Background
Signed into law by President Obama on December 19, 2014, the ABLE Act creates a new and more accessible financial tool for Americans living with disabilities. The ABLE Act amends Section 529 of the IRS Code to create tax-free savings accounts available to individuals with disabilities. Millions of people with disabilities depend on public benefits such as Supplemental Security Income and Medicaid to provide them with finances they are otherwise unable to provide for themselves. However, in order to maintain eligibility for these public benefits, an individual must meet a means or resource test which puts a limit on the person’s available income and assets. The ABLE Act recognizes that there are often extra, significant costs of living that come with having a disability, and creates a way to save money, tax-free, without disqualifying the individual from receiving public benefits.
What is an ABLE Account?
An ABLE account is a tax-free savings account for people with disabilities. The money in the account can be used for what are called “qualified expenses.” Qualified expenses can include education, housing, transportation, medical and dental care, community based supports, employment training, and assistive technology. The account is meant to supplement, but not supplant, benefits provided through private insurance, the Medicaid program, the Supplemental Security Income program, the beneficiary’s employment, as well as other sources. This eliminates barriers that disabled persons previously had if they tried to work and save because the law says that the dollars saved through ABLE accounts don’t count against an individual’s eligibility for federal benefits programs.
How does it Work?
Once the ABLE account is set up, anyone can contribute to the beneficiary’s account. This includes family, friends, the beneficiary, and anyone else who may want to contribute. Contributions made to the account are not tax deductible, but any income earned by the account will not be taxed. The total amount that all individuals can contribute to the ABLE account per year is $14,000, which will be adjusted annually for inflation. Each State will set a limit on the amount of money that can be contributed to the account over the lifetime of the beneficiary. If the beneficiary has received Medicaid benefits, at the time of his/her death, whatever funds remain in the account will be used to “payback” Medicaid for any care that previously had been provided.
Who Qualifies for an ABLE Account?
An ABLE account is limited to individuals with a “significant disability” that arose before the individual turned 26 years of age. Individuals who meet this disability and age criteria and who are also receiving benefits under the Social Security Income program and/or the Social Security Disability Income program are automatically eligible to establish an ABLE account. However, if an individual meets the disability and age criteria but is not receiving the above mentioned benefits, he/she would have to submit proof of significant disability to determine eligibility.
This means that any individual who has been diagnosed with a disability before they turn 26 years old, and who is has a medically determined physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death, or which has lasted or can be expected to last for more than 12 months, or is blind, and provides a copy of their diagnosis signed by a physician would be eligible to open an ABLE account. However, regulations are currently being written which will go into more detail about the standard of proof and medical documentation required.
When and how can I Sign up for an ABLE Account?
Each State will set up an ABLE program which will administer applications. The Department of Treasury will develop regulations that will guide States in terms of information required to open an ABLE account, documentation needed to prove disability, and details about what is considered “qualified disability expenses.” No accounts can be established until regulations are finalized before the end of 2015. It is also important to note that only one ABLE account can be set up per beneficiary.
What are the Benefits?
ABLE accounts will allow for beneficiaries and their families to have more control over funds. It also provides a way to save funds that can be used to care for the disabled person. It is a cheaper alternative to the creation of a special needs trust or a Pooled Trust. It can also just be an additional option for families or individuals who already have these special needs plans in place. Perhaps, most importantly, an ABLE account can be managed by the beneficiary. There is no need for the beneficiary to rely on a Trustee to make spending decisions.
Drawbacks
ABLE accounts are only available to disabled persons who have essentially had a lifelong disability. This means that older individuals who became disabled later in life, or even young individuals who become disabled after turning 26 years old, are not eligible to open an ABLE account. In addition to the age limitation, the act creates a requirement that the person needs to have a significant disability. Whether this will go beyond the present Social Security Act definition of disability is yet to be determined.