The Achieving a Better Life Experience (ABLE) Act, enacted by Congress in late 2014, amended Section 529 of the Internal Revenue Code, permitting states to allow tax-advantaged savings accounts to be established for qualified individuals with disabilities for certain disability-related expenses. Funds held in ABLE Accounts will generally not be considered in determining eligibility for the supplementary security (SSI) program, Medicaid, and certain other federal means-tested benefits.
Unlike a regular savings account, an ABLE Account allows individuals with a disability to save and invest money without losing certain public benefits. Income from an ABLE Account is tax free when used for qualifying expenses, as defined below. (Nonqualified withdrawals will tax gains as ordinary income plus a 10% penalty.) Contributions to the account made by any person (the account beneficiary, family and friends) are not tax deductible.
The U.S. Treasury Department issued preliminary rules in 2015. Wisconsin was one of many states passing ABLE Account legislation, doing so in the 2015-2017 state budget. On February 16, 2016, Wisconsin repealed the legislation, but subsequently extended preferential tax treatment when residents create an ABLE Account out of state with another state’s program.
Who is Eligible to Establish an ABLE Account?
Eligibility is limited to individuals with significant disabilities with an age of onset of disability before turning 26 years of age. To meet the disability requirement, an individual must be entitled to Supplementary Security Income (SSI), be entitled to Social Security Disability Income (SSDI), or meet the SSI criteria regarding significant functional limitations. In addition, designated beneficiaries can certify, under penalty of perjury, that they meet the qualification standards, including their receipt of a signed physician’s diagnosis, if necessary, and that they will retain that diagnosis and provide it to the program or the IRS upon request.
ABLE Accounts Allow Individuals with Disabilities to Remain Eligible for Public Benefits.
Many individuals with disabilities and their families depend on public benefits, like SSI, FoodShare, Community Care and Medicaid for income, health care and food and housing assistance. Eligibility for these public benefits is for individuals who have less than $2,000 in cash savings, retirement funds and other assets. The ABLE Act recognizes the potential extra and significant costs of living with a disability, or raising a child with a disability for assistance, services and health care not covered by insurance, Medicaid or Medicare.
Limitations on ABLE Accounts.
Contributions by all participating individuals, including family and friends, are limited to a total of $14,000 per year. The amount will be adjusted annually for inflation. The total account maximum limit is the same as 529 college savings, currently $440,300 as of 2016 in Wisconsin. Only one ABLE account is allowed per eligible individual. In addition, if an individual with a disability is a recipient of SSI, the individual would no longer be eligible for SSI if the account exceeds $100,000. Eligibility for Medicaid would not be affected; however, estate recovery from ABLE accounts is allowed for Medicaid recipients upon the death of the beneficiary.
Qualified Disability Expenses.
A “qualified disability expense” is defined as any expense related to the beneficiary as a result of living a life with disabilities. These include education, housing, transportation, employment training and employment support, assistive technology, personal support services, health care expenses, financial management and administrative services. Distributions for certain expenses, (such as housing) may affect SSI benefits.
Opening an ABLE Account.
The U.S. Department of Treasury regulations guide the states in terms of (a) the information required to be presented to open an ABLE account; (b) the documentation needed to meet the requirements of ABLE account eligibility for a person with a disability; and (c) the definition details of “qualified disability expenses” and the documentation that will be needed for tax reporting.
Differences Between Special Needs or Pooled Trust.
While Special Needs Trusts and Pooled Trusts also allow an individual with a disability to maintain eligibility for public benefits, an ABLE Account offers a significant and viable option, in addition to, rather than instead of, a Trust. The cost of establishing an account will be less than establishing a Trust and still offers account owners control over the distribution of funds. An ABLE Account, used in conjunction with a Special Needs Trust or Pooled Income Trust, offers multiple options for an individual to maintain benefits while providing for the significant expenses of a disability to the maximum extent possible.