Individual Development Accounts (IDAs): Background and Current Legislation for Federal Grant Programs to Help Low-Income Families Save

Individual Development Accounts (IDAs):
Background and Current Legislation
for Federal Grant Programs to Help
Low-Income Families Save
Gene Falk
Specialist in Social Legislation
Domestic Social Policy Division
Summary
Individual Development Accounts (IDAs) are savings accounts to help low-income
families and persons save for specified purposes, usually education, purchase of a home,
or to start a business. Current IDA programs match an individual’s contributions, much
like retirement 401(k) accounts. The Assets For Independence (AFI) Act, enacted by
Congress in 1998, specifically authorizes IDA demonstration programs. Authorization
for the AFI programs expired at the end of FY2003, though Congress continued to
appropriate money for the program. President Bush’s FY2009 budget would fund AFI
at $24.025 million, the same funding level as provided for FY2008.
States are also given authority to use funds from the Temporary Assistance for
Needy Families (TANF) block grant to fund IDA programs. The Deficit Reduction Act
of 2005 (P.L. 109-171, S. 1932) “reauthorized” TANF through FY2010, making no
changes to TANF’s rules for IDAs. The AFI program remains unauthorized. This
report will be updated to track legislative or appropriations activity.
Introduction
Most federal and state programs of financial assistance to poor and low-income
families either increase income or subsidize the purchase of goods and services to help
them meet their basic, immediate consumption needs. The exceptions are education and
training programs, that seek to build “human capital.” More recently, Individual
Development Accounts (IDAs) have been developed to help low-income families build
financial capital. President Bush has mentioned IDAs as a component of his proposals
to increase “ownership.”

IDA programs are operated by community-based organizations (including faith-
based organizations), as well as state and local governments in partnership with
community-based organizations. From the participant’s viewpoint, IDAs operate much
like retirement 401(k) plans: the participant makes contributions, which are matched (at
varying rates) by the program. Withdrawals from IDAs are restricted. Funds can be
withdrawn to finance specific activities and purchases — generally, education, the
purchase of a home, and to start a business. An individual’s contributions may also be
withdrawn for other purposes, but this leads to the loss of matching funds. In addition to
providing matching funds for accounts, IDA programs also provide financial literacy
education, case management, and supportive services to participants.
This report describes IDA programs funded by two major federal grants: the Assets
for Independence (AFI) Act of 1998 and the Temporary Assistance for Needy Families
(TANF) program created in the 1996 welfare reform law. Other federal initiatives that
provide for more targeted IDAs (e.g., for refugees and for families in assisted housing)
are not discussed in this report.
Assets for Independence Act Demonstrations
The Assets for Independence Act (AFI, P.L. 105-285) authorized up to $25 million
per year for FY1999 to 2003 for competitively awarded IDA demonstration programs.¹
Congress has continued the AFI program absent an authorization. The Department of
Health and Human Service (HHS) administers the AFI program.
Table 1 provides a funding history for IDAs under the AFI program. In recent years,
funding has been near the old $25 million authorization level. President Bush’s FY2009
budget would fund AFI at $24.025 million, the same funding as provided for FY2008.
AFI grantees must raise nonfederal funds to operate AFI IDAs. The AFI federal
grant cannot exceed the amount of nonfederal resources raised for the program. The
maximum federal grant under the AFI program is $1 million.
What Types of Organizations May Operate AFI IDAs? The AFI Act²
authorizes competitive grants for IDA programs to nonprofit organizations; state, local,
and tribal governments that apply with non-profits; credit unions; and organizations
designated by the Secretary of the Treasury as community development financial
institutions. Credit unions and community development financial institutions must
demonstrate a collaborative relationship with local community-based organizations whose
activities are designed to address poverty. Faith-based organizations may also operate
IDA programs.

¹ The AFI Act IDA program was subsequently amended by P.L. 106-554.
² Defined as organizations described in Section 501(c)(3) of the Internal Revenue Code of 1986.
Exempt from taxation under Section 501(a) of the tax code.

Table 1. Assets for Independence Act IDAs:
Funding History, FY1999-FY2009
($ in millions)
^Fi^s^c^al^Y^e^ar^A^p^p^r^op^ri^ati^oⁿ^s
¹⁹⁹⁹^$9.994
²⁰⁰⁰^9.998
²⁰⁰¹^24.891
²⁰⁰²^24.943
²⁰⁰³^24.827
²⁰⁰⁴^24.695
²⁰⁰⁵^24.704
²⁰⁰⁶^24.435
²⁰⁰⁷^24.452
²⁰⁰⁸^24.025
^{2009 (Pres}ⁱ^den^t^’^s^requ^es^t⁾^24.025
^Source:^C^oⁿ^g^r^es^sⁱ^on^{al R}^e^s^earch^Serv^{ice (C}^R^S⁾^c^o^m^p^ilation^of
ⁱⁿ^f^o^r^m^atioⁿ^f^r^o^m^{HHS an}^d^A^p^p^r^o^p^r^iatioⁿ^s^Co^m^m^{ittee d}^o^c^u^m^en^ts.
Additionally, the AFI Act “grandfathers” in eligibility to operate an IDA program
to state programs funded at $1 million or higher that were in operation on the date of
enactment. “Grandfathered” state programs need not comply with AFI’s rules. Under
this provision, Pennsylvania and Indiana received AFI funds.
Who May Participate in AFI IDAs? Participation in AFI Act IDA programs is
limited to persons who
^!are eligible for TANF assistance; or
^!live in a household with income below 200% of the poverty line or have
earnings low enough to qualify for the Earned Income Tax Credit and
have a net worth of less than $10,000. The net worth test takes into
account the market value of all assets except the household’s primary
residence and the value of one motor vehicle.
IDAs may be established for the benefit of the participant, as well as his/her spouse and
dependents. Since IDAs are targeted to low-income families who might qualify for
government aid based on low income and assets, the AFI Act requires that IDA funds be
ignored when determining eligibility for federal assistance programs.
What Are the Contributions and Match Rules in AFI IDAs? Participants
are required to contribute to their IDA with cash or a check. Contributions from earnings
are matched by a minimum $1 for each $1 in participant contributions. Matching
amounts are funded from both federal and nonfederal sources, with a minimum 50%
funded from nonfederal sources. Maximum matching amounts from federal funds are³
limited to $2,000 for any one individual and $4,000 for any one household.

³ For programs that have the minimum nonfederal 50% match, this would mean maximum
matching amounts of $8 per $1 in contributions and a total $4,000 per individual and $8,000 per
(continued...)

For What Activities May a Participant Withdraw Funds from the IDA?
Participants may withdraw their contributions, match funds, and interest for specified
purposes. These specified purposes are:
^!Post-secondary educational expenses. Payments are made directly from
the IDA to an educational institution for tuition, fees, books, supplies,
and equipment.
^!The purchase of a home. Payments are made directly from the IDA to
cover the acquisition costs (including the closing costs) of the home. The
acquisition costs cannot exceed 120% of the average purchase price of
similar residences in the area.
^!Starting a business. The IDA may be used to finance expenditures under
a business plan to acquire plant, equipment, working capital and finance
inventory expenses. The business plan must be approved by a financial
institution, micro enterprise development organization, or a nonprofit
loan fund.
Can Participants Make Withdrawals for “Emergency” Expenses? The
AFI Act allows participants to withdraw their contributions from the IDA to pay medical
expenses for the participant and his/her spouse or dependents; payments to prevent the
eviction of the participant from her home; and necessary living expenses following loss
of employment. Match funds and interest earnings cannot be withdrawn for these
emergency expenses.
What Additional Benefits and Services are Offered in an IDA Program?
Under the AFI Act, IDA programs must use funds to provide financial literacy education
(economic literacy, budgeting, credit, and credit counseling) to IDA participants. Of the
federal and nonfederal funds used in the IDA program, up to 15% may be used for such
financial literacy, administration, and assisting with an evaluation of the program.
AFI Evaluation Requirements. As a demonstration program, the AFI Act IDA
program has an evaluation component. Organizations operating IDAs are required to
submit annual progress reports to the Secretary of Health and Human Services (HHS) and
HHS is required to submit periodic reports to Congress. Additionally, the AFI law
requires an evaluation, which is being conducted by the Abt Research organization.
(Annual reports from HHS and reports from the AFI evaluation are cited in the
“Additional Reading” section of this report.)
TANF Program IDAs
Temporary Assistance for Needy Families (TANF) is a federal block grant that gives
states broad flexibility in the use of its funds in aiding needy families with children.
Generally, TANF funds (and required state monies spent under its “maintenance of effort”

³ (...continued)
household. However, if the program is able to raise additional funds (beyond 50%), those funds,
too, could be used to match participant contributions.

requirement) can be used to further any of its statutory goals.⁴ In addition, TANF
provides specific authority and rules for states to operate IDA programs. States may use
TANF and state maintenance of effort funds for IDAs either as an activity that furthers
the statute’s broad goals, in which case it must conform only to general TANF rules, or
under TANF’s specific authority to use funds for IDAs, in which case it must follow
TANF’s specific IDA rules.⁵
TANF’s Specific IDA Rules. The TANF law provides explicit authority for states⁶
to use federal block grant funds for IDA programs and rules for their operation. Under
this provision, IDA programs may be established for individuals eligible for TANF
assistance who may make contributions from earned income to the account. Many of the
rules for the TANF IDA are similar to the rules under the AFI Act: contributions are to
be matched through a nonprofit organization or a state and local government (though there
are no limits to matching rates or amounts); withdrawals may be made for educational
expenses, purchase of a first home, or starting a business; and the IDA is not to be
considered when determining the financial eligibility status of a recipient applying for or
receiving federal aid. Eligibility to participate in TANF IDA programs is limited to those
“eligible” for TANF assistance. There are no provisions for “emergency” withdrawals
from TANF IDAs.
IDAs Under TANF’s General Use of Funds Provisions. As mentioned
above, IDAs may also be established under TANF’s authority to permit federal and state
funds to be used to accomplish any TANF purpose. Except for general requirements
regarding the use of TANF funds,⁷ states are free to design IDA programs without regard
to federal limits and rules. For example, such IDAs may be established for purposes other
than educational expenses, home purchase, or starting a business — such as purchasing
a car.
IDAs in Determining TANF Cash Eligibility. Most states require that a family
have low assets in addition to low income to be eligible for TANF cash welfare. Ohio and
Virginia eliminated this “asset test,” basing eligibility on income alone. As of January

2004, 37 other states exempted funds in IDA accounts from being counted as assets when

⁴ TANF statutory goals: to (1) provide assistance to needy families so that children may live in
the homes of their relatives; (2) end the dependence of needy parents on government benefits
through work, job preparation, and marriage; (3) reduce the rate of out-of-wedlock pregnancies;
and (4) promote the formation and maintenance of two-parent families.
⁵ The basic TANF block grant is $16.5 billion; state “maintenance of effort” spending is $10.4
billion per year. IDAs have represented only a small share of this funding, though the exact
amount of TANF funding used by IDAs year-to-year is not available. In FY2003, total reported
federal and state TANF expenditures on IDAs totaled $26.6 million, but about half of that, $13.7
million, represents a reclassification of spending in a Wisconsin program from being reported as
a tax credit to being reported as an IDA expenditure.
⁶ See Section 404(h) of the Social Security Act.
⁷ See CRS Report RL32748, The Temporary Assistance for Needy Families (TANF) Block Grant:
A Primer on Financing and Requirements for State Programs, by Gene Falk.

determining eligibility for TANF cash welfare.⁸ (The exemption of IDAs from countable
assets could apply to TANF, AFI, or otherwise funded IDAs.)
Additional Reading
Boshara, Ray. Individual Development Accounts: Policies to Build Savings and Assets
for the Poor. Brookings Institution Policy Brief, Welfare Reform and Beyond #32.
March 2005.
Ciurea, Michelle, et al. Assets for Independence Act Evaluation: Second Annual Site Visit
Reports. Abt Associates, prepared for the U.S. Department of Health and Human
Services. December 2002.
Sheridan, Michael. Assets and the Poor. M.E. Sharpe Inc., Armonk, New York. 1991.
U.S. Department of Health and Human Services. Interim Report to Congress. Assets for
Independence Demonstration Program Status at the Conclusion of the Third and
Fourth Years Volume 1 of 3: Narrative. May 2004.

⁸ This is based on a Congressional Research Service survey of financial income and benefit rules
in state TANF programs. See CRS Report RL32598, TANF Cash Benefits as of January 1, 2004,
by Meridith Walters, Gene Falk, and Vee Burke.