Tax-advantaged savings plan are now a part of the investment portfolios for many families. They may have a 529 savings plan for future college costs, a health savings account to fund medical expenses, and an IRA to cover their retirement needs. For the first time, individuals with disabilities and their families will have a similar type of flexible savings tool.
On December 19, 2014, the Achieving a Better Life Experience (ABLE) Act was signed into law. The ABLE Act creates tax-advantaged savings accounts for individuals with disabilities. The law seeks to ease the financial strains placed on individuals with disabilities and to allow those individuals and their families to save for disability-related expenses.
What is an ABLE account?
This type of special savings account, called an ABLE account, allows people with disabilities to save up to $100,000 without losing eligibility for Social Security Income (SSI), Medicaid and other needs-based government benefits. Although contributions made to an ABLE account are not tax-deductible for federal income tax purposes, the income earned by the accounts will not be taxed. As with 529 plans, each state is responsible for establishing and operating its own ABLE program. Missouri is currently considering a bill that will implement the Federal ABLE Act on the state level.
Who can open an ABLE account?
An individual with significant disabilities, or families and friends of such individuals, can open an ABLE account. However, to qualify, the onset of an individual’s disability must have occurred before 26 years of age. In other words, an individual over the age of 26 may still qualify for an ABLE account but documentation must be provided confirming the onset of disability before the age of 26. The standard of proof and required medical documentation are expected to be addressed in the coming months.
What type of expenses may be paid from ABLE accounts?
The funds may be used to supplement government benefits for qualified disability expenses, which are any expenses related to the designated beneficiary incurred as a result of living a life with disabilities. Examples include education, housing, transportation, employment training and support, assistive technology, personal support services, health care and dental expenses, financial management and administrative services.
What limitations are associated with ABLE accounts?
Only one ABLE account may be opened per eligible individual. The total annual contribution by all participating individuals, including family and friends, cannot exceed the federal gift tax limit ($14,000 in 2015), and total contributions to an account will be capped at the limit established by each state for its 529 accounts (currently $325,000 in Missouri). While an ABLE account, regardless of value, will not impact an individual’s Medicaid eligibility, an account with assets in excess of $100,000 will result in suspension of the individual’s SSI benefits, if any. Finally, states may be able to recoup expenses paid through Medicaid from the ABLE account upon the individual’s death.
How is an ABLE account different from a Special Needs Trust?
An ABLE account will offer individuals and their families a simple, flexible option for tax-advantaged savings to help cover the extraordinary expenses associated with living with disabilities. However, given its limitations, an ABLE account alone cannot provide the level of financial security and support a special needs trust offers. Families may find that the use of a special needs trust will ensure their estate planning goals are met. Ultimately, an ABLE account may be best suited to compliment, rather than replace, a special needs trust when planning for a family member with disabilities.
It is expected that ABLE accounts will become available later this year, or early next year.