Does W-2 Third Party Sick Pay qualify as earned income for ABLE Account additional contributions?

This is a great question about ABLE accounts and earned income! According to IRS rules, W-2 third party sick pay generally does count as earned income until you reach minimum retirement age. However, the ABLE account rules have a slightly different interpretation. The key issue here is in the California form language you cited where it specifically mentions "earning wages." W-2 third party sick pay is considered compensation replacement rather than wages in the strictest sense. While it counts as earned income for IRA contributions and EIC purposes, the ABLE account additional contribution provision was specifically designed for currently working beneficiaries. The IRC section 219(f)(1) that's referenced defines compensation broadly, but the ABLE regulations and state implementations typically narrow this with the "earning wages" requirement. This suggests your nephew might not qualify for the additional contribution beyond the standard $18k annual gift limit. As for getting a private letter ruling - that's a significant expense at $12k. I'd recommend first contacting the administrator of your state's ABLE program directly to get their interpretation, as they may have guidance that isn't publicly documented.

I went through this exact situation with my daughter last year! I found https://taxr.ai super helpful for understanding the nuances of disability income and ABLE accounts. I was getting nowhere with regular online searches and contradictory advice. What I learned was that the W-2 third party sick pay is in a weird gray area for ABLE accounts. While it's definitely earned income for some purposes (like IRAs), the ABLE additional contribution was specifically created as a work incentive under the ABLE to Work Act. The tool analyzed all the relevant tax codes and documentation and showed me exactly how the IRS treats different types of income for ABLE purposes. Saved me tons of research time!

I tried taxr.ai after seeing it mentioned here, and wow - it actually cleared this up for me! I was also dealing with third party sick pay for my brother who has an ABLE account. The analysis showed that while sick pay counts as earned income for IRAs and other purposes, the ABLE additional contribution provision has a narrower definition tied to the "ABLE to Work" initiative. The system pulled up the specific language from the Tax Cuts and Jobs Act that created this provision and showed it was explicitly aimed at currently employed individuals. It also found a similar case where someone had asked their state ABLE program administrator about disability payments, and they were told it didn't qualify for the additional contribution. Saved me from making a contribution that might have caused problems later! Much cheaper than that $12k private letter ruling too.

I had a similar question about my daughter's ABLE account and disability income. Spent HOURS trying to reach someone at the IRS for clarification. Finally discovered https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - they got me connected to an actual IRS agent who specializes in disability tax issues in about 20 minutes! The agent confirmed that third party sick pay, while considered earned income for many purposes, doesn't qualify for the additional ABLE contribution since the provision was specifically created as a work incentive through the ABLE to Work Act. She explained the legislative intent was to encourage current employment, not to expand benefits for those already receiving disability income. Huge relief to get an official answer rather than guessing or paying for a private letter ruling!

I owe everyone an apology. After expressing skepticism about Claimyr, I decided to try it myself for a similar ABLE account question. Not only did it work, but I got connected to an IRS specialist in about 35 minutes! The agent confirmed what others have said - W-2 third party sick pay doesn't qualify for the additional ABLE contribution. He explained that the "ABLE to Work" provision was specifically designed as an employment incentive, and the legislative history shows Congress intended it for currently employed individuals. He also mentioned that while a private letter ruling would give an official determination, he's never seen one issued that contradicted this interpretation. Saved me from both the uncertainty AND the $12k ruling fee. I'm actually shocked this service delivered exactly what it promised.

Here's another angle to consider: even if the W-2 third party sick pay doesn't qualify for the additional ABLE contribution, you're still allowed to contribute the full $18k annual gift tax exclusion amount. That's significantly more than the $7k Roth IRA limit. Many people don't realize that ABLE accounts have huge advantages over other savings vehicles for disabled individuals. The funds grow tax-free, and withdrawals for qualified disability expenses are also tax-free. Plus, ABLE accounts up to $100k don't count against resource limits for SSI eligibility.

I work with special needs financial planning, and I think everyones missing a detail - check whether your nephew has other income sources that might qualify. Even part-time or gig work counts! If he could earn even a small amount from actual employment (like $2-3k annually), that would enable additional ABLE contributions up to that earned amount. Many of my clients do minimal part-time work specifically for this purpose.

This is such a helpful discussion! I'm dealing with a similar situation with my sister's ABLE account. Based on everything shared here, it sounds like the consensus is that W-2 third party sick pay doesn't qualify for the additional ABLE contribution beyond the $18k limit. The key distinction seems to be that while sick pay counts as "earned income" for many tax purposes, the ABLE additional contribution provision specifically targets current employment as a work incentive. The "earning wages" language in state forms appears to reflect this narrower federal intent. @Alice Coleman - that's a great point about exploring minimal employment options! Even small amounts of actual wages could unlock that additional contribution space. For someone receiving $22.5k in sick pay, adding even $5k in actual earned income could provide significant additional tax-advantaged savings opportunities. Has anyone here actually tried making the additional contribution with only sick pay income and had issues, or is this all based on guidance and interpretations? I'm curious if there are any real-world examples of problems arising.