A new law should offer a path to additional financial
security for some individuals with disabilities. The “Achieving a Better Life
Experience” (ABLE) Act creates Section 529A of the Internal Revenue Code (26
U.S. Code §529A)
which authorizes a new form of tax free savings account for individuals who
became severely disabled before they reached age 26.
The idea is to allow a limited class of people with disabilities
to have more savings than previously allowed without jeopardizing their public benefits
eligibility. The extra savings in the account can be used as needed to pay for
a broad range of expenses like education and housing costs.
ABLE accounts should be relatively easy and inexpensive to
set up. Unlike creating a trust, you won’t need to involve a lawyer (although advance legal planning advice would be beneficial). If you
follow all the rules there should be no income tax on the earnings of the ABLE
account and you won’t have to file an annual income tax return.
This all sounds pretty good. Unfortunately, the law is
subject to limitations that restrict its value for most of the disabled
population. But it is an option that will be useful for some.
Overview
The ABLE Act allows qualified individuals to set up one
special ABLE account that can be used to pay for a broad range of expenses. The account is established by and owned by the disabled individual but anyone
can contribute to it.
If the rules are followed, earnings on the ABLE account will not
be subject to federal income tax, and more importantly, the funds in the account
will not disqualify the owner from continued benefits under the Supplemental
Security Income (SSI) and Medicaid programs. (If the account balance exceeds
$100,000, SSI is suspended but Medicaid eligibility can continue.)
To be “designated beneficiary” of an ABLE account you must
have become disabled before age 26. If you meet this limitation there are two
potential paths to ABLE qualification:
(1) If you are receiving SSI or Social Security Disability Insurance
(SSDI), you are qualified under the ABLE Act.
(2) If you are not receiving benefits
from SSI or SSDI, you can still qualify via a certification process based on a
doctor’s diagnosis. You must be certified as having a medically determinable
physical or mental impairment, which results in marked and severe functional
limitations, and that can be expected to result in death or that has lasted or
can be expected to last for a continuous period of not less than 12 months, or
as being blind.
The money in an ABLE account can be used for a wide range of "qualified
disability expenses." Funds can be used to pay for education, housing,
health, transportation, personal support, employment training, legal and
financial assistance, and more.
The ABLE Act takes effect for tax years beginning in 2015 but
you won’t be able to set up an account right away. Regulatory guidance must be
issued and your state must establish a program before you can set up an account.
Limitations
Because of the age limitation in the law, ABLE accounts will
be of most interest to individuals with developmental disabilities, mental
health issues and childhood conditions. Although the condition must have arisen
before the account owner reached age 26, individuals over that age can create
an account if they meet the age of onset requirement.
But the age limitation means that few older adults will be eligible
beneficiaries under the ABLE Act. And the program has a number of other requirements
that make it less attractive for many of the individuals who do qualify. These
include the following:
Medicaid Payback
Requirement. After the death of the beneficiary funds remaining in an ABLE
account must be used to repay any state Medicaid plan that was used by the
beneficiary after the account was established.
Contribution
limitations. ABLE
accounts are modeled to some extent on qualified tuition plans
(QTP
or “529 plans”) that allow for tax free savings for higher education
expenses. Some of the limitations are based on those found in QTP plans. Contributions
to ABLE accounts will be limited to the annual exclusion amount (currently $14,000
per year per donor) and the accounts will have the same aggregate contribution
limit as the state’s QTP plans. (In Pennsylvania the aggregate 529 plan contribution
limit is currently $452,210). Contributions must be made in cash. Violation of
these limits may disqualify the entire account.
$100,000 Limitation
for SSI Qualification. The usual qualification resource limit for an individual for SSI is
$2,000. But amounts in an ABLE account of up to $100,000 will be ignored for
purposes of qualifying for SSI. Amounts (including earnings) in an ABLE account
in excess of $100,000 will be considered to be a resource of the designated
beneficiary and can cause their SSI benefits to be suspended
until the balance is reduced. Note that the suspension of benefits applies to
SSI but not to Medicaid.
One Account. A beneficiary can have only one
ABLE account.
Residence. The beneficiary must reside in a state
that has authorized ABLE. (My guess is that this will not be a problem in most
states including Pennsylvania given the broad bi-partisan support in Congress
for the ABLE Act.)
Qualified Expense
Limitation. As
noted above, the funds in an ABLE account can only be used for “qualified
disability expenses.”
Comparing ABLE Accounts to Special Needs Trusts
Even for those who meet its age of disability onset
requirement, ABLE will be only one of several tools that can be used to set
aside some savings. Other options will often be superior. In particular, various
forms of “special needs trust” have long been used to provide additional
financial security for disabled individuals without impacting their SSI and
Medicaid benefits.
If the funding is coming from a parent (or other third party),
using a third party special needs trust will have many advantages over funding
an ABLE account. With a third party created trust there are no age limits,
or limits on the amount you can put into the trust. Perhaps most notably, there is no Medicaid payback requirement.
The ABLE account does have some potential income, estate, and
gift tax advantages over the third party trust, but in most cases these tax
advantages will turn out to be illusory. Gift and estate tax concerns mainly
apply only to those few donors who have assets in excess of a $5.43
million dollar (in 2015) exemption amount. Few parents are that wealthy.
And, while the earnings on an ABLE account can be income tax
free, the earnings of many third party special needs trusts also avoid federal income tax. These trusts are usually set up so that income is taxed to
the disabled beneficiary. This means that the beneficiary’s $4,000 exemption
and $6,300 standard deduction (in 2015) can shelter up to $10,300 from income
tax. In addition, disabled beneficiaries of third party trusts usually have
lots of tax deductible expenses that can protect additional income from tax. So,
the federal income tax on the earnings of many special needs trusts ends up
being zero.
Families should carefully consider the advantages and
disadvantages of ABLE accounts vs. special needs trusts before deciding what
to create and fund. (For a more in-depth discussion of the types of special
needs trust and their use see my earlier blog post What
are "Special Needs Trusts.")
Who may benefit most from the ABLE planning option
Given the restrictions that apply to ABLE accounts and the
existence of other planning tools (especially special needs trusts), it’s easy
to become discouraged. It looked like Congress finally decided to do something
to help the disabled “achieve a better life experience,” but when you dig down
into the law you begin to question who will actually be helped.
Actually, even with all of its limitations, the ABLE account option
may be of significant value to some disabled individuals. In particular, it may
provide a much needed escape hatch for the employed disabled.
Currently, millions of individuals with disabilities are
caught in a financial trap that affects their SSI
and Medicaid benefits. The problem is that when they try to save some of their
wages, it causes their savings to exceed the $2,000 SSI limit and they lose SSI
and Medicaid benefits.
The ABLE Act should allow disabled workers (provided they
were disabled before age 26) to deposit their excess earnings into an ABLE account. (Note that the $14,000 annual contribution and $100,000 balance restrictions will apply.) They can save for future expenses and needs while maintaining their SSI and Medicaid eligibility. This increase in savings and resources will hopefully allow them to "achieve a better life experience."
The bottom line: the ABLE Act is a beneficial law
that will help some disabled persons. It may be particularly useful to shelter
some of the excess earnings of the working disabled. But funding a special
needs trust will typically be a better option for parents, grandparents, and
other third parties.
Further Information
The ABLE Act was included as part of The
Tax Increase Prevention Act of 2014 that President Obama signed on December
16, 2014. If you use the above hyperlink see Division B of that Act at page 125
for the specific provisions of the ABLE Act.
2 comments:
I am trying to find information in regards to PA setting up their ABLE ACT benefits program and how to go about starting one. Any help is appreciated.
Gavin, See my update on the status of ABLE regulations and legislation in PA.
"IRS Publishes Rules for ABLE Disability Accounts." Published on this blog on June 29, 2015.
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