Rev. Rul. 80-348, 1980-2 C.B. 60; Rev.

Rul. 79-263, 1979-2 C.B. 82.

In Burnett, a lawyer advanced expenses to clients that the clients were obligated to repay only to the extent the lawyer was successful in obtaining recovery on the client’s claim. The taxpayer argued that the advances were deductible trade or business expenses under section 162 of the Code because there was no unconditional obligation on the part of the clients to repay the advances. The court noted that the taxpayer provided assistance only to clients with claims that were likely to be successful and that the advances were “made to clients with the expectation, substantially realized, that they would be recovered.” 356 F.2d at 758. On that basis, the court affirmed the Tax Court’s holding that the advances were not deductible. Similarly, in Canelo v. Commissioner, 53 TC 217, 225-226 (1969), aff’d 447 F.2d 484 (9th Cir.1971), a personal injury law firm advanced litigation costs on behalf of its clients, and the clients had no obligation to repay the costs unless their case was successful. The law firm deducted the litigation costs in the year paid and included the reimbursed costs in income in the year of reimbursement. The law firm screened clients to reduce the risk that the advanced costs would not be repaid and took cases when there was a “good hope” of recovery. The court determined that the law firm’s advances operated as loans to its clients for which the law firm had an expectation of reimbursement. Therefore, deductions for the advances under section 162 were not allowed. See also Herrick v. Commissioner, 63 T.C. 562 (1975) (similar effect); Silverton v. Commissioner, T.C. Memo. 1977-198 (1977) (similar effect).

Under the related “tax benefit rule,” if a taxpayer takes a proper deduction and, in a later tax year, an event occurs that is fundamentally inconsistent with the premise on which the previous deduction was based (for example, an unforeseen refund of deducted expenses), the taxpayer must take the deducted amount into income. See section 111 of the Code (providing that gross income does not include income attributable to the recovery during a taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by chapter 1 of the Code). The Supreme

Court applied the tax benefit rule in Hills- boro National Bank v. Commissioner, 460 U.S. 370 (1983). In that case, the Court observed that “[t]he basic purpose of the tax benefit rule is to achieve rough transactional parity in tax … and to protect the Government and the taxpayer from the adverse effects of reporting a transaction on the basis of assumptions that an event in a subsequent year proves to have been erroneous. Such an event, unforeseen at the time of an earlier deduction, may in many cases require the application of the tax benefit rule.” Id . at 383.

ANALYSIS

In both Situation 1 and Situation 2, A and B each have a reasonable expectation of reimbursement. At the end of 2020, the reimbursement of A’s and B’s eligible expenses, in the form of covered loan forgiveness, is reasonably expected to occur

• rather than being unforeseeable – such that a deduction is inappropriate. Compare Canelo, 53 TC at 225-226 with Hillsboro, 460 U.S. at 383. Section 1106(b), (d), and (g) of the CARES Act, and the supporting loan forgiveness application procedures published by the SBA, provide covered loan recipients like A and B with clear and readily accessible guidance to apply for and receive covered loan forgiveness. See www.sba.gov/funding-programs/loans/ coronavirus-relief-options/paycheck-protection-program. Under these procedures, each taxpayer calculates the amount of its covered loan forgiveness on the basis of the eligible expenses paid or accrued in the covered period and submits a completed form and supporting documentation to their covered loan lender. See PPP Loan Forgiveness Application Form 3508. Within 60 days of receipt of an application for forgiveness, their covered loan lenders must issue a decision regarding A and B’s applications. See section 1106(g) of the CARES Act. Accordingly, A’s and B’s eligible expenses are not deducible because there is a reasonable expectation of reimbursement.

Section 265(a)(1) of the Code also disallows any amount of A’s and B’s eligible expenses otherwise allowable as a deduction under the Code, including section 161, to the extent the payment of such eligible expenses is allocable to tax-exempt

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HOLDING

A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.

EFFECT ON OTHER DOCUMENTS

This revenue ruling amplifies Notice 2020-32, 2020-21 IRB 837 (May 18, 2020).

DRAFTING INFORMATION

The principal authors of this revenue ruling are Sarah Daya and Charles Gorham of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue ruling, contact Ms. Daya at (202) 3174891 (not a toll-free number).

26 CFR §1.529A added; 1.511-2 amended; 1.513-1 amended; 25.2501-1 amended; 25.2503-3 amended; 25.2503–6 amended; 25.2511-2 amended; 26.2642- 1 amended

T.D. 9923

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1, 25, 26, 301, and 602

Guidance under Section 529A: Qualified ABLE Programs

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations that provide guidance regarding programs under the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act). The ABLE Act provides rules under which States or State agencies or instrumentalities may establish and maintain a Federal tax-favored savings program for eligible individuals with a disability who are the owners and designated beneficiaries of accounts to which contributions may be made to meet qualified disability expenses. These accounts also receive favorable treatment for purposes of certain means-tested Federal programs. In addition, these final regulations provide corresponding amendments to the unrelated business income tax regulations, the gift and generation-skipping transfer tax regulations, and the electronic filing requirements regulations. These regulations affect eligible individuals that are designated beneficiaries of accounts established and maintained under the ABLE Act.

DATES: Effective date : These final regulations are effective November 19, 2020.

Applicability dates : For dates of applicability, see §§ 1.511-2(e)(2), 1.513-(g), 1.529A-1(c), 1.529A-2(q), 1.529A-3(h), 1.529A-4(e), 1.529A-5(g), 1.529A-6(f), 1.529A-7(b), 1.529A-8(a), and 301.60112(g).

FOR FURTHER INFORMATION CONTACT: Concerning the final regulations under section 529A, Taina Edlund, (202) 317-4541, or Julia Parnell, (202) 317-4086; concerning the estate and gift tax regulations, Lorraine Gardner, (202) 317-4645, or Daniel Gespass, (202) 3174632; concerning the reporting provisions under section 529A, Isaac Brooks, (202) 317-6844 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regulations amending 26 CFR parts 1, 25, 26 and 301, to provide guidance under section 529A of the Internal Revenue Code (Code). Section 529A provides rules under which States or State agencies

or instrumentalities may establish and maintain a Federal tax-favored savings program through which contributions may be made to the account of an eligible individual with a disability to meet qualified disability expenses.

1. The ABLE Act

Section 529A was added to the Code on December 19, 2014, by the ABLE Act, which was enacted as part of the Tax Increase Prevention Act of 2014, Public Law 113-295 (128 Stat. 4010). The statutory requirements of section 529A apply to taxable years beginning after December 31, 2014. Congress recognized the special financial burdens borne by families raising children with disabilities and the fact that increased financial needs generally continue throughout the lifetime of an individual with a disability. Section 101 of the ABLE Act confirms that one of the ABLE Act’s purposes is to “provide secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits” otherwise available to those individuals, whether through private sources, employment, public programs, or otherwise. Before the enactment of the ABLE Act, various types of Federal tax-advantaged savings arrangements existed, but none adequately served the goal of promoting saving for those supplemental financial needs.

Section 529A allows the creation of a qualified ABLE program by a State (or agency or instrumentality thereof) under which a separate ABLE account may be established for an eligible individual with a disability who is the designated beneficiary and owner of that account. Generally, contributions to an ABLE account are subject to both an annual limit and a cumulative limit, and, when made by a person other than the designated beneficiary, are treated as gifts to the designated beneficiary. These gifts may be sheltered from Federal gift tax by the annual per-donee gift tax exclusion. Distributions from an ABLE account for the qualified disability expenses of the designated beneficiary are not included in the designated beneficiary’s gross income. However, the earnings portion of distributions from an ABLE

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account in excess of the qualified disability expenses generally is includible in the gross income of the designated beneficiary. An ABLE account may be used for the long-term benefit or short-term needs of the designated beneficiary.

Section 103 of the ABLE Act, while not a tax provision, is critical to achieving the goal of the ABLE Act of providing financial resources for the benefit of individuals with disabilities. Because so many of the programs that provide essential financial, occupational, and other resources and services to individuals with disabilities are available only to persons whose resources and income do not exceed relatively low dollar limits, section 103 generally disregards a designated beneficiary’s ABLE account (specifically, the account balance, contributions to the account, and distributions from the account) for purposes of determining the designated beneficiary’s eligibility for, and the amount of any assistance or benefits provided under, certain means-tested Federal programs. However, in the case of the Supplemental Security Income (SSI) program under title XVI of the Social Security Act, distributions for certain housing expenses are not disregarded, and the balance (including earnings) in an ABLE account is considered a resource of the designated beneficiary to the extent it exceeds $100,000. Section 103 also addresses the impact of an excess balance in an ABLE account on the designated beneficiary’s eligibility for benefits under the SSI program and Medicaid.

Finally, section 104 of the ABLE Act addresses the treatment of ABLE accounts in bankruptcy proceedings.

2. Guidance

A. Notice 2015-18

Shortly after the ABLE Act was enacted, the Department of the Treasury (Treasury Department) and the IRS were advised that several state legislatures were in the process of enacting enabling legislation, and ABLE programs might be in operation in some states before guidance under section 529A could be issued by the Treasury Department and the IRS. In order to prevent the lack of regulatory guidance from discouraging states to enact enabling

legislation and create ABLE programs, the Treasury Department and the IRS issued Notice 2015-18, 2015-12 I.R.B. 765 (March 23, 2015). The Notice provided that future section 529A guidance would confirm that the owner of an ABLE account is the designated beneficiary of the account, and that a person with signature authority over the account (if other than the account’s designated beneficiary) may neither have nor acquire any beneficial interest in the ABLE account and must administer the account for the designated beneficiary of the account. The Notice further provided that, in the event that State legislation creating an ABLE program enacted in accordance with section 529A prior to the issuance of guidance does not fully comport with the guidance when issued, the Treasury Department and the IRS intended to provide transition relief to give the States sufficient time to implement the changes necessary to avoid the disqualification of the program and of the ABLE accounts already established under the program.

B. 2015 proposed regulations

On June 22, 2015, the Treasury Department and the IRS published a notice of proposed rulemaking (NPRM) in the Federal Register (REG-102837-15; 80 FR 35602) proposing regulations under section 529A regarding programs under the ABLE Act (2015 proposed regulations). The 2015 proposed regulations set forth the requirements a program established and maintained by a State, or agency or instrumentality thereof, must satisfy to be considered a qualified ABLE program under section 529A. They covered the requirements for establishing an ABLE account (including those that an individual must satisfy to be an eligible individual qualified to be the designated beneficiary of an ABLE account) and the requirements concerning contributions to an ABLE account (including the limitations on the amount and investment of such contributions). In addition, the 2015 proposed regulations addressed the gift and generation-skipping transfer (GST) tax consequences of contributions to an ABLE account, as well as the Federal income, gift, and estate tax consequences of distributions from, and changes in the

designated beneficiary of, an ABLE account. The 2015 proposed regulations also provided guidance on requirements with respect to rollovers and program-to-program transfers from one ABLE account to another and on the recordkeeping and reporting requirements of a qualified ABLE program. Finally, the 2015 proposed regulations provided corresponding amendments to regulations under sections 511 and 513 (with respect to unrelated business taxable income), sections 2501, 2503, 2511, 2642, and 2652 (with respect to gift and GST taxes), and section 6011 (with respect to electronic filing requirements).

C. Notice 2015-81

More than 200 written comments were received in response to the 2015 proposed regulations and a public hearing was held on October 14, 2015. Numerous commenters asked the Treasury Department and the IRS to issue interim guidance to address three requirements under the proposed regulations that they said would create significant barriers to the development of qualified ABLE programs by the States: (i) the requirement to establish safeguards to categorize distributions from an ABLE account; (ii) the requirement to request the taxpayer identification number (TIN) of every contributor to an ABLE account; and (iii) the requirement to process disability certifications with signed physicians’ diagnoses.

In response to the request for interim guidance, the Treasury Department and the IRS published Notice 2015-81, 201549 I.R.B. 784 (Dec. 7, 2015), advising that the final regulations would address these requirements in the following manner: First, the final regulations would eliminate the requirement that a qualified ABLE program distinguish between types of expenses. Second, the final regulations would eliminate the requirement that a qualified ABLE program must request the TIN of each contributor at the time a contribution is made if the program has a system in place to identify and reject excess contributions and excess aggregate contributions before they are deposited into an ABLE account. Third, the final regulations would permit a certification of eligibility to satisfy the requirement for

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filing a disability certification. A certification of eligibility is a certification, under penalties of perjury, that the individual (or the individual’s agent under a power of attorney or a parent or legal guardian of the individual) has a signed physician’s diagnosis, and that the signed diagnosis will be retained and provided to the ABLE program or the IRS on request.

3. The PATH Act Amendment

On December 18, 2015, Section 303 of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), was enacted as part of the Consolidated Appropriations Act, 2016, Public Law 114-113 (129 Stat. 2242). The PATH Act amended section 529A(b)(1), effective for taxable years beginning after December 31, 2014, by removing the requirement that a State’s qualified ABLE program allow the establishment of an ABLE account only for a designated beneficiary who is a resident of that State or of a contracting State.

4. The TCJA

The contribution limits and other provisions of section 529A were modified by the Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat. 2054, (2017) (TCJA), signed into law on December 22, 2017. The TCJA amended section 529A(b)(2) (B) to allow an employed designated beneficiary described in new section 529A(b) (7) to contribute, prior to January 1, 2026, an additional amount in excess of the limit in section 529A(b)(2)(B) (i) (the annual gift tax exclusion amount in section 2503(b), formerly set forth in section 529A(b)(2)(B)). This additional permissible contribution is subject to its own limit as described in section 529A(b) (2)(B)(ii). Specifically, this additional contributed amount may not exceed the lesser of (i) the designated beneficiary’s compensation as defined by section 219(f) (1) for the taxable year, or (ii) an amount equal to the poverty line for a one-person household for the calendar year preceding the calendar year in which the taxable year begins. The TCJA also amended the section 529A(b)(2) flush language to require the designated beneficiary, or a person acting on behalf of the designated beneficiary, to maintain adequate records to ensure,

and to be responsible for ensuring, that the requirements of section 529A(b)(2)(B)(ii) are met.

New section 529A(b)(7)(A) identifies a designated beneficiary eligible to make this additional contribution as one who is an employee (including a self-employed individual) with respect to whom there has been no contribution made for the taxable year to: a defined contribution plan meeting the requirements of sections 401(a) or 403(a); an annuity contract described in section 403(b); or an eligible deferred contribution plan under section 457(b). Section 529A(b)(7)(B) defines the term “poverty line” as having the meaning provided in section 673 of the Community Services Block Grant Act (42 U.S.C. 9902). The TCJA also amended section 529 (regarding qualified tuition programs) to allow, before January 1, 2026, a limited amount to be rolled over to an ABLE account from the designated beneficiary’s own section 529 qualified tuition program (QTP) account or from the QTP account of certain family members. The TCJA added section 529(c)(3)(C)(i)(III), which provides that a distribution from a QTP made after December 22, 2017, and before January 1, 2026, is not subject to income tax if, within 60 days of the distribution, it is transferred to an ABLE account of the designated beneficiary or a member of the family of the designated beneficiary. Under section 529(c)(3)(C)(i), the amount of any rollover to an ABLE account is limited to the amount that, when added to all other contributions made to the ABLE account for the taxable year, does not exceed the contribution limit for the ABLE account under section 529A(b)(2)(B)(i), that is, the annual gift tax exclusion amount under section 2503(b). This limited rollover is described in more detail in Notice 201858, 2018-33 I.R.B. 305 (Aug. 13, 2018).

A. Notice 2018-62

To address the TCJA modifications to section 529A, the Treasury Department and the IRS published Notice 2018-62, 2018-34 I.R.B. 316 (Aug. 20, 2018), which announced the intent of the Treasury Department and the IRS to issue proposed regulations to implement these changes and describes the anticipated

rules to implement the statutory changes. No comments were received in response to the Notice.

B. 2019 proposed regulations

On October 10, 2019, the Treasury Department and the IRS published an NPRM in the Federal Register (REG-12824618; 84 FR 54529) to address the TCJA modifications to section 529A (2019 proposed regulations).

The 2019 proposed regulations confirmed that the employed designated beneficiary, or the person acting on his or her behalf, is solely responsible for ensuring that the requirements in section 529A(b) (2)(B)(ii) are met and for maintaining adequate records for that purpose. In addition, to minimize burdens for the designated beneficiary and the qualified ABLE program, the 2019 proposed regulations provided that ABLE programs may allow a designated beneficiary or the person acting on his or her behalf to certify, under penalties of perjury, that he or she is a designated beneficiary described in section 529A(b)(7) and that his or her contributions of compensation do not exceed the limit set forth in section 529A(b)(2)(B) (ii).

The 2019 proposed regulations also clarified 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 separate guidelines for (1) the contiguous 48 states and the District of Columbia, (2) Alaska, and (3) Hawaii. Because the Treasury Department and the IRS 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, the 2019 proposed regulations provided that a designated beneficiary’s contribution limit is to be determined using the poverty guideline applicable in the state of the designated beneficiary’s residence.

Because section 529A(b)(2) provides that rules similar to those set forth in section 408(d)(4) regarding the return of excess contributions to an individual retire

December 7, 2020 1556 Bulletin No. 2020–50

ment account or annuity apply to ABLE accounts, the 2019 proposed regulations provided that a qualified ABLE program must return any contributions of the designated beneficiary’s compensation in excess of the limit in section 529A(b)(2)(B) (ii) to the designated beneficiary.

The 2019 proposed regulations also provided 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 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.

Finally, 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 2019 proposed regulations provided that a 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.

Six comments were received in response to the 2019 proposed regulations. No public hearing was requested or held.

Summary of Comments and Explanation of Provisions

Approximately 200 comments were received in response to the 2015 proposed regulations. These comments, along with the six comments received in response to the 2019 proposed regulations, are discussed in this section. The Treasury Department and the IRS, after consideration of all of these comments and the changes made to section 529A of the Code by the

PATH Act and the TCJA, adopt the 2015 and 2019 proposed regulations as amended by this Treasury decision. The comments are available for public inspection at www.regulations.gov or on request.

These final regulations provide guidance on the requirements a program established and maintained by a State, or agency or instrumentality thereof, must satisfy to be considered a qualified ABLE program under section 529A. They also address the requirements for establishing an ABLE account, for qualifying as an eligible individual and thus a qualified designated beneficiary of an ABLE account and for contributions to an ABLE account, including the limitations on the amount and investment of such contributions. These final regulations also provide rules regarding changes in the designated beneficiary of an ABLE account, and rollovers and program-to-program transfers from one ABLE account to another. In addition, these final regulations provide guidance on the gift and GST tax consequences of contributions to an ABLE account, as well as on the Federal income, gift, and estate tax consequences of distributions from, and changes in the designated beneficiary of, an ABLE account. Finally, these final regulations provide guidance on the recordkeeping and reporting requirements of a qualified ABLE program.

1. Qualified ABLE Programs

A. Established and maintained by a State

Consistent with section 529A(b)(1), which defines an ABLE program as a program established and maintained by a State, or agency or instrumentality thereof, the final regulations, like the 2015 proposed regulations, provide that a program is established by a State, or its agency or instrumentality, if the program is initiated by State statute or regulation, or by an act of a State official or agency with the authority to act on behalf of the State. A program is maintained by a State, or its agency or instrumentality, if all the terms and conditions of the program are set by the State, or its agency or instrumentality, and the State, or its agency or

instrumentality, is actively involved on an ongoing basis in the administration of the program, including supervising decisions relating to the investment of assets contributed to the program. The final regulations set forth factors that are relevant in determining whether a State, or its agency or instrumentality, is actively involved in the administration of the program. Among those factors is the nature and extent of the State’s role in selecting and overseeing private contractors contracted to provide administrative or other services.

B. Community Development Financial Institutions

The Treasury Department and the IRS understand that many of the States will have the entity that currently administers its section 529 qualified tuition program (on which section 529A was loosely modeled) also administer that State’s qualified ABLE program. However, because of greater administrative obligations, each qualified ABLE program is likely to have higher costs and lower revenue to offset those costs than the same State’s qualified tuition program. The 2015 proposed regulations suggested that, by contracting with one or more Community Development Financial Institutions (CDFIs) ¹ to perform some or all of the duties involved in administering the qualified ABLE program, a State might be able to reduce its costs, and the cost to each owner of an ABLE account, because the CDFI might be able to obtain corporate or other grants to cover those costs. For example, a CDFI could provide services to facilitate distributions, collect and report social data, solicit grants to defray the cost of administering the program, and apply for a financial assistance award from the CDFI Fund, an entity established within the Treasury Department to promote community development in economically distressed communities.

Several commenters expressed concerns that the reference to CDFIs in the 2015 proposed regulations may lead qualified ABLE program administrators to believe that CDFIs are the preferred, or perhaps even the sole, entities with which they may contract for administrative and

1 CDFIs (as defined in 12 U.S.C. 4702(5) and 12 CFR 1805.104) are certified by the CDFI Fund established under 12 U.S.C. 4703. The CDFI Program (authorized by 12 U.S.C. 4704-4707) is administered by the Treasury Department. See the CDFI Fund’s website (www.cdfifund.gov) for more detailed information and a listing of CDFIs nationwide.

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other services. These commenters asked that the final regulations clarify that organizations other than CDFIs, such as community banks, also may perform such services. One commenter expressed concern that CFDIs will not be located where people with disabilities and their families would have easy access to make deposits or withdrawals. The same commenter also expressed concern that CFDIs would be overwhelmed by screening and verifying people associated with ABLE accounts.

The Treasury Department and the IRS note that the final regulations, like the 2015 proposed regulations, do not prohibit States from contracting with private contractors for various services. However, to increase clarity, the final regulations specifically provide that, while a qualified ABLE program may contract with a CDFI for services, a qualified ABLE program also may contract with other private contractors.

Some commenters requested that the rules applicable to qualified ABLE programs be as consistent as possible with the rules applicable to qualified tuition programs under section 529 in order to reduce administrative burdens and costs. Numerous others requested that the process and reporting should be made as simple and streamlined as possible for the individuals with a disability and their families. Others requested as much uniformity as possible among the qualified ABLE programs, to facilitate the movement of ABLE accounts from one program to another.

The Treasury Department and the IRS are aware of the desirability of reducing administrative burdens and costs. The final regulations therefore are consistent with the rules applicable to qualified tuition programs, where appropriate. However, the final regulations allow certain flexibility in the way each ABLE program may implement the applicable requirements.

C. Consortia

Several commenters asked whether qualified ABLE programs could join together to form a consortium for the purpose of offering broader investment choices, streamlined program administration, and lower fees for account holders. The Treasury Department and the IRS view

the States’ ability to streamline administration and lower costs as helpful in facilitating the establishment and maintenance of qualified ABLE programs. Therefore, the final regulations provide that a qualified ABLE program may be maintained by two or more States or agencies or instrumentalities of a State. If a State or agency or instrumentality of a State participates in a consortium, the consortium’s program is considered to be the program of each member (State or agency or instrumentality of a State) of the consortium.

D. Residency requirement

As originally enacted, section 529A(b) (1)(C) required a qualified ABLE program to allow for the establishment of an ABLE account only for a designated beneficiary who is a resident of that State or of a contracting State. Consistent with the statute, the 2015 proposed regulations required that an ABLE account for a designated beneficiary may be established only under the qualified ABLE program of the State in which that designated beneficiary is a resident or with which the State of the designated beneficiary’s residence has contracted for the provision of ABLE accounts.

The 2015 proposed regulations provided that, if a State does not establish and maintain a qualified ABLE program, it could contract with another State to provide an ABLE program for its residents. The 2015 proposed regulations defined “contracting State” as a State without a qualified ABLE program of its own, which, in order to make ABLE accounts available to its residents who are eligible individuals, contracts with another State that has a program.

Many commenters asked that the final regulations clarify whether a State without an ABLE program could contract with more than one State having an ABLE program. Another commenter asked whether the Federal government would allow a State without its own qualified ABLE program to decline to contract with another State, and thus deprive its residents of access to ABLE accounts.

A few commenters were in support of the residency requirement, but several commenters expressed hope that Congress would amend the ABLE Act to eliminate

the residency requirement. Commenters pointed out that the residency requirement prevents an otherwise eligible US citizen living abroad from having an ABLE account, and that the accounts of non-resident US citizens in a disability savings account program created under foreign law would not receive the same tax-sheltered benefits under US law as are accorded to ABLE accounts. Others argued that allowing an eligible individual a choice of programs would ensure quality, competitive fees, uniformity, and other benefits for the eligible individual.

Several commenters suggested that the final regulations permit a qualified ABLE program to rely on a certification under penalties of perjury by the designated beneficiary regarding his or her state of residence to establish that the residency requirement has been satisfied.

After the Treasury Department and the IRS received these comments, the PATH Act repealed the residency requirement. Therefore, the final regulations eliminate all references to a residency requirement and to a “contracting State.” A qualified ABLE program may allow an ABLE account to be established for an eligible individual regardless of his or her residence and, subject to the rules of the particular qualified ABLE program, an eligible individual may be the designated beneficiary of an ABLE account under the qualified ABLE program of any State. However, the Treasury Department and the IRS note that the final regulations do not prohibit a State from limiting its program to State residents nor do they require a State to establish or participate in an ABLE program.

2. ABLE Accounts

A. Establishment and signatory of an ABLE account

Section 529A(e)(3) defines the term “designated beneficiary” as the eligible individual who established an ABLE account and is the owner of such account. Consistent with section 529A(e)(3), the 2015 proposed regulations provided that the designated beneficiary of an ABLE account is the individual who is the owner of the ABLE account and who either established the account at a time when he or

December 7, 2020 1558 Bulletin No. 2020–50

she was an eligible individual or who has succeeded the original designated beneficiary. Because not every eligible individual may have the capacity or otherwise be able to establish an ABLE account on his or her own behalf, the 2015 proposed regulations provided that the ABLE account may be established on behalf of the eligible individual by his or her agent under a power of attorney or, if none, by a parent or legal guardian of the eligible individual. Similarly, the 2015 proposed regulations also provided that if the designated beneficiary is unable to, or chooses not to, exercise signature authority over his or her account, then signature authority may be exercised by an agent under power of attorney or, if none, a parent or legal guardian of the designated beneficiary. The final regulations retain these provisions with modifications.

One commenter suggested that the final regulations clarify that “parent” refers to the parent of an adult designated beneficiary, as well as the parent of a minor. The final regulations do not adopt this suggestion because it is not necessary. A person’s status as a parent is not changed by the child’s attainment of the age of majority. Rather, a person’s status as a parent is determined by reference to a familial relationship that is not age dependent.

Numerous commenters asked that the list of persons who may exercise signature authority over the ABLE account on behalf of the designated beneficiary (signatories) be expanded to provide greater flexibility and to avoid the need for the court appointment of a conservator or other legal representative, particularly in cases in which the designated beneficiary has no parent available to serve as signatory. One commenter suggested that there is no reason to restrict the list to those acting under a power of attorney or to legal guardians to the exclusion of custodians and other types of fiduciaries permitted under applicable state law. One commenter pointed out that an individual eligible for an ABLE account may not have a parent, guardian, or agent under a power of attorney who can and who is willing to manage an account. Other commenters suggested that the list of authorized signatories be expanded to include grandparents, siblings, non-family members, the trustees of a trust for which the designat

ed beneficiary is the trust beneficiary, the designated beneficiary’s representative payee as recognized by the Social Security Administration (SSA), and custodians or others designated by the designated beneficiary. One commenter explained that concerns about fraud or abuse by SSA representative payees would be alleviated by the Strengthening Protections for Social Security Beneficiaries Act of 2018, Public Law 115-165 (132 Stat. 1257), which increases the funding for the Representative Payee program and strengthens procedures for addressing misuse or misappropriation of funds by SSA representative payees. Another commenter suggested that someone other than the eligible individual be permitted to establish the account if the eligible individual has the legal capacity to do so but chooses to have another person establish the account. One commenter suggested that the law of each individual State should be permitted to govern who can be a signatory.

Some commenters suggested that the designated beneficiary and/or the other person with signature authority be permitted to name a successor, that the designated beneficiary be allowed to delegate to others not only signature authority over his or her account but also the ability to establish the ABLE account, that the designated beneficiary be able to choose more than one person to exercise signature authority over his or her ABLE account, and that the designated beneficiary be allowed to designate a co-signer to serve concurrently with the designated beneficiary. Commenters also requested that the final regulations confirm that a parent with signature authority over a minor child’s ABLE account remains eligible to serve after the designated beneficiary reaches the age of majority.

Some commenters requested that the ordering rule for determining the order in which a person has the authority to be a signatory be removed. These commenters were concerned that the ordering rule would impose obligations on the qualified ABLE programs to verify the absence of any other person with higher priority who was both willing and able to so serve. These commenters suggested that a program be permitted to rely on the certification, under penalties of perjury, of an individual seeking to exercise signature

authority over an ABLE account regarding that individual’s authority to act on behalf of the designated beneficiary.

On the other hand, one commenter supported the provision in the 2015 proposed regulations regarding permissible signatories. Another commenter questioned whether allowing the designated beneficiary to designate another individual (who may otherwise lack independent authority to act on behalf of the designated beneficiary) to exercise signature authority would be consistent with the designated beneficiary’s ownership of the ABLE account. The commenter also noted that allowing greater flexibility in the choice of authorized signatory could increase program costs.

The Treasury Department and the IRS recognize that there may be situations in which an eligible individual with legal capacity may want another person to establish, or to serve as the person with signature authority over, the ABLE account for that eligible individual. Therefore, the final regulations clarify that an eligible individual with legal capacity may delegate these responsibilities to any other person. Furthermore, the Treasury Department and the IRS recognize that expanding the categories of individuals who may serve as signatories of an ABLE account of a designated beneficiary who lacks legal capacity affords less cumbersome alternatives to a court-appointed guardian in the event the designated beneficiary has no agent under a power of attorney or parent to exercise signature authority. However, the Treasury Department and the IRS also recognize that expanding too widely the universe of individuals who are allowed to establish an ABLE account and serve as the signatory of that ABLE account could increase the risk of the impermissible establishment of multiple accounts for a single individual or of having the designated beneficiary’s only ABLE account being established and managed by a person who might not be the most appropriate person to serve in that capacity.

In an effort to find an appropriate balance between these possibly competing concerns, the final regulations provide an expanded hierarchy of persons who may establish an ABLE account for an individual or exercise signature authority over that individual’s ABLE account.

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That hierarchy consists of the individual selected by the eligible individual or the eligible individual’s agent under a power of attorney, conservator or legal guardian or conservator, the spouse, a parent, a sibling, a grandparent, or a representative payee (whether an individual or organization) appointed by the SSA, in that order. It is noted that the representative payee is subject to all applicable SSA rules.

Because each eligible individual is allowed to have only one ABLE account, the Treasury Department and the IRS concluded that the ordering rule is necessary to provide a clearer process for determining who may establish the designated beneficiary’s only permissible ABLE account. For this reason, the limitation and ordering rule prescribing the persons who may establish the account and/or serve as a signatory is retained in the final regulations. To further facilitate the establishment of ABLE accounts without imposing undue burden on the program or the eligible individuals, the final regulations permit a qualified ABLE program to accept a certification by an individual, under penalties of perjury, that he or she is authorized to establish the ABLE account for the benefit of the eligible individual and that there is no other willing and able person with a higher priority to do so.

The final regulations also allow a designated beneficiary with legal capacity to remove and replace from time to time the individual with signature authority over that designated beneficiary’s ABLE account, and to name a successor signatory. The final regulations also allow a person with signature authority to name a successor signatory, consistent with the same ordering rule, if the designated beneficiary lacks the legal capacity to do so.

A few commenters suggested that more than one person be allowed to serve as authorized co-signatories. The Treasury Department and the IRS understand that this could provide administrative flexibility, so the final regulations allow a qualified ABLE program to permit co-signatories as long as each co-signatory would satisfy the ordering rule if the other had refused to so serve.

As in the 2015 proposed regulations, the final regulations provide that, be

cause individuals with signature authority over an ABLE account would be acting on behalf of the designated beneficiary, references to actions of the designated beneficiary, such as establishing or managing the ABLE account, are deemed to include the actions of any individual with signature authority over the ABLE account. Further, the final regulations continue to provide that, except for the designated beneficiary of the ABLE account, any person with signature authority over the account may neither have, nor acquire, a beneficial interest in the account during the lifetime of the designated beneficiary, and must administer the account for the benefit of the designated beneficiary.

One commenter asked that the person with signature authority over an ABLE account be allowed to elect to establish an ABLE account as a custodial account under a Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). The Treasury Department and the IRS decline to adopt this suggestion. The ABLE Act mandates very different rules governing ABLE accounts than those governing UTMA and UGMA accounts under State laws. As a result, the Treasury Department and the IRS concluded it would not be possible to administer an ABLE account as mandated by the ABLE Act if the account instead was structured and administered as a UTMA or UGMA account.

One commenter suggested that the final regulations confirm that the provisions regarding authorized signatories do not limit the ability of either the designated beneficiary or the person with signature authority to name other agents to, for instance, obtain information, make electronic contributions and investment option changes, authorize withdrawals, or have full joint control. With regard to shared full joint control, the final regulations do not adopt the suggestion. The Treasury Department and the IRS have concluded that this responsibility is properly the obligation of the person(s) with signature authority over the account and should not be delegable. However, the final regulations do not prohibit the person(s) with signature authority from having co-signatories or from allowing sub-accounts, each with a different signatory, for specific purposes.

B. Limit on number of ABLE accounts of a designated beneficiary

Section 529A(b)(1)(B) provides that each eligible person may have only one ABLE account. In addition, section 529A(c)(4) generally provides that, except with respect to rollovers, once an ABLE account has been established for a designated beneficiary, no account subsequently established for the same designated beneficiary may qualify as an ABLE account. Accordingly, the 2015 proposed regulations provided that, except in the case of rollovers or program-to-program transfers, a designated beneficiary would be limited to one ABLE account at a time, regardless of where located. The final regulations confirm that an eligible individual is not prohibited from establishing an ABLE account merely because he or she previously was the designated beneficiary of an ABLE account that has been closed.

Consistent with the statutory provisions, the 2015 proposed regulations provided that, except with respect to rollovers and program-to-program transfers, if an ABLE account is established for a designated beneficiary who already has an ABLE account in existence, the additional account would not be treated as an ABLE account. The 2015 proposed regulations also provided that, if an additional account is established and all contributions made to the additional account are returned in accordance with the rules applicable to excess contributions, the additional account would be treated as never having been established. The final regulations retain these provisions with one substantive modification.

Section 103 of the ABLE Act generally exempts ABLE accounts from being counted as a resource in determining the designated beneficiary’s eligibility for, or the amount of, certain public benefits. Thus, an ABLE account has both tax and nontax benefits. Several commenters raised concerns regarding the treatment of additional accounts for purposes of the designated beneficiary’s eligibility for public benefits. Although a tax regulation cannot govern provisions administered by other government agencies, the final regulations appropriately provide guidance on circumstances under which accounts are treated as ABLE accounts.

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As a result of the PATH Act’s amendment to section 529A eliminating the requirement that the account be opened in the State of the designated beneficiary’s residence, the Treasury Department and the IRS concluded that there is now an increased risk that an additional account could be opened under a different qualified ABLE program by a person with authority to establish an account without the knowledge of either the eligible individual or another person with authority to establish an account, thus increasing the risk that the eligible individual thereby could lose his or her eligibility for his or her public benefits. The Treasury Department and the IRS also concluded that it is within the scope of their regulatory authority to attempt to prevent this potential harm to the class of individuals that section 529A was enacted to benefit. Accordingly, the final regulations provide that, if an additional account is established for the eligible individual, the additional account also is an ABLE account if either all contributions made to the additional account are returned to the contributor(s) under the same rules applicable to the return of excess contributions, or the additional account is transferred into the designated beneficiary’s preexisting ABLE account with any excess contributions and excess aggregate contributions being returned to the contributor(s). If neither of these conditions is satisfied on or before the due date (including extensions) of the eligible individual’s Federal income tax return for the year in which the additional account was established, the additional account will cease to be an ABLE account immediately after that return due date.

Like the 2015 proposed regulations, the final regulations provide that, at the time when an individual seeks to establish an ABLE account, the qualified ABLE program must obtain verification from the individual, signed under penalties of perjury, that the individual neither knows nor has reason to know that the eligible individual for whom the ABLE account is being established has an existing ABLE account, other than an account the assets of which will be rolled over or transferred to the new account in a program-to-program transfer. As noted previously, an eligible individual is not prohibited from establishing an ABLE account merely because

he or she was the designated beneficiary of an ABLE account that has been closed.

Some commenters asked whether any penalty would be imposed on a qualified ABLE program that allows an individual to establish an ABLE account on the basis of such certification if the same eligible individual in fact does have a preexisting ABLE account. The Treasury Department and the IRS note that, in such an instance, no penalty would be imposed on the qualified ABLE program as long as the program has complied with all of the requirements of the regulations, including in obtaining the necessary certifications. As noted earlier in this section, if all of the contributions to the additional account are returned timely, the additional account will be treated as an ABLE account.

C. Definition of one account

Several commenters asked that the final regulations allow for the establishment of one or more sub-accounts under a master account of a single designated beneficiary, and that the master account (including all of its sub-accounts) would constitute a single ABLE account. Each sub-account would have a different individual with signature authority and discretion to direct the investments in that sub-account, provided that all of the sub-accounts are treated as one account for Federal tax and Federal means-tested benefit purposes. These commenters expressed concern that, if qualified ABLE programs are not given the discretion to allow sub-accounts, fewer individuals would be willing to contribute to a designated beneficiary’s account because they would not have control over the manner in which the contributions were invested or used for the designated beneficiary. Another commenter expressed concern that allowing sub-accounts could increase program costs.

The Treasury Department and the IRS view the ability of a program to allow different individuals to establish and have signature authority over separate sub-accounts under one master account as being contrary to the only-one-account rule under section 529A. Therefore, the final regulations do not permit the kind of arrangement described in the preceding paragraph.

However, the final regulations do permit, but do not require, an ABLE program to allow the establishment of sub-accounts within the sole ABLE account of the designated beneficiary. Such a sub-account could be authorized by either the designated beneficiary or the person with signature authority over the ABLE account. The signatory over the ABLE account has sole authority over the investment of the ABLE account, but the final regulations permit a program to allow the creation and maintenance of separate funds within that account, each to be used for one or more types of expenditures and from which distributions may be authorized by a person other than the signatory. For example, a designated beneficiary may authorize a parent to open and administer the ABLE account, but also may authorize the maintenance of a particular sub-account to be used for the purchase of the designated beneficiary’s groceries and entertainment expenses on an ongoing basis, and from which the designated beneficiary (or a named sibling, for example) may make distributions for that purpose. Thus, different persons may be authorized to make distributions from different sub-accounts. All sub-accounts are aggregated as part of the one ABLE account for all other purposes, including, without limitation, the contributions limits, limit on the number of permissible investment direction changes, tax provisions, and reporting requirements.

D. Eligible individual

At the time an ABLE account is established, the designated beneficiary of the account must provide evidence that he or she is an “eligible individual.” Consistent with section 529A(e)(1), the 2015 proposed regulations provided that an individual is an eligible individual for a taxable year if he or she is either (i) entitled during that year to benefits based on blindness or disability under title II or XVI of the Social Security Act, provided that such blindness or disability occurred before the date on which the individual attained age 26, or (ii) the subject of a disability certification filed with the Secretary of the Treasury or his delegate (Secretary) for that year.

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The final regulations, like the 2015 proposed regulations, provide that the determination that an individual is an eligible individual is made each taxable year and applies for the entire year. The final regulations, like the 2015 proposed regulations, provide that a qualified ABLE program must specify the documentation that an individual must furnish, both at the time an account is established and thereafter, to ensure that the designated beneficiary of the ABLE account is, and continues to be, an eligible individual.

A few commenters requested clarification as to whether an ABLE account may be established for an individual with a mental illness. The Treasury Department and the IRS note that the statute does not differentiate between a mental or physical condition, and the final regulations retain the language from § 1.529A-2(e)(1)(i)(A) of the 2015 proposed regulations that provides that a mental impairment can meet the requirements for a disability certification.

One commenter asked whether a qualified ABLE program could narrow the types of physical or mental impairments that would satisfy the requirements to be an eligible individual to specific disabilities, such as developmental disabilities. The Treasury Department and the IRS concluded that the statute does not permit a qualified ABLE program to discriminate on the basis of the nature of the disability, and that Congress intended that all individuals meeting the definition of an eligible individual under section 529A have access to an ABLE account, regardless of the nature of the individual’s disability. Therefore, a qualified ABLE program may not narrow the definition of an eligible individual by limiting the types of disabilities that can be considered.

The Treasury Department and the IRS considered whether to retain the term “entitled” for purposes of the definition of an eligible individual under section 529A(e) (1)(A). To clarify the definition of “eligible individual” under section 529A(e)(1) (A) and its use of the word “entitled”, the final regulations retain the term “entitled” as provided in the statute, interpret it to include eligibility for SSI benefits, and define the term “eligible individual” to include an individual who either is receiving SSI benefits based on blindness or a dis

ability that occurred before age 26 or is a person whose entitlement to such benefits has been suspended due solely to excess income or resources.

A few commenters suggested that establishing an individual’s eligibility should be the obligation of the Treasury Department or the SSA and should not be a burden shifted to the qualified ABLE programs. In addition, one commenter requested that a defined term, “qualified proxy,” be added to the regulations to clarify the procedures for establishing eligibility based on the individual’s entitlement to SSI or SSDI benefits. Such a certification would be signed under penalties of perjury by the designated beneficiary or a “qualified proxy” who would certify as to the beneficiary’s entitlement to these benefits during the applicable tax year and as to the onset of blindness or disability prior to age 26. The commenter also suggested that the certification either be accompanied by a copy of a letter from the SSA confirming eligibility for such benefits or reference the existence of such a letter and specifying the date of that letter. The commenter suggested allowing a qualified ABLE program to rely on an SSA certification for purposes of determining whether an individual is an eligible individual based on blindness or disability under title II or XVI of the Social Security Act. Other commenters recommended that the applicant be asked to certify the date of the most recent SSA benefit entitlement letter or to show some easily available proof, which the commenters suggested could be verified through electronic data matches between the IRS and the SSA.

The Treasury Department and the IRS agree that a certification-based process regarding eligibility by reason of entitlement to benefits based on blindness or disability under title II or XVI of the Social Security Act is the simplest way to facilitate the establishment of ABLE accounts without unduly burdening individuals, the program, the IRS, or the SSA. Additionally, the Treasury Department and the IRS concluded that it would be in everyone’s best interests to permit an eligible individual to establish an ABLE account without experiencing the delay that would result from having to wait for the acceptance or approval of a certification by a government agency. Therefore, consistent with