by Thomas D. Begley, Jr., Esquire, CELA
On December 16, 2014, Congress enacted and the President has signed an Act known as Achieving a Better Life Experience (ABLE) Act of 2014. This Act is to provide a tax-favored account, similar to a 529 Plan, for individuals with disabilities to pay for qualified expenses. Highlights of this Act are as follows:
- State Established or Contracted. Each state is authorized to establish and operate an ABLE program. This must be done by each state before these accounts can be opened in that state. States may contract with other states to operate these programs.
- Contributions into an account may be made by any person, but are not tax deductible.
- Contribution Limit. Total annual contributions by all individuals to any one ABLE account are limited to the gift tax annual exclusion amount, which is $14,000 for 2015. The annual exclusion amount is indexed to inflation. Unlike the gift tax, this cap applies to the contributions made by all individuals, not just any single individual contributor.
- Non-Taxable Income. Income earned by the accounts would not be taxable, if properly distributed. These accounts would be similar to 529 Plans in that the income earned by the 529 Plan is non-taxable, if it is used for certain purposes.
- Distributions, including portions attributable to investment earnings generated by the account, to an eligible individual for qualified expenses are not taxable.
- Qualified Expenses. Qualified expenses are expenses related to the individual’s disability, such as health, education, housing, transportation, training, assistive technology, personal support, related services and expenses. Regulations will address this further.
- 10% Penalty. Distributions for non-qualified expenses are subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10% penalty on such portion.
- Medicaid Payback. Upon the death of the individual, amounts remaining in the account must be paid back to Medicaid. This is known as a Medicaid payback. This provision is similar to the Medicaid payback provision required in Self-Settled Special Needs Trusts. Because of the relatively small size of these accounts and the fact that Medicaid must be paid back, it is unlikely that there would be any significant remaining funds to pass on to the deceased’s estate or designated beneficiaries.
- Residual Beneficiary. After the Medicaid payback, the remaining funds would be payable to the deceased’s estate or to a designated beneficiary and would be subject to income tax on investment earnings, but not to the penalty.
- One Account. Individuals would be limited to one ABLE account, although an unlimited number of people could make contributions to that ABLE account.
- ABLE accounts can be rolled over only into another ABLE account for the same individual or to an ABLE account for a sibling who is also an eligible individual.
- Age 26. Eligible individuals must be severely disabled before turning age 26. Individuals who become disabled after turning age 26 would not be eligible for ABLE accounts. Therefore, personal injury victims who sustain their injury after 26 will not be able to benefit from the ABLE legislation.
- Distribution Standard. The individual’s disability must be based on marked and severe functional limitations or receipt of benefits under SSI or SSDI. There may be disagreements with public benefit agencies as to what constitutes a marked and severe functional limitation absent a Determination of Disability by the Social Security Administration.
- SSI/SSDI. An individual does not need to receive SSI or SSDI to open or maintain an ABLE account, nor does the ownership of an account confer eligibility for those programs.
- Non-Countable. Individuals with ABLE accounts could maintain eligibility for means-tested benefit programs, such as SSI and Medicaid. The assets in the account are non-countable for federal means-tested benefit program eligibility purposes.
- Asset Limit. ABLE accounts are limited to $100,000. Any excess could cause a suspension of SSI until the account is reduced to $100,000. It would appear that earnings in an account would constitute a portion of the account for purposes of determining the $100,000 cap. So, if an account had $100,000 in it at the beginning of the year and earned money during the year, the cap could be exceed unless distributions were larger than the amount of the earnings.
- Housing Expense. Account distributions for housing expenses would be counted as income for SSI purposes.
- SSI Suspension. If the balance of the ABLE account, together with the individual’s other assets exceeds $102,000, the individual would be suspended from eligibility for SSI benefits, but would remain eligible for Medicaid.
- Assets in an ABLE account are protected in case of bankruptcy, so long as the account contributions were made more than 365 days prior to the bankruptcy filing.
- Effective Date. The effective date of the legislation is December 31, 2014. This is the effective date for federal purposes. Each individual state must establish its own Act, so the effective date for the actual establishment of the accounts will vary from state to state.
While these ABLE accounts are a useful tool for individuals with disabilities, they are of limited benefit. The two advantages to these accounts are (1) the non-taxed nature of the earnings on the accounts, and (2) the fact that there is little or no cost involved in establishing these accounts. The primary disadvantages to the accounts are that they are limited to $100,000 and the Medicaid payback. In a Third-Party Special Needs Trust there is no Medicaid payback and funds remaining in the trust can be distributed to children or grandchildren as the parent or grandparent establishing the trust sees fit. It is anticipated that the individuals funding these accounts will be third party such as parents and grandparents or other family members so they will not be able to replace First-Party Special Needs Trusts. They are also not a substitute for a Third-Party Special Needs Trust where larger sums of money can be set aside to meet the needs of children, grandchildren or other family members with disabilities. The primary concern for most parents is what will happen to their children after the parents are gone. Monies in an ABLE account would not be sufficient to provide a very comfortable lifestyle for children with disabilities. A Third-Party Special Needs Trust is a much better vehicle for larger sums of money.
 H.R. 5771.