ABLE Increases Options for People with Special Needs
Written by Ana Perez-Arrieta
There may soon might be another option to hold funds for individuals with special needs. Late last year Congress passed what’s known as the ABLE Act (aka the Achieving a Better Life Experience Act). The law adds Section 529A to the Internal Revenue Code to create a new savings vehicle for disabled people.
The Act allows a disabled person to have as much as $100,000 in this new type of account (called a “529 ABLE account”) and still qualify for Medicaid, Supplemental Security Income (SSI), and other government benefits. Without this arrangement, a person with more than $2,000 in an account will be disqualified for SSI. With this ABLE account, tax-free savings can then be used to pay for expenses that are not covered by government programs.
Eligibility, though, is pretty limited. First, one must have been disabled or blind before age 26. If a person meets that rule and is already on SSI and/or SSDI, then he or she is automatically eligible to establish an ABLE account. If he or she is not yet getting benefits, they could become eligible via a doctor’s certification process. No one knows yet what this will involve.
Federal regulations are still needed before the new law can be implemented, and then each state needs to authorize its own ABLE accounts. Unlike 529 college savings plan, the ABLE accounts have to be established in the state where the beneficiary lives. No one in Arizona can take advantage of the accounts until the Arizona legislature passes authorizing legislation.
Anyone can contribute to an account established for a disabled person. The growth in the account is tax-free, provided that the money is used for “qualified disability expenses,” including education, transportation, medical care, housing, employment training, financial management, funeral expenses, and legal fees. If funds are used for non-qualified expenses, investment gains will get hit with both income tax and a 10% penalty.
Although these accounts are similar to 529 college savings accounts, there are important differences. In addition to being limited to the state where the person lives, accounts are limited to contributions of $14,000 per person annually (this figure is indexed to the maximum annual gift tax exclusion amount, so it could go up); a person can have only one ABLE account; and contributions are irrevocable gifts.
Plus, there’s a cap. If an ABLE account exceeds $100,000, the beneficiary’s SSI benefits will be suspended. And, if there are assets in the account at the beneficiary’s death, the state will seek to be reimbursed for Medicaid benefits that have been paid.
These accounts, expected to be available in about a year, are an option for some families, but their application will be limited. For people who become disabled after age 26 or want to hold onto more money during life, or would like to provide a legacy after they die, a Special Needs Trust will remain the better option.