulations clarify that an advance made to an ABLE account by a qualified ABLE program before settlement of a check or other money transfer by a contributor is not a loan.

The Treasury Department and the IRS agree that it is possible for an ABLE program to permit the use of checking accounts and debit cards to facilitate the qualified ABLE program’s ability to make qualified distributions. For purposes of section 529A, the final regulations do not treat these uses—which are necessary to make funds available for qualified disability expenses as intended— as pledging the interest in the ABLE account as security for a loan, provided that these uses do not result in an advance of funds to a designated beneficiary in excess of the amount in his or her ABLE account. Similarly, the program administrator’s advance of funds to satisfy a withdrawal request while the proceeds from the sale of an account asset, sufficient to satisfy that withdrawal

request, clear or settle will not be treated as a pledge or grant of security or as a loan for purposes of this section. However, whether a different particular arrangement constitutes the use of an interest in a qualified ABLE program as security for a loan is a factual determination that is beyond the scope of these regulations.

6. Distributions and Transfers

A. Qualified disability expenses

In accordance with section 529A(e) (5), the 2015 proposed regulations defined qualified disability expenses as any expenses incurred at a time when the designated beneficiary of an ABLE account is an eligible individual that relate to the blindness or disability of the designated beneficiary, including expenses that are for the benefit of the designated beneficiary in improving his or her health, independence, or quality of life. Such expenses include, but are not limited to, expenses for 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 expenses, and other expenses that may be identified from time to time in future guidance published in the Internal Revenue Bulletin. Such expenses include basic living expenses and are not limited to items for which there is a medical necessity or which solely benefit the designated beneficiary. As an example of a qualified disability expense, the 2015 proposed regulations included the expense of buying, using, and maintaining a smartphone used by an individual with a mental impairment to help her navigate and communicate more safely and effectively. In the preamble to the 2015 proposed regulations, the Treasury Department and the IRS requested comments regarding the types of expenses that should be considered qualified disability expenses and under what circumstances.

Many commenters commended the 2015 proposed regulations’ expansive definition of qualified disability expenses. Commenters generally found the example helpful. However, one commenter pointed out that the expense of maintaining a

smartphone could be considered a basic living expense and need not be tied to any particular disability or impairment to be considered a qualified disability expense.

While acknowledging the difficulty of compiling an exhaustive list of qualified disability expenses, many commenters suggested a wide variety of expenses that they believed should be considered qualified disability expenses. One commenter requested that the final regulations provide more comprehensive guidance on the scope of, and exclusions from, the definition of qualified disability expenses so that a designated beneficiary may correctly determine his or her tax liability. Believing that most, if not all, expenses of an eligible individual could be considered qualified disability expenses, another commenter suggested defining types of expenses that are not qualified disability expenses. The commenter suggested that expenses that do not directly benefit the designated beneficiary, such as the expense of a gift for someone other than the designated beneficiary, are not qualified disability expenses. One commenter suggested that an online list of examples be maintained and accessible to the public. Another commenter recommended that all disbursements be deemed to be for qualified disability expenses until proven otherwise.

The Treasury Department and the IRS continue to view the definition of qualified disability expenses as expansive. Whether a particular expense is a qualified disability depends on each designated beneficiary’s unique circumstances and whether the expense is for maintaining or improving the health, independence, or quality of life of the designated beneficiary. Therefore, the Treasury Department and the IRS cannot provide either a comprehensive list of qualified disability expenses or a short list of expenses that would not satisfy that standard. The Treasury Department and the IRS note that Congress did not define a qualified disability expense as any expenditure for the benefit of an eligible individual, nor did Congress define a qualified disability expense as an expense that benefits only the eligible individual. The ABLE Act mandates different tax treatment for those expenses that are qualified disability expenses and those that are not. Consequently, the final regulations retain

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the 2015 proposed regulations’ broad, but not unlimited, definition of a qualified disability expense.

One commenter requested that the same permissible categories of expenses be used to define a qualified disability expense for purposes of both section 529A and SSA programs to provide consistency for disabled individuals. Because the categories suggested in that comment are identical to those included in the 2015 proposed regulations, no change is required in response to this comment. Further, because the Treasury Department and the IRS have no authority with regard to any program administered by the SSA, it is up to SSA to decide whether or not to adjust SSA’s definitions.

A few commenters asked that the final regulations provide a process for appealing a determination on examination by the IRS that a particular expense is not a qualified disability expense. The Treasury and the IRS note that an appeals process already exists under the IRS’ examination procedures. For more information, visit the IRS Office of Appeals’ website at https://www.irs.gov/appeals/considering-an-appeal, or consult IRS Publication 5: Your Appeal Rights and How to Prepare a Protest If You Don’t Agree.

The 2015 proposed regulations provided that a qualified ABLE program is required to establish safeguards to permit the identification of the amounts distributed for housing expenses as that term is defined for purposes of the SSI program of the SSA. One commenter requested a more specific definition of housing expenses, but other commenters noted that, because the identification of housing expenses is relevant only for purposes of determining eligibility for certain Social Security benefits and has no relevance for Federal income tax purposes, any reference to classifying distributions as housing expenses should be eliminated from the regulations. The Treasury Department and the IRS agree, and the final regulations do not require a qualified ABLE program to identify or record whether distributions were made for housing expenses.

Commenters also expressed concerns regarding the requirement that a qualified ABLE program must establish safeguards to distinguish between distributions for qualified disability expenses and other dis

tributions. Commenters emphasized that requiring a qualified ABLE program to determine how a distribution will be used prior to making the distribution would be unduly burdensome for both the program and the designated beneficiary, and they explained that the actual use of a distribution might not be known by the designated beneficiary and thus by the ABLE program when the distribution is made. The commenters recommended that any requirement or suggestion that the qualified ABLE program classify distributions be removed from the regulations. The Treasury Department and the IRS agree that it would be burdensome and unadministrable to require the qualified ABLE programs to categorize and keep track of the actual use of each distribution by the designated beneficiary. Consistent with Notice 2015-81, the final regulations do not require, for any Federal income tax purpose, a qualified ABLE program to establish safeguards to distinguish between distributions used for the payment of qualified disability expenses and other distributions.

Commenters also expressed concerns that the 2015 proposed regulations require designated beneficiaries to report or to justify the reason for each distribution at the time of the distribution. Another commenter requested clarification that distributions may be made for qualified disability expenses through entities including section 501(c)(3) charitable organizations and special needs trusts as described in 42 U.S.C. 1396p(d)(4). The Treasury Department and the IRS wish to clarify that the statute, the 2015 proposed regulations, and the final regulations do not require the designated beneficiary to report his or her qualified disability expenses to the qualified ABLE program or to the IRS when filing a tax return. However, just as with qualified higher education expenses under section 529, the designated beneficiary will need to categorize distributions from the ABLE account in order to properly determine his or her Federal income tax obligations. Therefore, the designated beneficiary should maintain adequate records for determining and supporting his or her qualified disability expenses for each taxable year. The final regulations clarify that the payment of administrative or investment fees charged by a qualified ABLE

program is not a distribution. The Treasury Department and the IRS note that distributions may be made for all qualified disability expenses of the designated beneficiary, regardless of whether the payee is an individual, organization, or trust.

B. Taxation of distributions

Consistent with section 529A(c)(1), the 2015 proposed regulations provide that, if distributions do not exceed the designated beneficiary’s qualified disability expenses for the year, no amount is includible in the designated beneficiary’s gross income. Otherwise, the earnings portion of the distributions from the ABLE account as determined under section 72, reduced by the product of such earnings portion and the ratio of the qualified disability expenses for the year to the total distributions in that year, is includible in the gross income of the designated beneficiary to the extent not otherwise excluded from income. For purposes of applying section 72 to amounts distributed from an ABLE account, the 2015 proposed regulations provided that: (1) all distributions during a taxable year are treated as one distribution; and (2) the value of the contract, income on the contract, and investment in the contract are computed as of the close of the calendar year in which the designated beneficiary’s taxable year began.

For purposes of determining whether distributions from an ABLE account exceed qualified disability expenses in any given year, one commenter suggested that the final regulations allow qualified disability expenses incurred before April 15 of any given year to count as qualified disability expenses for the immediately preceding year. The commenter expressed concern that a distribution taken late in one year but not used to pay for qualified disability expenses until the next year could cause a designated beneficiary’s distributions to exceed his or her qualified disability expenses in the year of the distribution. Another commenter recommended that the final regulations require a nexus between a distribution from an ABLE account and the payment of qualified disability expenses by prescribing a period of time (for example, 60, 90, or 120 days) after a distribution is made during which the proceeds must be used to pay

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for a qualified disability expense. Some commenters also raised questions regarding the relevance of incurring versus paying the expenses for purposes of comparing the total qualified disability expenses to the total distributions in the designated beneficiary’s taxable year.

The Treasury Department and the IRS understand that a designated beneficiary could take a distribution in anticipation of an expense that does not materialize and thus want to redeposit the distribution into the ABLE account, or that an expense incurred in one year may be billed and paid in the following year. The Treasury Department and the IRS concluded that, for purposes of determining the designated beneficiary’s income tax liability, the distributions from an ABLE account should be compared to the qualified disability expenses that are paid, rather than just incurred, during the year because it is payments that appear in a taxpayer’s records and that generally determine income tax consequences. However, to relieve the possible disadvantage to a designated beneficiary from a potential timing mismatch of the distribution and the payment of the expense, and to permit the redeposit of an unused distribution, the Treasury Department and the IRS agree that it is appropriate and helpful to allow a grace period. Therefore, the final regulations provide that a designated beneficiary may treat qualified disability expenses paid by the sixtieth day immediately following the end of the designated beneficiary’s taxable year as if they had been paid in the immediately preceding taxable year, but any expense so treated may not be counted again with respect to the year in which it is paid.

Section 529A(c)(1)(A) provides that any distribution under a qualified ABLE program is includible in the gross income of the distributee in the manner provided under section 72 to the extent not otherwise excluded from gross income under any other provision of the Code. Noting the similarities between the taxation of distributions under sections 529 and 529A, a few commenters recommended that the method for determining the earnings ratio of a distribution from an ABLE account be made consistent with the rule applicable to section 529 programs under Notice 2001-81, which provided that the Treasury Department and the IRS expect

that final regulations under section 529, when issued, will require section 529 programs to determine the earnings portion of each distribution from a section 529 account separately as of the date of its distribution. The commenters advised that the imposition of a different method with respect to qualified ABLE programs would require service providers to build a separate recordkeeping system specific to ABLE accounts, thereby increasing program costs. Moreover, determining the earnings portion of a distribution as of the date of distribution facilitates the administration of partial rollovers and program-to-program transfers, the earnings of which must be calculated as of the date of distribution rather than at the end of the year. These commenters also explained that using the date of each distribution rather than a year-end total would not change the income tax impact on the designated beneficiary because his or her taxable income is determined by a ratio applied to total earnings.

The Treasury Department and the IRS agree with the commenters. Harmonizing how the earnings ratio is determined under section 529A with how it is determined under section 529 should reduce administrative costs of the qualified ABLE programs, making the programs more cost-effective. Therefore, the final regulations provide that the earnings ratio, as applied to a particular distribution, is determined as of the date of distribution, and is equal to the amount of earnings attributable to the account as of the date of distribution divided by the total account balance on that date.

C. Change of designated beneficiary

Section 529A(c)(1)(C) addresses the tax consequences of a change of designated beneficiary of an ABLE account. With respect to such a change, the 2015 proposed regulations described the circumstances in which amounts will be includible in the designated beneficiary’s income. The 2015 proposed regulations provided that a change of designated beneficiary is not treated as a distribution, and therefore does not result in gross income, but this rule applies only if the new designated beneficiary is both (1) an eligible individual for his or her taxable year in

which the change is made and (2) a sibling of the former designated beneficiary.

The 2015 proposed regulations required a qualified ABLE program to permit a change in the designated beneficiary of an ABLE account, but only during the lifetime of the designated beneficiary, and only if the successor designated beneficiary is an eligible individual. Because the designated beneficiary could be subject to gift tax and/or GST tax if the successor designated beneficiary is not a sibling of the designated beneficiary, the Treasury Department and the IRS requested comments on whether the final regulations should allow States to limit a permissible successor designated beneficiary to a sibling of the designated beneficiary.

Several commenters recommended that the final regulations require any successor designated beneficiary to be a sibling of the designated beneficiary. However, one commenter pointed out that a designated beneficiary might not have a sibling who is an eligible individual, and recommended that qualified ABLE programs not be permitted to limit the successor designated beneficiary to a sibling who is an eligible individual, but recommended that a change to any other eligible individual require notice to the designated beneficiary of the adverse tax implications for that designated beneficiary. Another commenter asked whether a qualified ABLE program could limit the successor designated beneficiary to a sibling of the designated beneficiary if the final regulations do not impose that limitation.

The Treasury Department and the IRS concluded that, although section 529A imposes income and transfer tax consequences on a change of designated beneficiary if the successor designated beneficiary is not an eligible individual who is a sibling of the former designated beneficiary, the statute does not prohibit such changes. Therefore, the final regulations do not impose such a restriction. However, in order to minimize the potential that the designated beneficiary will have adverse tax consequences, the final regulations permit a qualified ABLE program to limit successor designated beneficiaries to a sibling, provided that the successor designated beneficiary also is an eligible individual. If a successor designated beneficiary is not a sibling of the former designated ben

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eficiary, the former designated beneficiary will have received a deemed distribution of the amount transferred to the successor designated beneficiary that is subject to all of the tax provisions in section 529A(c).

One commenter suggested that the final regulations define “member of the family” broadly, as in the proposed regulations under section 529, to include descendants and ancestors of the designated beneficiary, rather than only a sibling. The Treasury Department and the IRS note that the term “member of the family” is expressly defined by section 529A(e)(4). Therefore, the final regulations do not expand the meaning of that term to also include descendants and ancestors of the designated beneficiary.

Several commenters asked that the final regulations allow the designated beneficiary or the person with signature authority over an ABLE account to designate an individual, who is both an eligible individual and a sibling of the designated beneficiary, to be the successor designated beneficiary of the account, effective upon the death of the designated beneficiary. Commenters suggested that such a designation should be conditioned on the named successor designated beneficiary being an eligible individual at the time of the designated beneficiary’s death. One commenter suggested permitting the naming of a secondary successor designated beneficiary. Commenters suggested that, if the successor designated beneficiary already has an ABLE account, the funds of the deceased designated beneficiary’s ABLE account should be rolled into the ABLE account of the successor designated beneficiary, and one commenter requested that the final regulations exempt such a rollover from the restriction under section 529A(c)(1) (C)(iii) preventing more than one rollover to the same designated beneficiary within a 12-month period. One commenter asked that the final regulations allow a reasonable bereavement period (for example, one year) after the death of the designated beneficiary, during which the guardian of the deceased designated beneficiary, the executor of his or her estate, or a court could transfer the ABLE account to a sibling of the deceased designated beneficiary who is then an eligible individual. Finally, one commenter asked that the final regulations allow the distribution of a

deceased designated beneficiary’s ABLE account to the section 529 account of his or her child or to a health savings account for his or her family.

The Treasury Department and the IRS recognize the difficulties faced by the family, friends, and caregivers of a designated beneficiary at the end of the designated beneficiary’s life. In order to alleviate some of these difficulties, the final regulations allow a qualified ABLE program to permit a successor designated beneficiary to be named during the lifetime of the designated beneficiary that will take effect upon the death of the designated beneficiary. The designation must be made before the designated beneficiary’s death. If no successor designated beneficiary is named, the assets in the ABLE account are payable to the estate of the deceased designated beneficiary. Before any transfer to the successor designated beneficiary, however, the ABLE account is subject to the Federal estate tax imposed by chapter 11 of the Code upon the estate of the deceased designated beneficiary, as well as to the payment of any outstanding qualified disability expenses of the decedent and any State claim under section 529A(f).

D. Rollovers and program-to-program transfers

Under section 529A(c)(1)(C), a rollover from an ABLE account is not treated as a distribution includible in the gross income of the distributee. The 2015 proposed regulations defined a rollover as an amount withdrawn from the ABLE account of a designated beneficiary and contributed, within 60 days of the date of the withdrawal, to another ABLE account of the designated beneficiary, or to the ABLE account of an eligible individual who is a sibling of the designated beneficiary, provided that, in the case of a contribution to the ABLE account of the same designated beneficiary, no rollover has been made to an ABLE account of the designated beneficiary within the prior 12 months.

The 2015 proposed regulations also provided that a program-to-program transfer is not a distribution and is not includible in income. A “program-to-program transfer” is the direct transfer of the entire balance of an ABLE account that will be

closed upon completion of the transfer into an ABLE account of the same designated beneficiary, or the direct transfer of part or all of the balance to an ABLE account of another eligible individual who is a sibling of the former designated beneficiary, without any intervening distribution or deemed distribution to the designated beneficiary or former designated beneficiary. In the preamble to the 2015 proposed regulations, the Treasury Department and the IRS stated that a program-to-program transfer may be preferable to a rollover in protecting the designated beneficiary’s eligibility for benefits under Federal and State means-tested programs. A program-to-program transfer also could facilitate the transfer of information concerning contributions and accumulated earnings. In light of these expected benefits, the Treasury Department and the IRS requested comments as to whether and to what extent a qualified ABLE program should be permitted to require that funds from another State’s ABLE program be accepted only through program-to-program transfers.

Many commenters expressed approval of the rules allowing program-to-program transfers, but several of these commenters recommended that the final regulations continue to allow the use of a rollover as a means of transferring funds from one qualified ABLE program to another. Consistent with section 529A(c)(1)(C), the final regulations continue to permit rollovers and do not require the use of a program-to-program transfer. However, the Treasury Department and the IRS recognize that qualified ABLE programs may differ in determining how best to administer their programs. For example, a qualified ABLE program may choose to require that a transfer of funds from one ABLE account to another under the program or to or from an ABLE account under another qualified ABLE program be by a program-to-program transfer.

Like the 2015 proposed regulations, the final regulations provide that, upon a rollover or program-to-program transfer, all the attributes of the former ABLE account relevant for purposes of calculating the investment in the account and applying the cumulative limits on contributions are applicable to the recipient account. The portion of the rollover or transfer

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amount that constituted investment in the account from which the distribution or transfer was made becomes an investment in the recipient ABLE account. Similarly, the portion of the rollover or transfer amount that constituted earnings of the account from which the distribution or transfer was made constitutes earnings of the recipient account. For purposes of the annual contribution limit, contributions do not include program-to-program transfers or rollovers.

Several commenters asked that the final regulations permit a tax-free rollover from a qualified tuition account under section 529 to an ABLE account for the same designated beneficiary. The commenters believe that such a provision would be particularly important to the designated beneficiary of a qualified tuition account who becomes disabled and is unable to attend college. Since the issuance of the 2015 proposed regulations, the TCJA amended section 529 to permit, before January 1, 2026, a limited rollover from a section 529 account to an ABLE account of the same designated beneficiary or a member of his or her family as defined expansively under section 529 to include, among others, a designated beneficiary’s ancestors and descendants. The Treasury Department and the IRS issued Notice 2018-58, 2018-33 I.R.B. 305 (Aug. 13, 2018) announcing how they intended to provide clarification regarding the rollover provision. In light of this change, the final regulations define “contribution” to include this limited rollover from such a section 529 account.

Similarly, one commenter asked that final regulations permit the tax-free rollover from the ABLE account of an individual to a qualified tuition account under section 529 for the benefit of a child of that individual. The Code does not provide for a tax-free transfer from a qualified ABLE account to a qualified tuition account under section 529 because such a distribution would not be for a qualified disability expense. Accordingly, this comment is not adopted in the final regulations.

E. Post-death payments

Consistent with section 529A(f), the 2015 proposed regulations required that a portion or all of the balance remaining

in the ABLE account of a deceased designated beneficiary (after providing for the payment of all outstanding qualified disability expenses of the designated beneficiary) be distributed to a State that files a claim against the designated beneficiary or against the ABLE account with respect to benefits provided to the designated beneficiary under that State’s Medicaid plan (Medicaid reimbursement claim). The payment of such claim is limited to the amount of the total medical assistance paid for the designated beneficiary after the establishment of the ABLE account over the amount of any premiums paid to a Medicaid Buy-In program under any State Medicaid plan.

One commenter asked for confirmation that a State’s ABLE program will not fail to qualify as a qualified ABLE program merely because State law prohibits the State’s Medicaid agency from filing Medicaid reimbursement claims. The Treasury Department and the IRS agree that a State law mandating that the State’s Medicaid agency refrain from filing Medicaid reimbursement claims will not jeopardize the status of the State’s ABLE program as a qualified ABLE program. Section 529A(f) does not require a State to file a Medicaid reimbursement claim.

Commenters asked whether a qualified ABLE program may make distributions, including payment on an existing contract for funeral expenses, before it receives a State Medicaid reimbursement claim. Commenters also asked whether a qualified ABLE program has an obligation to determine the validity or accuracy of a state’s Medicaid reimbursement claim or whether multiple States are able to file a claim.

Consistent with section 529A, the final regulations provide that a qualified ABLE program may satisfy a State’s Medicaid reimbursement claim only after providing for the payment of any outstanding qualified disability expenses of the deceased designated beneficiary, including the designated beneficiary’s funeral and burial expenses, whether or not the subject of a pre-death contract for those services. The final regulations do not impose an obligation on the qualified ABLE program to verify the validity or accuracy of a State’s Medicaid reimbursement claim. However, as noted previously, the payment of any

claim is limited to the amount of total medical assistance paid for the designated beneficiary after the establishment of the ABLE account, net of any premiums paid (whether from the ABLE account or otherwise by or on behalf of the designated beneficiary) to a State Medicaid Buy-In program. In addition, no obligation is imposed on the qualified ABLE program to determine whether claims could be filed by multiple States. After the expiration of the applicable statute of limitations for filing Medicaid claims against the designated beneficiary’s estate, a qualified ABLE program may distribute the balance of the ABLE account to the successor designated beneficiary or, if none, to the deceased designated beneficiary’s estate.

The 2015 proposed regulations required a qualified ABLE program to file an annual information return on Form 1099QA, or any successor form, with respect to each ABLE account from which any distribution is made during the calendar year, on which is reported the aggregate amount of distributions from the ABLE account during the calendar year. One commenter asked whether a qualified ABLE program should report the payment of a Medicaid reimbursement claim on Form 1099-QA. The final regulations clarify that the term “distribution” does not include a payment in satisfaction of a Medicaid reimbursement claim. Therefore, the payment is not reported on Form 1099-QA.

7. Gift and Generation-Skipping Transfer (GST) Taxes

The final regulations, like the 2015 proposed regulations, provide that contributions to an ABLE account by a person other than the designated beneficiary are treated as completed gifts to the designated beneficiary of the account, and that such gifts are neither gifts of a future interest nor a qualified transfer under section 2503(e). Accordingly, no distribution from an ABLE account to the designated beneficiary of that account is treated as a taxable gift. Finally, consistent with section 529A(c)(2)(C), neither gift nor GST taxes apply to the change of designated beneficiary of an ABLE account if the new designated beneficiary is an eligible individual who is a sibling of the former designated beneficiary.

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8. Unrelated Business Income Tax

A qualified ABLE program generally is exempt from Federal income taxation. A qualified ABLE program is subject, however, to the unrelated business income tax imposed under section 511 on its unrelated business taxable income. For purposes of this tax, certain administrative and other fees do not constitute unrelated business taxable income to the ABLE program. One commenter asked for clarification regarding the definition and possible application of the unrelated business income tax.

Further guidance on the unrelated business income tax provisions of the Code already is set forth in the regulations under sections 511 through 514. Those rules generally are applicable to qualified ABLE programs and other tax-exempt entities. If any unrelated business income tax liability exists, the tax is paid by the qualified ABLE program. If it has any unrelated taxable income, a qualified ABLE program is required to file Form 990-T, “Exempt Organization Business Income Tax Return,” as though it were an organization described in §§ 1.6012-2(e) and 1.6012-3(a)(5). One commenter stated that the reporting requirements in the 2015 proposed regulations are burdensome to ABLE account holders, and recommended that the final regulations eliminate the need for any individual to file a Form 990-T. Form 990-T is for the use of a qualified ABLE program to report and pay tax on its unrelated business taxable income under section 512, if any, and is not for the use of individuals such as the designated beneficiaries of ABLE accounts.

9. Recordkeeping and Reporting Requirements

As in the 2015 proposed regulations, the final regulations set forth recordkeeping and reporting requirements. A qualified ABLE program must maintain records that enable the program to account to the Secretary with respect to all contributions, distributions, returns of excess contributions or additional accounts, income earned, and account balances for any designated beneficiary’s ABLE account. In addition, a qualified ABLE program must

report to the Secretary the establishment of each ABLE account, including the name, address, and TIN of the designated beneficiary, information regarding the disability certification or other basis for eligibility of the designated beneficiary, and other relevant information regarding each account. Information regarding contributions is reported on Form 5498-QA, “ABLE Account Contribution Information.” Information regarding distributions from ABLE accounts is reported on Form 1099-QA, “Distributions from ABLE Accounts.” The final regulations and instructions to the Forms 1099-QA and 5498-QA contain more detail on how the information must be reported.

One commenter stated that the reporting requirements in the 2015 proposed regulations would increase the cost to qualified ABLE programs of offering ABLE accounts, and therefore recommended that the final regulations eliminate the requirement to file Form 5498-QA. The Treasury Department and the IRS note that Form 5498-QA is necessary to allow the qualified ABLE program to provide the notice of establishment of an ABLE account required under section 529A(d)(3), to report contributions to an ABLE account required under section 529A(d)(1), and to report other information necessary for the public reports required under section 529A(d)(2). Because the statute requires this reporting, the final regulations do not incorporate this suggestion. Additionally, the filing of Form 5498-QA satisfies certain statutory requirements regarding the disability certification.

The 2015 proposed regulations provided that the qualified ABLE program is required to furnish a statement to the designated beneficiary of the ABLE account for which it is required to file a Form 5498-QA, which statement is required to include, among other things, the name, address, and TIN of the designated beneficiary. One commenter recommended that final regulations permit the exclusion of the TIN of the designated beneficiary from the statement required to be furnished to the designated beneficiary. The Treasury Department and the IRS confirm that a qualified ABLE program may truncate the TIN of the designated beneficiary (by replacing the first five digits of the 9-digit number with asterisks or Xs) on the copy

of the Form 5498-QA (or substitute statement) that is provided to the designated beneficiary, but must include the full, untruncated TIN on the return it files with the IRS. See the General Instructions for Certain Information Returns.

In addition, section 529A(b)(3) requires that a qualified ABLE program provide separate accounting for each designated beneficiary. Separate accounting requires that contributions for the benefit of a designated beneficiary, as well as earnings attributable to those contributions, are allocated to that designated beneficiary’s account. Whether or not a program ordinarily provides each designated beneficiary an annual account statement showing the income and transactions related to the account, the program must give this information to the designated beneficiary upon request.

The preamble to the 2015 proposed regulations stated that section 529A(d) (4) provides that, for purposes of section 4 of the ABLE Act, States are required to submit electronically to the Commissioner of Social Security, on a monthly basis and in the manner specified by the Commissioner of Social Security, statements on relevant distributions and account balances from all ABLE accounts. Commenters remarked that such reporting requirements may be unduly burdensome on qualified ABLE programs, and will require designated beneficiaries of ABLE accounts to justify all expenditures on a nearly continuous basis to the qualified ABLE program. One commenter suggested that the designated beneficiary self-certify, under penalties of perjury, at the time of a distribution, that the distribution will be used for (i) housing expenses, (ii) other qualified disability expenses, or (iii) non-qualifying expenses, which information the qualified ABLE program could use to report the designated beneficiary’s housing expenses to the SSA. The final regulations do not require that housing or other qualified disability expenses be reported to the IRS by either the designated beneficiary or the ABLE program. The Treasury Department and the IRS note that the reporting requirement in section 529A(d)(4) concerns reporting by the qualified ABLE program to the SSA, not to the IRS, and thus is beyond the appropriate scope of these regulations.

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10. Transition Relief