Understanding the ABLE Act

“A major victory for the disability community, ABLE, for the first time in our country’s policy on disability, recognizes that there are added costs to living with a disability….For far too long, federally imposed asset limits to remain eligible for critical public benefits have served as a roadblock toward greater financial independence for the millions of individuals living with a disability.” – Michael Morris, Executive Director of the National Disability Institute

Savings accounts for individuals with disabilities will soon be possible without risking their access to federal benefits. On December 19, 2014, the Achieving a Better Life Experience (ABLE) Act was signed into law by President Barack Obama after receiving huge bipartisan support in both the U.S. Senate and House of Representatives. The ABLE Act is an amendment to the federal tax code that eliminates the $2,000 cap on conventional savings accounts for individuals with disabilities to qualify for Supplemental Security Income (SSI) and Medicaid.

Eligibility for many federal benefits, such as SSI, SNAP and Medicaid, requires that individuals meet a means test. Part of that test includes that an individual can report no more than $2,000 in savings. However, such a uniform test failed to recognize the additional costs of living with a disability. The ABLE Act seeks to remedy this unfairness by allowing a tax-advantaged savings account to supplement federal benefits, rather than supplanting them.

ABLE Accounts

The savings accounts, called ABLE accounts, are modeled after 529 college savings plans. While the accounts have federal tax implications, states will be responsible for accepting applications and regulating the accounts. Like 529 plans, states will likely offer various investment options for the accounts. Income earned within the account is not taxable income to either the contributor or the beneficiary. Likewise, distributions for qualified expenses from the account are also not taxable income.

Contributions can be made by anyone into the account, including friends, family, or the beneficiary. The funds can be used for a variety of qualified disability expenses such as education, housing, transportation, employment training and support, assistive technology and personal support services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and any other expenses approved by the Secretary of the Treasury.

Additional funds remaining after the death of the beneficiary may be used to reimburse the state Medicaid agency. An ABLE account may also be rolled over into another account without penalty if the new beneficiary is an eligible individual and a member of the former beneficiary’s family.

Eligibility

The criteria to determine disability is based on the Supplemental Security Income program’s disability standard. All children who meet that standard are eligible. Additionally, all adults whose disability occurred before the age 26 who meet that standard are eligible as well.

Limitations

ABLE accounts may receive contributions annually up to the annual gift-tax exemption. Under current law, that amount is $14,000. Aggregate contributions will also be subject to state-based limitations for 529 accounts. Missouri allows 529 plans to hold up to $325,000 for each beneficiary.

Eligibility for SSI only exempts the first $100,000 in ABLE accounts from the $2,000 resource limit. However, Medicaid eligibility is not affected by the amount held in the ABLE account. Therefore, even if the account holds over $102,000, the beneficiary may still receive Medicaid even if they no longer qualify for SSI.

Unfortunately, ABLE accounts cannot be set up until the Department of Treasury finalizes regulations. These regulations will state the information needed to open an ABLE account, documentation necessary, and greater details of what constitutes “qualified disability expenses.” This is expected to be completed late in 2015. Such regulations will be open to public comment prior to their finalization.

Updated information on ABLE accounts will be posted once regulations are finalized.

Due to the restrictions under the ABLE Act, this type of account will not replace a special needs trust; however, it is a useful tool for family members to accumulate some funds on behalf of a family member with a disability in order to make special purchases.