The Achieving a Better Life Experience Act (ABLE), establishing tax-advantaged savings accounts for people with disabilities, was passed by Congress in 2014. Similar to a 529 plan for education, ABLE account contributions are considered after-tax, earnings grow tax-deferred, and distributions are tax-free when used for qualified expenses.
Helping without hurting
The ABLE account solves a dilemma that many people face when trying to care for a disabled loved one – how to provide financial support without causing them to lose government benefits. Before the ABLE Act, those with disabilities who had more than $2,000 in their name would lose their eligibility for government benefits such as Medicaid coverage and Supplemental Security Income.
Contributions to the account may be made by family, friends, or any other person and could be tax-deductible depending on state law. Even though the beneficiary is the owner of the account, legal guardianship and powers of attorney will allow others to control ABLE funds if the recipient is incapable to manage the account.
Access to funds
There are three ways to access the account. Debit cards, direct pay to service providers, and electronic transfer to a bank account. Before opening an ABLE account, it’s important to check if that account has the fund access you prefer.
ABLE = Independence
Account distributions are tax-free for “qualified disability expenses.” It is a broad definition and includes any cost that provides independence and improves the life of the beneficiary, such as housing, education, medical expenses, transportation, personal support services, assistive technology, and daily living expenses. Although approval will not be required, it is a good idea to maintain documents and receipts.
ABLE account eligibility
There are two requirements to become eligible to open an ABLE account:
1. The beneficiary must have become disabled before age 26.
The age restriction has been controversial as it disqualifies a large number of individuals. I expect the age requirement to be amended in the future, possibly closer to age 40, but it’s important to note that the objective of the ABLE Act is to help younger individuals who may not have the opportunity to save or live independently. The ABLE Act is not a retirement savings tool for those who become disabled later in life.
2. The definition of disability is the Social Security definition of “marked and severe functional limitations.” Individuals will fall into one of two categories of eligibility:
If the disability occurred before age 26 and they are receiving Social Security Supplemental Income or Social Security Disability (SSI/SSDI), then eligibility is automatic.
If the disability occurred before age 26, but they are not receiving SSI/SSDI, then they must provide a disability certification from their physician to become eligible for an ABLE account.
ABLE account limitations
An able account is a fantastic tool, yet there are limitations.
1. Total annual contributions from all family or friends are limited to the annual yearly gift tax exclusion amount of $15,000 (2021). You and Grandma can’t each deposit $15,000 into the ABLE account in the same year. If you both wanted to contribute it would have to be $7,500 and $7,500 or any combination not to exceed $15,000. I’ve spelled that out because that is different than a 529 where multiple individuals can give $15,000.
2. If ABLE Account values grow beyond $100,000, then Supplemental Social Security Income payments will be suspended until the account falls below that value. All participating states have account limits that are between $100,000 and $300,000, so please check this before you open an account. Medicaid eligibility is not affected.
3. State-Sponsored: Similar to 529 accounts, ABLE Accounts are state-sponsored. Also like a 529, you don’t have to open one in your home state, so you can shop around. There are, however, some states offering income tax incentives to residents. Always check out your own state’s plan for tax incentives first.
4. There is a limit to one ABLE account per person, but you do have the ability to switch plans. That is good, particularly if you find an option with lower costs, better funds accessibility, or investment choices. You just can’t have multiple ABLE accounts.
5. What happens if the beneficiary passes away?
Any outstanding qualified expenses get paid first. Then Medicaid may claim any remaining money as reimbursement for services provided since the opening of the ABLE account. Finally, any remaining funds will pass to the beneficiary’s estate.
6. What does it cost?
Almost all ABLE accounts have investment and maintenance costs. Shop around and find a plan with low costs and flexible access to funds. You can compare ABLE accounts at the ABLE National Resource Center’s website.
An ABLE account isn’t the only game in town
Before the passing of the ABLE Act, the most common way to help was to create a special needs trust. A special needs trust is another great option, but it’s not for everyone.
They are cumbersome, expensive to open and maintain, taxed at a higher rate, and you need an attorney. The benefit is that you can stash away quite a bit more than an ABLE account and still qualify for Medicaid or SSI/SSD benefits.
Compared to a special needs trust, an ABLE is much less expensive, tax-free, and provides easier access to funds. One must gain prior approval through a trustee to access the resources in a special needs trust. There is no approval required for an ABLE account.
In a perfect world, combining an ABLE account and a special needs trust would provide the largest benefit. Unfortunately, not everyone has the resources to open a special needs trust. Individuals with disabilities often have specialized healthcare needs. The ABLE is a long-overdue addition that significantly expands the ability to help loved ones at a lower cost.
If you know a family that could benefit from an ABLE account, you can share it with them through one of the links below.