Under pre-OBBBA law, the additional contribution limit to Achieving a Better Life Experience (ABLE) accounts, which is equal to the lesser of:
(1) the applicable federal poverty level for a one-person household in the prior year, or
(2) the beneficiary’s compensation for the year,
And was set to expire after December 31, 2025.
OBBBA: Effective after 2025, OBBBA permanently allows the additional contributions to ABLE accounts. The provision also provides an additional year of inflation adjustment for the base amount of the limit.
Overview of ABLE Programs: The tax code provides for tax-favored savings programs intended to benefit disabled individuals, known as qualified ABLE programs. A qualified ABLE program is a program established and maintained by a State or agency or instrumentality thereof. A qualified ABLE program must meet the following conditions:
(1) Under the provisions of the program, contributions may be made to an account (an “ABLE account”) established for the purpose of meeting the qualified disability expenses of the designated beneficiary of the account.
(2) the program must limit a designated beneficiary to one ABLE account; and
(3) the program must meet certain other requirements discussed below.
Designated Beneficiaries and Eligible Individuals: A designated beneficiary of an ABLE account is the owner of the ABLE account. A designated beneficiary generally must be an eligible individual (discussed below) at the time the ABLE account is established. An ABLE account may be transferred to a successor designated beneficiary who is a member of the same family as the original designated beneficiary.
For this purpose, a member of the family includes the original designated beneficiary’s brother, sister, stepbrother, or stepsister. In the case of such a transfer, the successor designated beneficiary must be an eligible individual at the time of transfer.
Eligible Individual: An eligible individual is an individual either:
(1) For whom a disability certification has been filed with the [Treasury] Secretary (i.e., the IRS) for the taxable year, or
(2) Who is entitled to Social Security Disability Insurance (SSDI) benefits or Supplemental Security Income (SSI) benefits based on blindness or disability, and such blindness or disability occurred:
- Before the individual attained age 26 or,
- For taxable years beginning after December 31, 2025, aged 46.
Disability Certification: A disability certification means a certification to the satisfaction of the Secretary, made by the eligible individual or the parent or guardian of the eligible individual, that the individual either:
(1) Has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than 12 months, or
(2) Is blind (within the meaning of section 1614(a)(2) of the Social Security Act). Such blindness or disability must have occurred before the date the individual attained age 26 (or, for taxable years beginning after December 31, 2025, age 46). The certification must include a copy of the diagnosis of the individual’s impairment and be signed by a licensed physician.
Tax Treatment and Additional Requirements: A qualified ABLE program is generally exempt from income tax but is subject to the taxes imposed on the unrelated business income of tax-exempt organizations.
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Contributions: Contributions to an ABLE account must be made in:
o Cash and are not deductible for Federal income tax purposes.
o Except in the case of a rollover contribution from another ABLE account
o An ABLE account must not receive aggregate contributions during a taxable year more than the amount under IRC Sec 2503(b), the annual gift tax exclusion. For 2025, the annual gift tax exclusion is $19,000.
o Until January 1, 2026, if the designated beneficiary is an employee for whom no contribution during the taxable year is made to a tax-advantaged defined contribution plan, an IRC Sec 403(b) plan, or a governmental IRC Sec 457 plan,
o The beneficiary may contribute to his or her ABLE account the lesser of the beneficiary’s compensation included in gross income or an amount equal to the poverty line for a one-person household for the preceding calendar year. The beneficiary may make such a contribution regardless of whether it increases the total amount contributed (by the beneficiary or others) for the taxable year above the year’s gift tax exclusion amount.
o In addition to the foregoing contribution limitations, a qualified ABLE program must provide adequate safeguards to ensure that ABLE account contributions do not exceed the limit imposed on accounts under the qualified tuition program of the State maintaining the qualified ABLE program.
A qualified ABLE program may permit a designated beneficiary to direct (directly or indirectly) the investment of any contributions (or earnings thereon) no more than two times in any calendar year and must provide separate accounting for each designated beneficiary.
A qualified ABLE program may not allow any interest in the program (or any portion thereof) to be used as security for a loan.
No inference may be drawn from a disability certification under IRC Sec 529A for purposes of eligibility for SSDI, SSI, or Medicaid benefits.
Excess Contributions: If contributions to an ABLE account exceed the annual limit, an excise tax in the amount of 6% of the excess contribution to such account is imposed on the designated beneficiary (IRC Sec 4973). Such tax does not apply if the trustee of the account makes a corrective distribution of the excess amount by the due date (including extensions) of the designated beneficiary’s tax return for the taxable year of the excess contribution.
Distributions: A distribution from an ABLE account is generally includible in the distributee’s income to the extent it consists of earnings on the account. However, distributions from an ABLE account in a taxable year are excludable from income to the extent they do not exceed the qualified disability expenses (discussed below) of the designated beneficiary for the taxable year.
If distributions from an ABLE account exceed such qualified disability expenses, a pro rata portion of the distributions is excludable from income. The portion of any distribution that is includible in income is subject to an additional 10% tax unless the distribution is made after the death of the beneficiary.
Rollover: Amounts in an ABLE account may be rolled over without income tax liability to another ABLE account for the same beneficiary or another ABLE account for the designated beneficiary’s brother, sister, stepbrother, or stepsister who is also an eligible individual.
Once an ABLE account has been established by a designated beneficiary, no account subsequently established by such beneficiary shall be treated as an ABLE account, except in the case of a rollover (in which case the contributor ABLE account must be closed within 60 days of the rollover).
A contribution to an ABLE account is treated as a completed gift of a present interest to the designated beneficiary. Such contributions qualify for the per-donee annual gift tax exclusion ($19,000 for 2025) and, to the extent of such exclusion, are also exempt from the generation-skipping transfer (“GST”) tax. A distribution from an ABLE account to the designated beneficiary is not subject to gift tax or GST tax.
Rollover From Qualified Tuition Programs: Amounts rolled over within 60 days of distribution from a qualified tuition program (also known as a 529 account) to an ABLE account before January 1, 2026, generally are not included in the gross income of the 529 account beneficiary, provided that the ABLE account beneficiary is either the 529 account beneficiary or a member of the 529 account beneficiary’s family.
Such rolled-over amounts count towards the overall limitation on amounts that may be contributed to an ABLE account within a taxable year. However, to the extent that a 529 rollover amount, when added to all other amounts contributed to the ABLE account in the taxable year, exceeds the inflation-indexed annual gift tax exclusion amount, the 529 rollover is includible in the gross income of the 529 beneficiary.
Qualified Disability Expenses:
As described above, distributed earnings from an ABLE account are excluded from income only to the extent total distributions do not exceed the qualified disability expenses of the designated beneficiary. For this purpose, qualified disability expenses are any expenses related to the designated beneficiary’s blindness or disability which are made for the benefit of the designated beneficiary. Such expenses include expenses for the following:
o Education,
o Housing,
o Transportation,
o Employment training and support,
o Assistive technology and personal support services,
o Health, prevention and wellness,
o Financial management and administrative services,
o Legal fees,
o Expenses for oversight and monitoring,
o Funeral and burial expenses, and
o Other expenses, which are approved by the Secretary under regulations and consistent with the purposes of IRC Sec 529A.
Transfer to State: Upon death of the designated beneficiary, subject to any outstanding payments due for qualified disability expenses incurred by the designated beneficiary, a State may file a claim for payment of amounts remaining in the designated beneficiary’s account. Such claim may not exceed the total medical assistance paid for the designated beneficiary after the establishment of the ABLE account under the State’s Medicaid plan established under title XIX of the Social Security Act, net of any premiums paid from the ABLE account or by or on behalf of the beneficiary to such State’s Medicaid Buy-In program.
Treatment of ABLE Accounts Under Federal Programs: Any amounts in an ABLE account, any contributions to such account, and any distributions for qualified disability expenses shall be disregarded for purposes of determining the designated beneficiary’s eligibility to receive, or the amount of, any assistance or benefit authorized by any Federal means-tested program.
However, in the case of the SSI program, a distribution from an ABLE account for housing expenses is not disregarded, nor are amounts in an ABLE account more than $100,000. If an individual’s ABLE account balance exceeds $100,000, such individual’s SSI benefits shall not be terminated but instead shall be suspended until such time as the individual’s resources fall below $100,000. However, such suspension shall not be considered for purposes of Medicaid eligibility.
OBBBA makes permanent the ability of a designated beneficiary who is an employee (and for whom no contribution during the taxable year is made to a tax-advantaged defined contribution plan, a section 403(b) plan, or a governmental section 457 plan) to contribute to his or her ABLE account the lesser of his or her compensation included in gross income or an amount equal to the poverty line for a one-person household for the preceding calendar year. The beneficiary may make such a contribution regardless of whether it increases the total amount contributed (by the beneficiary or others) for the annual gift tax exclusion amount.
Under OBBBA, the maximum annual contribution limit for an ABLE account (not including the employment-related contributions made by the designated beneficiary) is equal to the annual inflation-adjusted gift tax exclusion. Whereas the $10,000 annual gift tax exclusion base amount for inflation is adjusted with a base year of 1997, under the OBBBA the $10,000 base amount is adjusted for inflation with a base year of 1996. The extra year of inflation increases the annual contribution limit above what it would be under present law which would be $19,000 for 2025.
Other provisions are unchanged and is effective for taxable years beginning after December 31, 2025