People with disabilities and their families will soon have another tool for saving. In December Congress passed and the president signed into law the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014.
Modeled on the popular 529 college-savings program, the ABLE Act, as it is commonly known, will provide a funding source for disability-related expenses. Money invested in ABLE accounts will generally be disregarded for Supplemental Security Income (SSI), Medicaid, and other means-tested federal safety-net programs – a key feature for individuals with the most severe disabilities.
Before ABLE accounts become available, the IRS must write rules and states must take legislative and administrative action. As with the college-savings program, 529A (the section of the Internal Revenue Code created by the new law) ABLE programs established by states are likely to differ. Potential investors should consider investment options, contribution limits, and tax benefits before making decisions.
Although ABLE accounts remain a work in progress, this much is clear:
- Number of Accounts. A beneficiary may have only 1 ABLE account. The account must be situated in the beneficiary’s state or, if the beneficiary’s state does not have an ABLE program, in a state that has contracted with the beneficiary’s state.
- Total Contributions. Anyone may contribute to an ABLE account, but the total contributions to an account cannot exceed the annual gift tax limit (currently, $14,000) or the aggregate limit states set for college savings accounts.
- Cash Contributions. Contributions to an ABLE account must be in cash.
- Qualified Disability Expenses. ABLE accounts can be used for many of the expenses an individual may incur because of a disability. The ABLE Act defines “qualified disability expenses” as including “education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other expenses,” which are approved by the IRS.
- Tax Advantages. If used for qualified disability expenses, distributions from an ABLE account will not be taxed by the federal government. Distributions that exceed qualified disability expenses will be taxable and subject to an additional 10 percent tax.
- Eligibility. Not everyone with a disability will be eligible for an ABLE account. To qualify, an individual must become disabled before age 26. (Age of diagnosis is not a factor.) In addition, an individual either must be entitled to Supplemental Security Income (SSI) or Social Security Disability Income (SSDI) benefits or file a disability certification with the IRS.
The IRS will be writing rules for disability certification in consultation with the Commissioner of Social Security, but an individual who files this document must certify that he or she “has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, or is blind.” An individual who files a disability certification can work, volunteer, or engage in other productive activities.
- Rollovers. Amounts in an ABLE account can be rolled over to an ABLE account for the beneficiary’s brother, sister, stepbrother, or stepsister.
- Medicaid Payback. When a beneficiary dies, amounts remaining in an ABLE account may be subject to a state claim for medical assistance paid on behalf of the beneficiary after the account was established. This rule applies regardless of whether money in the account was contributed by the beneficiary or by a third party. Amounts remaining in the account after payback pass to the beneficiary’s estate.
- Treatment of Account Funds Under SSI & Medicaid. As noted above, ABLE account funds are generally not considered for means-tested federal programs like SSI (which has a $2,000 resource limit for individuals) and Medicaid. This general rule has two exceptions: a distribution from an ABLE account for housing expenses will be counted as income for SSI; and any amount in an ABLE account that exceeds $100,000 will be considered a resource of the beneficiary. SSI benefits will be suspended but not terminated for a beneficiary with excess resources. Medicaid eligibility will not be affected.
ABLE programs are meant to supplement but not supplant benefits provided through other sources, such as private insurance, Medicaid, SSI, and the individual’s employment. Special needs trusts remain an option for people with a disability. ABLE accounts should be easy to access and will offer significant tax advantages for individuals and families bearing the increased financial costs of disability, at the same time protecting eligibility for SSI and Medicaid.
Will an ABLE account be the right choice for a person with a disability? For many people with a disability, the answer will be yes.