As a result of the passage of the Achieving a Better Life Experience (ABLE) Act of 2014, ABLE accounts offer an effective way for individuals with disabilities and their families to save for disability expenses while maintaining eligibility for essential benefits, like Medicaid.
Prior to the passage of the ABLE Act, individuals with disabilities would be ineligible for public benefits, like Supplemental Security Income (SSI); SNAP; and Medicaid, if they reported more than $2,000 in cash savings, retirement funds and other items of significant value. However, the ABLE Act recognizes the significant additional costs of living with a disability that come along with raising a child through working age. This provides eligible families a greater opportunity to focus on their own priorities while still ensuring the needs of their disabled loved ones are met.
Are you eligible? Individuals are eligible for an ABLE account if they are already receiving benefits under (SSI) and/or Social Security Disability Insurance (SSDI). If not, they may still be eligible if they certify that they are blind, disabled or has a diagnosed condition listed on the List of Compassionate Allowances. Under all circumstances, the onset of the disability must have started prior to age 26. One way to determine eligibility is through the help of a financial advisor and appropriate physician to determine whether you meet the qualifications.
Who’s the Account Owner? The account owner is the eligible individual and is also referred to as the designated beneficiary. The beneficiary of the account is the account owner, and income earned by the accounts will not be taxed. Contributions to the account, which can be made by any person (the account beneficiary, family and friends), must be made using post-taxed dollars and will not be tax deductible for purposes of federal taxes, however some states may allow for state income tax deductions for contribution made to an ABLE account. If the account owner is a minor a person with signature authority must be designated on the account.
Which Expenses are Qualified? A “qualified disability expense” is defined as any expense related to the designated beneficiary that comes from living a life with disabilities, which includes expenses that help improve health, independence, and/or quality of life. These may include education, housing, transportation, job training and support, assistive technology, personal support services, health care expenses, financial management and administrative services.
Contribution Limits: The total annual contribution per beneficiary for a single tax year is $15,000. This amount includes contributions made by all participants and includes a rollover from an existing 529 college plan if applicable (see below for more details). Under current tax law, annual contributions may not exceed the federal gift tax exclusion amount, which is $15,000 for 2018.
It’s important to keep in mind that a beneficiary does want to be mindful of the balance in the ABLE account. For disabled individuals who are recipients of SSI, the first $100,000 in an ABLE account is exempt from the SSI $2,000 individual resource limit. When an ABLE account exceeds $100,000, the beneficiary’s SSI cash benefit will be suspended until balance falls back below $100,000. While the beneficiary’s eligibility for the SSI cash benefit is suspended, it has no effect on their ability to receive or be eligible to receive medical assistance through Medicaid.
Other Considerations – Medicaid Pay Back: The Medicaid Pay-Back is a provision that may allow the state to recoup Medicaid related expenses from the time the account was open upon the death of the account owner/beneficiary. This provision allows the state in which the beneficiary lived to file a claim to all or a portion of the funds in the account equal to the amount in which the state spent on the individual through their Medicaid program. For example, the claim could be for the amount of total Medicaid assistance paid out for the account owner’s benefit after the establishment of the ABLE account. Payments for all outstanding qualified disability expenses, including funeral expenses, would be paid by the ABLE account before any such Medicaid claim, and the amount payable is reduced by the amount of all premiums paid by or on behalf of the beneficiary to a Medicaid Buy-In program.
Maximize Your Options: Roll an Existing 529 Plan into an ABLE Account: As a result of the new tax law of 2017, qualified individuals and families are able to directly roll over funds from a 529 college savings plan into the beneficiary’s ABLE account. The annual contribution limit remains the same at $15,000 – and this includes contributions made by transfer or cash. Keep in mind that money held in 529s usually won’t affect an individual’s eligibility for means-tested government benefits, since these accounts tend to be in parents’ names.
Establishing an ABLE account from an existing 529 plan may make more sense if the beneficiary is older and if you want your loved one to manage their own money. Withdrawals may continue to be used by the beneficiary for qualified disability expenses such as housing, legal fees, medical treatments and job training.
In certain situations it may make sense for a family member, such as a grandparent, to start an ABLE account for the current and future needs of a loved one. For many families, an ABLE account is a viable complement and option for supplementing a Special Needs Trust Program. Consulting a trusted team of advisors should be your first step to understand if ABLE accounts are the best avenue for your family in aligning your expenses with your ultimate life priorities.
Sources: ABLE National Resource Center, Fidelity, Special Needs Alliance