On June 30, 2015, I watched with pleasure as Governor Robert Bentley signed the bill to turn Alabama’s Achieving a Better Life Experience (ABLE) Act into law. The ABLE Act allows a savings account to be established for an individual who became disabled prior to age 26. For individuals with disabilities who receive Supplemental Security Income (SSI) or Medicaid (both programs have a resource limit of $2,000 to qualify), an ABLE Act account will not count as a resource. This account offers a simple solution in many cases to handle funds of a person on SSI or Medicaid to prevent disqualification because of excess resources. Financial organizations in Alabama should be ready by year-end to offer ABLE Act accounts.
While some advocates had hoped that the ABLE Act would eliminate the need for a Special Needs Trust, it does not because of the contribution limits and distribution restrictions listed below, as well as the Medicaid payback required. Despite this, however, the ABLE Act should provide practical and inexpensive options for persons with disabilities seeking more autonomy over resources while retaining eligibility for important government benefits.
Here are some of the facts regarding ABLE Act accounts:
- Only individuals with a disability that occurred before age 26 can have an account.
- Only one ABLE Act account per individual is allowed.
- The ABLE Act account must be located in the State of the individual's residence.
- Proof of disability must be shown to open the account — for example, a doctor's letter or a disability determination by Social Security.
- Total contributions to the account for one year cannot exceed $14,000 (or the amount of the gift tax annual exclusion in effect). This requirement, unfortunately, eliminates the option for an insurance policy over $14,000 or a distribution from an inheritance above that amount to name an ABLE Act account as beneficiary.
- If the account exceeds $100,000.00, then the individual will lose eligibility for SSI, as well as Medicaid, which is automatically provided to SSI recipients in Alabama. If an individual is not on SSI but is receiving Medicaid benefits, then the total ABLE Act account limit is $350,000.00 in Alabama (this amount is tied to Alabama’s 529 plan maximum amount).
- The funds in an ABLE Act account can grow inside the account tax-deferred and will come out income tax free when used to pay for “qualified disability expenses” for the for the account beneficiary. Any payments for a non-qualified expense may mean the account will no longer qualify as an exempt resource and will cause a pro rata portion of the earnings attributable to the non-qualified payment to be subject to tax plus a 10% penalty. The proposed regulations by the Federal government require each state to monitor distributions from ABLE Act accounts on an annual basis.
- The term “qualified disability expenses” is not yet fully defined. Examples of qualified expenditures are likely to include transportation, assisted technology, health and wellness needs, housing and employment support. Non-qualified expenses may include entertainment or vacation expenses.
- While it appears that the proposed regulations regarding ABLE Act accounts will allow for housing, Social Security has stated that distributions for housing from these accounts will have an impact on SSI distributions in the same manner that presently exists when distributions for housing are made from any source other than SSI.
- Most importantly, the amount remaining in an ABLE Act account at an individual's death — regardless of the source of the funds contributed — must be paid to the Medicaid agency that paid benefits for the individual's care. If funds remain after repayment to Medicaid, then they may pass to family. Because a Special Needs Trust created by family to receive inheritances, life insurance or gifts for the individual does not need Medicaid payback, it remains a better option to leave funds for a person on SSI or Medicaid than relying on an ABLE Act account alone.
While this list of limitations may seem daunting, the ABLE Act does offer plenty of useful opportunities for individuals with special needs who qualify to have an account. Here are a few examples:
If an individual on SSI or Medicaid (recipient) directly receives a small inheritance, gift or personal injury award, then up to $14,000 of the amount can be contributed to an ABLE Act account, with any excess amount being “spent-down” on items or services for the recipient. This avoids having to spend the entire amount down to $2,000.
If the recipient is able to save money from his or her monthly SSI or Social Security Disability check, he can contribute some to an ABLE Act account, up to $14,000 per year. This avoids having to spend the excess in order to maintain the $2,000 resource limit. The ABLE Act account should not receive funds from an SSI check that the individual should be spending for room or board, however.
If an individual on SSI or Medicaid is working and wants to save some of his earnings, the ABLE Act account is perfect for these savings. This is particularly helpful for individuals learning skills to live independently.
Similarly, if the parent of an SSI or Medicaid recipient wants to supplement the recipient’s monthly income from SSI or working, and allow the recipient to have direct access to the funds the parent contributes, the parent can make a direct deposit to the ABLE Act account each month, being aware of the limit of $14,000 a year. We do not know yet whether interest earned by the account will count towards the $14,000 limit. Nevertheless, where the recipient is able to manage monthly finances, and the family encourages these skills, the ABLE Act account can provide more autonomy over finances while living independently, without reducing or eliminating SSI or Medicaid.
Another possible use of an ABLE Act account may be to receive child support payments for a child (regardless of age) on SSI or Medicaid. This would be a better way to approach child support payments since they otherwise reduce monthly SSI dollar for dollar (except for the first $20), even to the point of eliminating SSI and Medicaid (which is provided automatically in Alabama to SSI recipients). Please be aware, however, that for this approach to be successful, a parent should consult legal counsel experienced in this area.
I am proud that Alabama quickly took the steps to give our citizens with disabilities the legislation needed to open ABLE Act accounts. Much advocacy took place over the past 8 years to bring the federal law into place. I hope individuals with disabilities and their families will take advantage of this new legislation. Please feel free to give me a call to discuss estate and government benefits planning for individuals with special needs and how an ABLE Act account can be part of your plan.