Qualified ABLE Program

What is a Qualified ABLE Program?

A Qualified ABLE Program is a state-established initiative designed to support individuals who became blind or disabled before age 26. The program must meet strict criteria under Section 529A to maintain its “qualified” status:

• Eligibility: An ABLE account may be opened for an individual who is blind or disabled, with the condition onset occurring before age 26. This individual is both the account owner and the designated beneficiary.
• Purpose: Contributions support Qualified Disability Expenses, or QDEs, which include, but are not limited to, expenses for education, housing, transportation, training for employment, health care, assistive technology, and other costs related to enhancing health, independence, or quality of life.
• Contribution Limits: One ABLE account for each beneficiary (other than a rollover case) is allowed, and contributions within each calendar year must be limited. For 2025, the total contribution limit allowed by all sources is aligned with that of the federal gift tax exclusion (currently $18,000, subject to inflation adjustments), adding up an allowance for employing beneficiaries of either their compensation or for a household of one to a poverty line (for example, in 2024, $14,580 adjusted for 2025).
• Program Requirements: The program must limit contributions that exceed those amounts (other than rollovers and program-to-program transfers) and comply with other requirements of Section 529A, such as separate accounting for each account.

States or other designated entities administer these programs, overseeing such compliance. Each distribution or termination of an account becomes the subject grant of Form 1099-QA reporting requirements from the IRS for tax implications.

Tax Benefits of ABLE Accounts

ABLE accounts offer some unique tax advantages similar to those of qualified tuition programs (QTPs) under Section 529, but designed for disability-related benefits:

• Tax-Free Withdrawals: Amounts withdrawn from an ABLE account, including earnings, are excluded from taxable income if spent on QDEs. This is similar to tax-free treatment for qualified education expenses under a 529 plan.
• Tax-Deferred Growth: The earnings in the account-interest, dividend and investment gains-are allowed to accumulate free of tax liability to enhance the growth potential of the account.
• No Federal Deduction for Contributions: Contributions to ABLE accounts do not qualify for a federal income tax deduction, like contributions to some retirement accounts. However, some states may offer state tax incentives.

If an expenditure is a non-qualified expense, the earnings portion is taxable and possibly subject to a 10% additional tax, much like penalties for non-qualified 529 plan distributions. Therefore, it is critical that funds are used correctly to maintain tax benefits.

Form 1099-QA: Reporting Distributions

The IRS mandates detailed reporting for ABLE accounts through Form 1099-QA, which tracks distributions and terminations. This form ensures transparency and compliance with tax rules. Here’s how it functions:

• Who Files: Any state, agency, or instrumentality maintaining a Qualified ABLE Program must file Form 1099-QA for each account with a distribution or termination in the calendar year. An officer, employee, or their designer overseeing the program handles the filing.
• Filing Deadline: The form must be submitted to the IRS by February 28 (or the next business day if it falls on a weekend or holiday) of the following year. For 2025 distributions, this means February 28, 2026. In leap years, the deadline remains February 28, not February 29.
• Recipient Statements: A copy or substitute statement must also be furnished to the designated beneficiary and any contributor receiving a returned contribution (plus earnings) by March 15 of the following year (e.g., March 15, 2026, for 2025 distributions).

What’s Reported:

• Box 1: Gross Distribution: Total amount distributed, including both basis (contributions) and earnings, whether for qualified or non-qualified purposes.
• Box 2: Earnings: The taxable portion of the distribution, calculated as the difference between the gross distribution and the basis, if not used for QDEs.
• Box 3: Basis: The non-taxable portion representing original contributions.
• Box 4: Program-to-Program Transfer: Checked if funds were rolled over to another ABLE account or transferred between state programs, typically non-taxable if completed within 60 days.
• Box 5: Reserved for future use.
• Box 6: Recipient Not Designated Beneficiary: Checked if the distribution went to someone other than the account’s designated beneficiary (e.g., a contributor receiving excess funds).

Special Cases: If the designated beneficiary changes to an ineligible individual or non-family member, the fair market value (FMV) of the account on the change date is reported as a distribution in Box 1. Family members (siblings, including step- or half-siblings) qualify for tax-free beneficiary changes, and no Form 1099-QA is filed in such cases.

Due to low paper filing volumes, Form 1099-QA is available as an online fillable PDF at IRS.gov/Form1099QA. Entities filing fewer than 10 forms may submit paper copies with Form 1096, while those filing 10 or more must e-file via the IRS FIRE System.

Key Rules and Restrictions

To maintain its qualified status and tax benefits, an ABLE Program enforces specific rules:

• One Account Limit: Each eligible individual is restricted to one ABLE account nationwide, barring rollovers or transfers. Excess accounts may lose tax advantages.
• Contribution Caps: Beyond the annual limit, employed beneficiaries may contribute additional amounts from their compensation, up to the poverty line threshold, provided they do not participate in certain employer retirement plans.
• Rollover Rules: Funds can be rolled over from one ABLE account to another for the same beneficiary or a family member within 60 days without tax consequences. Program-to-program transfers between states follow similar guidelines.
• Excess Contributions: Programs must reject contributions exceeding limits unless part of a rollover. Returned contributions, including earnings, trigger a Form 1099-QA filing for the contributor.

Tax Implications for Beneficiaries and Contributors

Beneficiaries: When distributions cover QDEs, no income tax or penalty applies. Non-qualified distributions tax the earnings portion at the beneficiary’s ordinary income tax rate, plus a 10% additional tax, reported on Form 1040 or 1040-SR. Records of expenses should be retained to substantiate qualified use.

Contributors: Contributions are made with after-tax dollars and returned contributions (e.g., excess amounts) are non-taxable up to the basis. Earnings on returned contributions may be taxable if not rolled over or used for QDEs.