Congress has passed and the President has signed, the Achieving a Better Life Experience (ABLE) Act. The Act adds a new section, Section 529A, to the Internal Revenue Code to allow for the creation of new tax-free savings accounts for individuals with disabilities. These new accounts could help millions of disabled individuals and their families pay for the extra costs associated with living with a disability and, in most cases, do so without impacting the disabled individual’s eligibility for means-tested benefits such as Supplemental Security Income (SSI), Supplemental Nutrition Assistance Program (SNAP) and Medicaid.
Here are a few important things to know about the ABLE Act:
- Under the ABLE Act, the states would establish “Qualified ABLE Programs” similar to how the states establish 529 Plans for education. These state programs would allow disabled individuals (or their families) to create accounts to help fund “qualified disability expenses.”
- An eligible individual is someone who is entitled to Social Security benefits for blindness or disability under Title II or XVI and whose blindness or disability began before the age of 26. Therefore, if the disability occurred before the age of 26, the beneficiary does not have to presently be under 26.
- Contributions to an account would be funded with “after-tax” dollars, but would grow within the account tax free.
- Contributions are limited (among all contributors to an account) to the annual exclusion for gift taxes (currently $14,000) and the value of an account would be capped.
- Qualified Disability Expenses include:
expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary, including the following expenses: 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 other expenses, which are approved by the Secretary under regulations and consistent with the purposes of this section. IRC 529A(e)(5) - Distributions for a designated beneficiary’s qualified disability expenses would be excluded from income. However, distributions in excess of a beneficiary’s qualified disability expenses would be subject to tax and incur a 10% penalty.
- Accounts with balances up to $100,000 will not be considered for certain means-tested federal programs (such as SSI), and will be protected in bankruptcy.
- Eligible individuals (the disabled persons) would only be allowed to have one ABLE account.
The ABLE Act has the potential to greatly improve a family’s ability to provide for a disabled child’s care. They won’t take the place of special needs or pooled income trusts, but because ABLE accounts should be relatively easy and inexpensive to set up and administer, they should be a viable option for many families. However, because of the funding and account value limitations on ABLE accounts, in most cases this new option will be used in addition to, not instead of, more traditional special needs planning.
Unfortunately, families are not yet able to set up ABLE accounts and it may be a while before they are. The Department of the Treasury still has to develop regulations to guide the states’ development of these programs. The regulations will likely deal with the information needed to open an ABLE account, what documentation will be needed to establish eligibility of a disabled beneficiary, and the details on how “qualified disability expenses” will be defined and documented for tax reporting purposes. Regulations will need to be proposed and made available for public comment before they are finalized, but it appears that many expect that applications to open these accounts will be available in some states this year.