Senate Study Bill 1210 - Introduced SENATE FILE _____ BY (PROPOSED COMMITTEE ON HUMAN RESOURCES BILL BY CHAIRPERSON MATHIS) A BILL FOR An Act creating an Iowa ABLE savings plan trust, providing 1 deductions and exclusions from the individual income tax 2 and inheritance tax relating to the trust, and including 3 retroactive and other applicability provisions. 4 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 5 TLSB 1660XC (3) 86 mm/sc

S.F. _____ Section 1. NEW SECTION . 12I.1 Purpose and definitions. 1 1. The general assembly finds that the general welfare 2 and well-being of the state are directly related to the 3 health, maintenance, independence, and quality of life of its 4 disabled residents, and that a vital and valid public purpose 5 is served by the creation and implementation of programs that 6 encourage and make possible savings to secure funding for 7 disability-related expenses on behalf of individuals with 8 disabilities that will supplement, but not supplant, other 9 benefits provided by various federal, state, and private 10 sources. The creation of the means of encouragement for 11 citizens to invest in such a program represents the carrying 12 out of a vital and valid public purpose. In order to make 13 available to the citizens of the state an opportunity to fund 14 future disability-related expenses of individuals, it is 15 necessary that a public trust be established in which moneys 16 may be invested for payment of future disability-related 17 expenses of an individual. 18 2. As used in this chapter, unless the context otherwise 19 requires: 20 a. “Account balance limit” means the maximum allowable 21 aggregate balance of an account established for a designated 22 beneficiary. Account earnings, if any, are included in the 23 account balance limit. 24 b. “Account owner” means an individual who is a resident of 25 this state and who enters into a participation agreement under 26 this chapter for the payment of qualified disability expenses 27 on behalf of a designated beneficiary. 28 c. “Designated beneficiary” means an individual who is a 29 resident of this state and who meets the definition of “eligible 30 individual” in section 529A of the Internal Revenue Code. 31 d. “Internal Revenue Code” means the same as defined in 32 section 422.3. 33 e. “Iowa ABLE savings plan trust” or “trust” means the trust 34 created under section 12I.2. 35 -1- LSB 1660XC (3) 86 mm/sc 1/ 12

S.F. _____ f. “Participation agreement” means an agreement between the 1 account owner and the trust entered into under this chapter. 2 3. “Qualified disability expenses” means the same as defined 3 in section 529A of the Internal Revenue Code. 4 Sec. 2. NEW SECTION . 12I.2 Creation of Iowa ABLE savings 5 plan trust. 6 An Iowa ABLE savings plan trust is created. The treasurer of 7 state is the trustee of the trust, and has all powers necessary 8 to carry out and effectuate the purposes, objectives, and 9 provisions of this chapter pertaining to the trust, including 10 the power to do all of the following: 11 1. Make and enter into contracts necessary for the 12 administration of the trust created under this chapter. 13 2. Enter into agreements with the state, or any federal or 14 other state agency, or other entity as required to implement 15 this chapter. 16 3. Carry out the duties and obligations of the trust 17 pursuant to this chapter. 18 4. Accept any grants, gifts, legislative appropriations, 19 and other moneys from the state, any unit of federal, state, or 20 local government, or any other person, firm, partnership, or 21 corporation which the treasurer of state shall deposit into the 22 administrative fund or program fund. 23 5. Participate in any federal, state, or local governmental 24 program for the benefit of the trust. 25 6. Procure insurance against any loss in connection with the 26 property, assets, or activities of the trust. 27 7. Enter into participation agreements with account owners. 28 8. Make payments to designated beneficiaries pursuant to 29 participation agreements. 30 9. Make refunds to account owners upon the termination 31 of participation agreements, and partial nonqualified 32 distributions to account owners, pursuant to this chapter and 33 the limitations and restrictions set forth in this chapter. 34 10. Invest moneys from the program fund in any investments 35 -2- LSB 1660XC (3) 86 mm/sc 2/ 12

S.F. _____ that are determined by the treasurer of state to be 1 appropriate. 2 11. Engage investment advisors, if necessary, to assist in 3 the investment of trust assets. 4 12. Contract for goods and services and engage personnel 5 as necessary, including consultants, actuaries, managers, 6 legal counsel, and auditors for the purpose of rendering 7 professional, managerial, and technical assistance and advice 8 to the treasurer of state regarding trust administration and 9 operation. 10 13. Establish, impose, and collect administrative fees 11 and charges in connection with transactions of the trust, and 12 provide for reasonable service charges, including penalties for 13 cancellations and late payments with respect to participation 14 agreements. 15 14. Administer the funds of the trust. 16 15. Prepare and file reports and notices. 17 16. Adopt rules pursuant to chapter 17A for the 18 administration of this chapter. 19 Sec. 3. NEW SECTION . 12I.3 Participation agreements for 20 trust. 21 The trust may enter into participation agreements with 22 account owners pursuant to the following terms and agreements: 23 1. a. The treasurer of state shall allow only one 24 participation agreement per designated beneficiary. 25 b. The account owner must also be the designated beneficiary 26 of the account. However, a trustee or legal guardian may 27 be designated as custodian of an account for a designated 28 beneficiary who is a minor or who lacks capacity to enter into 29 a participation agreement if such designation is not prohibited 30 under section 529A of the Internal Revenue Code. 31 c. The treasurer of state shall set an annual contribution 32 limit and account balance limit to maintain compliance with 33 section 529A of the Internal Revenue Code. A contribution 34 shall not be permitted to the extent it exceeds the annual 35 -3- LSB 1660XC (3) 86 mm/sc 3/ 12

S.F. _____ contribution limit or causes the aggregate balance of the 1 account established for the designated beneficiary to exceed 2 the applicable account balance limit. 3 d. The maximum amount that may be deducted for Iowa income 4 tax purposes shall not exceed the maximum deductible amount 5 determined for the year pursuant to section 12D.3, subsection 6 1, paragraph “a” . This maximum amount applies per designated 7 beneficiary per year. 8 e. Participation agreements may be amended to provide 9 for adjusted levels of contributions based upon changed 10 circumstances or changes in disability-related expenses. 11 f. Any person may make contributions pursuant to a 12 participation agreement on behalf of a designated beneficiary 13 under rules adopted by the treasurer of state. 14 2. The execution of a participation agreement by the trust 15 shall not guarantee in any way that future disability-related 16 expenses will be equal to projections and estimates provided by 17 the trust or that the account owner or designated beneficiary 18 is guaranteed any of the following: 19 a. A return of principal. 20 b. A rate of interest or other return from the trust. 21 c. Payment of interest or other return from the trust. 22 3. a. A designated beneficiary under a participation 23 agreement may be changed as permitted under rules adopted by 24 the treasurer of state upon written request of the account 25 owner as long as such change would be permitted by section 529A 26 of the Internal Revenue Code. 27 b. Participation agreements may otherwise be freely amended 28 throughout their terms in order to enable account owners to 29 increase or decrease the level of participation, change the 30 designated beneficiary, and carry out similar matters as 31 authorized by rule. 32 4. Each participation agreement shall provide that the 33 participation agreement may be canceled upon the terms and 34 conditions, and upon payment of applicable fees and costs set 35 -4- LSB 1660XC (3) 86 mm/sc 4/ 12

S.F. _____ forth and contained in the rules adopted by the treasurer of 1 state. 2 Sec. 4. NEW SECTION . 12I.4 Program and administrative funds 3 —— investment and payment. 4 1. a. The treasurer of state shall segregate moneys 5 received by the trust into two funds: the program fund and the 6 administrative fund. 7 b. All moneys paid by account owners or other persons 8 on behalf of a designated beneficiary in connection with 9 participation agreements shall be deposited as received into 10 separate accounts for each designated beneficiary within the 11 program fund. 12 c. Contributions to the trust made on behalf of designated 13 beneficiaries may only be made in the form of cash. 14 d. An account owner or designated beneficiary is not 15 permitted to provide investment direction regarding program 16 contributions or earnings held by the trust. 17 2. Moneys accrued by account owners in the program fund 18 of the trust may be used for payments of qualified disability 19 expenses. 20 3. Moneys in the account of a designated beneficiary may 21 be claimed by the Iowa Medicaid program as provided in section 22 529A(f) of the Internal Revenue Code and subject to limitations 23 imposed by the treasurer of state. 24 Sec. 5. NEW SECTION . 12I.5 Cancellation of agreements. 25 An account owner may cancel a participation agreement at 26 will. Upon cancellation of a participation agreement, an 27 account owner shall be entitled to the return of the account 28 owner’s account balance. 29 Sec. 6. NEW SECTION . 12I.6 Repayment and ownership of 30 payments and investment income —— transfer of ownership rights. 31 1. a. An account owner retains ownership of all 32 contributions made on behalf of a designated beneficiary under 33 a participation agreement up to the date of utilization for 34 payment of qualified disability expenses of the designated 35 -5- LSB 1660XC (3) 86 mm/sc 5/ 12

S.F. _____ beneficiary. 1 b. All income derived from the investment of the 2 contributions made on behalf of a designated beneficiary shall 3 be considered to be held in trust for the benefit of the 4 designated beneficiary. 5 2. In the event the program is terminated prior to 6 payment of qualified disability expenses for the designated 7 beneficiary, the account owner is entitled to a refund of the 8 account owner’s account balance. 9 3. Any amounts which may be paid to any person or persons 10 pursuant to the Iowa ABLE savings plan trust but which are not 11 listed in this section are owned by the trust. 12 4. An account owner may transfer ownership rights to 13 another designated beneficiary, including a gift of the 14 ownership rights to a designated beneficiary who is a minor, in 15 accordance with rules adopted by the treasurer of state and the 16 terms of the participation agreement, so long as the transfer 17 would be permitted by section 529A of the Internal Revenue 18 Code. 19 5. An account owner shall not be entitled to utilize any 20 interest in the trust as security for a loan. 21 Sec. 7. NEW SECTION . 12I.7 Reports —— annual audited 22 financial report —— reports under federal law. 23 1. a. The treasurer of state shall submit an annual 24 audited financial report, prepared in accordance with generally 25 accepted accounting principles, on the operations of the trust 26 by November 1 to the governor and the general assembly. 27 b. The annual audit shall be made either by the auditor 28 of state or by an independent certified public accountant 29 designated by the auditor of state and shall include direct and 30 indirect costs attributable to the use of outside consultants, 31 independent contractors, and any other persons who are not 32 state employees. 33 2. The annual audit shall be supplemented by all of the 34 following information prepared by the treasurer of state: 35 -6- LSB 1660XC (3) 86 mm/sc 6/ 12

S.F. _____ a. Any related studies or evaluations prepared in the 1 preceding year. 2 b. A summary of the benefits provided by the trust, 3 including the number of account owners and designated 4 beneficiaries in the trust. 5 c. Any other information deemed relevant by the treasurer of 6 state in order to make a full, fair, and effective disclosure 7 of the operations of the trust. 8 3. The treasurer of state shall prepare and submit to the 9 secretary of the United States treasury or other required party 10 any reports, notices, or statements required under section 529A 11 of the Internal Revenue Code. 12 Sec. 8. NEW SECTION . 12I.8 Tax considerations. 13 1. For federal income tax purposes, the Iowa ABLE savings 14 plan trust shall be considered a qualified ABLE program exempt 15 from taxation pursuant to section 529A of the Internal Revenue 16 Code. The Iowa ABLE savings plan trust meets the requirements 17 of section 529A(b) of the Internal Revenue Code as follows: 18 a. Pursuant to section 12I.3, subsection 1, paragraph “a” , 19 only one account per designated beneficiary is allowed. 20 b. Pursuant to section 12I.3, subsection 1, paragraph “c” , 21 a maximum contribution level and account balance level is 22 established. 23 c. Pursuant to section 12I.3, subsection 1, paragraph 24 “f” , any person may make contributions to an account that is 25 established for the purpose of meeting the qualified disability 26 expenses of the designated beneficiary of the account. 27 d. Pursuant to section 12I.4, subsection 1, paragraph 28 “b” , a separate account is established for each designated 29 beneficiary. 30 e. Pursuant to section 12I.4, subsection 1, paragraph “c” , 31 contributions may only be made in the form of cash. 32 f. Pursuant to section 12I.4, subsection 1, paragraph “d” , 33 an account owner or designated beneficiary is not permitted to 34 provide investment direction regarding program contributions 35 -7- LSB 1660XC (3) 86 mm/sc 7/ 12

S.F. _____ or earnings held by the trust. 1 g. Pursuant to section 12I.6, subsection 5, an account owner 2 shall not pledge any interest in the trust as security for a 3 loan. 4 2. State income tax treatment of the Iowa ABLE savings plan 5 trust shall be as provided in section 422.7, subsections 34 and 6 34A. 7 3. State inheritance tax treatment of interests in Iowa ABLE 8 savings plans shall be as provided in section 450.4, subsection 9 9. 10 Sec. 9. NEW SECTION . 12I.9 Property rights to assets in 11 trust. 12 1. The assets of the trust shall at all times be preserved, 13 invested, and expended solely and only for the purposes of the 14 trust and shall be held in trust for the account owners and 15 designated beneficiaries. 16 2. Except as provided in section 12I.4, subsection 3, no 17 property rights in the trust shall exist in favor of the state. 18 3. Except as provided in section 12I.4, subsection 3, the 19 assets of the trust shall not be transferred or used by the 20 state for any purposes other than the purposes of the trust. 21 Sec. 10. NEW SECTION . 12I.10 Construction. 22 This chapter shall be construed liberally in order to 23 effectuate its purpose. 24 Sec. 11. Section 422.7, Code 2015, is amended by adding the 25 following new subsections: 26 NEW SUBSECTION . 34. a. Subtract the maximum contribution 27 that may be deducted for Iowa income tax purposes for a 28 contribution on behalf of a designated beneficiary to the Iowa 29 ABLE savings plan trust pursuant to section 12I.3, subsection 30 1, paragraph “d” . 31 b. Add the amount resulting from the cancellation of a 32 participation agreement refunded to the taxpayer as an account 33 owner in the Iowa ABLE savings plan trust to the extent 34 previously deducted by the taxpayer or any other person as a 35 -8- LSB 1660XC (3) 86 mm/sc 8/ 12

S.F. _____ contribution to the trust. 1 c. Add the amount resulting from a withdrawal made by a 2 taxpayer from the Iowa ABLE savings plan trust for purposes 3 other than the payment of qualified disability expenses to the 4 extent previously deducted by the taxpayer or any other person 5 as a contribution to the trust. 6 NEW SUBSECTION . 34A. Subtract, to the extent included, 7 income from interest and earnings received from the Iowa ABLE 8 savings plan trust created in chapter 12I. 9 Sec. 12. Section 450.4, Code 2015, is amended by adding the 10 following new subsection: 11 NEW SUBSECTION . 9. On the value of any interest in the Iowa 12 ABLE savings plan trust created in chapter 12I. 13 Sec. 13. APPLICABILITY. This Act applies to contributions 14 to the Iowa ABLE savings plan trust made, and qualified 15 disability expenses incurred, on or after July 1, 2015. 16 Sec. 14. APPLICABILITY. The section of this Act amending 17 section 450.4 applies to estates of decedents dying on or after 18 July 1, 2015. 19 Sec. 15. RETROACTIVE APPLICABILITY. The section of this 20 Act amending section 422.7 applies retroactively to January 1, 21 2015, for tax years beginning on or after that date. 22 EXPLANATION 23 The inclusion of this explanation does not constitute agreement with 24 the explanation’s substance by the members of the general assembly. 25 This bill creates an Iowa ABLE (Achieving A Better Life 26 Experience) savings plan trust and provides for various Iowa 27 individual income tax and inheritance tax benefits. 28 BACKGROUND. On December 19, 2014, the federal Achieving 29 A Better Life Experience Act of 2014 (ABLE Act) was enacted 30 as part of the federal Tax Increase Prevention Act of 2014 31 (Pub. L. No. 113-295). The ABLE Act allows states to create 32 programs to assist individuals in saving private funds for 33 the purpose of supporting individuals with disabilities. 34 Qualifying state programs will allow for the establishment 35 -9- LSB 1660XC (3) 86 mm/sc 9/ 12

S.F. _____ of accounts into which eligible disabled individuals or 1 others may make contributions for the payment of future 2 disability-related expenses of the eligible disabled 3 individual. Funds and earnings in accounts established 4 under qualifying state programs are afforded federal benefits 5 in certain circumstances, including federal tax exemption, 6 bankruptcy protection, and exclusion from consideration under 7 certain means-tested programs, such as Medicaid or supplemental 8 security income. 9 IOWA ABLE SAVINGS PLAN TRUST. The bill creates the Iowa 10 ABLE savings plan trust (trust) under the treasurer of state 11 (state treasurer) that will meet the requirements of §529A of 12 the Internal Revenue Code (federal ABLE program). The state 13 treasurer is the trustee of the trust and has numerous powers, 14 as specified in the bill, for the purpose of carrying out the 15 purpose of the trust. 16 The trust is authorized to enter into participation 17 agreements with individuals for the payment of future qualified 18 disability expenses. “Qualified disability expenses” means the 19 same as defined under the federal ABLE program, which generally 20 defines the term to include expenses related to a designated 21 beneficiary’s education, housing, transportation, employment 22 training and support, assistive technology and personal support 23 services, health, prevention and wellness, financial management 24 and administrative services, legal fees, expenses for oversight 25 and monitoring, funeral and burial expenses, and other expenses 26 approved by the secretary of the United States treasury 27 (secretary). 28 The person with whom the state treasurer enters into a 29 participation agreement must be both the account owner and 30 designated beneficiary. However, the bill allows a trustee 31 or legal guardian to be designated as custodian of an account 32 for a designated beneficiary who is a minor or who lacks 33 capacity to enter into a participation agreement, provided such 34 designation would be allowed under the federal ABLE program. 35 -10- LSB 1660XC (3) 86 mm/sc 10/ 12

S.F. _____ “Designated beneficiary” is defined in the bill as a person 1 who is a resident of Iowa and who qualifies as an eligible 2 individual under the federal ABLE program, which includes 3 individuals who are entitled to benefits based on blindness or 4 disability under Title II (disability insurance) or Title XVI 5 (supplemental security income) of the federal Social Security 6 Act if such blindness or disability occurred before attaining 7 26 years of age, and if such individual files a disability 8 certification with the secretary. 9 The bill requires the state treasurer to maintain a separate 10 account in the trust for each designated beneficiary of a 11 participation agreement. Only one participation agreement 12 shall be allowed per designated beneficiary. Any person is 13 allowed to make contributions in the form of cash to an account 14 on behalf of a designated beneficiary. The trust is required 15 to maintain limits on the annual contributions to an account, 16 and the aggregate balance in an account, matching those set 17 forth in the federal ABLE program, which prohibits annual 18 contributions to an account from exceeding the annual gift tax 19 exclusion amount ($14,000 for 2015), and prohibits an aggregate 20 account balance from exceeding the limit set by a state under 21 its qualified tuition program (currently $320,000 for Iowa). 22 The bill provides other various terms and conditions for 23 participation agreements, use and segregation of trust funds, 24 cancellation of agreements and refund of account balances, 25 and ownership rights in the trust. The bill provides that an 26 account may be claimed by the Iowa Medicaid program upon the 27 death of the designated beneficiary, in accordance with the 28 federal ABLE program. The bill requires the state treasurer to 29 prepare and submit audited financial reports to the governor 30 and general assembly, and further requires the state treasurer 31 to comply with any reporting requirements of the federal ABLE 32 program. The bill applies to qualified disability expenses 33 incurred on or after July 1, 2015. 34 IOWA TAX BENEFITS. The bill provides several tax benefits 35 -11- LSB 1660XC (3) 86 mm/sc 11/ 12

S.F. _____ under the trust. First, the value of any interest in the trust 1 of a decedent dying on or after July 1, 2015, is excluded 2 from the Iowa inheritance tax. Second, contributions to the 3 trust made on or after July 1, 2015, on behalf of a designated 4 beneficiary are deductible from the Iowa individual income 5 tax up to the maximum amount allowed per beneficiary per year 6 for purposes of the Iowa educational savings plan trust in 7 Code chapter 12D. For 2015, that amount is set at $3,163. 8 Any amounts refunded to a taxpayer from the cancellation of 9 a participation agreement or that are withdrawn for purposes 10 other than the payment of qualified disability expenses of the 11 designated beneficiary must be included in Iowa net income to 12 the extent they were previously deducted by the taxpayer or any 13 other person as a contribution. Third, income and earnings 14 from the trust are exempt from the Iowa individual income tax. 15 The individual income tax benefits apply retroactively to 16 January 1, 2015, for tax years beginning on or after that date. 17 -12- LSB 1660XC (3) 86 mm/sc 12/ 12