Although traditional 529 college savings plans allow for front-loading five years’ worth of annual exclusions into one gift, this option is not available for 529A accounts. Contributions to a 529A account must adhere to the annual limit, which is $15,000 for 2019. Further, once a 529A account is established, the funds are irrevocable. Qualified distributions include, but are not limited to, health care expenses, education, transportation, employment training, personal assistance, and housing.
The good news is the Tax Cuts and Jobs Act of 2017 provides temporary changes regarding amounts contributed to a 529A account, allowing both earned income and rollovers. When a beneficiary is working and does not have an opportunity to participate in an employer retirement account, an additional $12,140 of the beneficiary’s own 2019 earnings can be contributed, and the taxes may qualify for a Saver’s Credit. In addition, the law allows funds from a traditional 529 college savings plan to be rolled over into a 529A account.
Generally, 529A accounts do not disqualify a disabled person from means-tested government programs, unless the 529A account balance exceeds $100,000. If a distribution does not meet the guidelines, a nonqualified distribution out of a 529A account will incur income tax on the earnings distributed and a 10-percent federal penalty. Please note: Nonqualified distributions may count against means-tested government programs, such as Supplemental Security Income.
When the beneficiary passes away, the state Medicaid office has a right to recover funds out of the 529A account for benefits paid, unless prohibited by state law. This is similar to the Medicaid payback provision for first-party special needs trusts. Anything remaining after Medicaid is paid back will be distributed to heirs.