In 2014, the ABLE (“Achieving a Better Life Experience”) Act was signed into law. The law is aimed at achieving a way for individuals with special needs to save money without losing their needs based public benefits such as Supplemental Security Income (SSI) or Medicaid.
While an ABLE accounts do not entirely replace other tools, like special needs trusts, they add another option for individuals with special needs.
About the ABLE Act & ABLE United
The ABLE Act is a federal law that allows states to establish a savings program for persons with disabilities. The program is modeled after the 529 college savings account program. Florida offers a qualified ABLE program called ABLE United. ABLE accounts allow many people with disabilities or their families to establish tax-free savings accounts that won’t affect their ability to qualify for, or remain on, government assistance as long as the account balance does not exceed $100,000.
An adult special needs individual who owns more than $2,000 in countable assets is generally ineligible for many public benefits programs, including Medicaid and SSI. But because ABLE accounts with balances below $100,000 are not counted as a resource for most public benefits programs, the account provides an opportunity for planning to ensure that the individual does not become ineligible because of wages, gifts, or other sources of funds that may become available to him or her.
An ABLE account may be established by any contributor (a parent, friend, family member or the person with a disability) for the benefit of an eligible beneficiary of any age so long as that person can establish that they met the standard for disability prior to turning the age of 26. A recipient of SSI or SSDI satisfies this requirement while those who do not receive such benefits must be certified under the act.
Financial Limitations on the ABLE Act
While the ABLE Act has made strides in bringing to light the issue of saving for those with disabilities, there are limits to the Act. The two biggest limitations are a limit as to the amount of that SSI exempts and a limitation on annual contributions. SSI exempts only the first $100,000 of an ABLE account. Therefore, if an individual receives SSI, his or her ABLE account may not exceed $100,000 and he/she may have other assets up to only $2,000. Otherwise, the individual will become ineligible to continue receiving SSI, but can remain eligible for Medicaid. In addition, annual contributions may not exceed the annual gift-tax exclusion amount (currently $15,000).
It is important to note that the ABLE account is a “Medicaid Payback” account. This means that the Act requires a provision in the account that upon the death of the beneficiary of the account, Medicaid payments made on behalf of the beneficiary subsequent to the establishment of the ABLE account must be reimbursed with any remaining funds.
ABLE accounts have tax benefits similar to 529 accounts. Qualified distributions from the account are not counted as taxable to either the contributor or the beneficiary. Qualified distributions include expenses paid for the benefit of the beneficiary related to: 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 any other expenses approved by the Secretary of Treasury.
In addition, earnings on the ABLE account are not taxable to the contributor or to the beneficiary. Contributions, however, are made from post-tax income.
Finally, assets in an ABLE account may be rolled over to another ABLE account for the benefit of another qualified individual who is a brother, sister, stepbrother, or stepsister of the beneficiary.
Uses of the ABLE Act
A person receiving needs-based government benefits often has a dilemma when it comes to saving, whether for education or for unexpected events, all while maintaining public benefits such as SSI. In order to receive SSI, a person with a disability must have assets under $2,000. The ABLE Act makes saving possible…up to a point. Now the individual can remain on SSI and save a modest amount in an ABLE account (up to $15,000 per year).
Persons with disabilities who are employed may want to utilize an ABLE account to save a portion of their income while remaining qualified for SSI. In addition, families may want to contribute to an ABLE account for their loved ones with disabilities in smaller increments. These same families may also desire to use other tools available such as Special Needs Trusts, which may be more flexible.
On the other hand, the ABLE account will not be useful for people who have become disabled due to an accident and who are receiving a judgment or settlement for a significant amount. And, it doesn’t work for a person with special needs in receiving a large inheritance. There are several other instances where an ABLE account is not the answer.
Every tool has its use and the ABLE account is no exception. When it comes to planning for your child’s needs, it is important not only to consider the advantages of ABLE accounts standing alone, but also to realize that ABLE accounts can be used in conjunction with other planning tools, such as a special needs trust, to craft a strategy that best fits your child’s needs now and in the future. Even as just one piece of a larger puzzle, ABLE accounts may be able to offer so much more to your child. Knowing when it is appropriate and knowing when another option might be more so is something we can assist with. Please call us if you would like to learn more about ABLE accounts and how it could be a beneficial part of your plan for your special needs family member.