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ABLE Accounts: A New Savings Tool for Individuals with Disabilities

If you or a family member has a disability that began before the age of 26, you may be able to benefit from a new type of savings account called an ABLE account. This savings option was made available through the Achieving a Better Life Experience (ABLE) Act of 2014 that was signed into law in December as part of the tax extenders bill. The ABLE Act authorized the establishment of private tax-advantaged savings accounts that can help you save for long-term expenses without sacrificing eligibility for public benefits such as Medicaid and Supplemental Security Income (SSI).

The following information is an overview of ABLE accounts. These accounts will be governed under Internal Revenue Code Section 529A and will be established and operated by states under federal guidelines. The IRS and the Treasury Department still have to finalize regulations and issue guidance before states may establish programs and begin accepting account applications, but in the meantime, here are answers to some questions you may have about this new savings tool.

What is an ABLE account?

An ABLE account is a tax-advantaged savings vehicle that can be used to save for future needs without sacrificing an individual's eligibility for public benefits such as SSI and Medicaid. To receive public benefits, individuals with disabilities must meet a means or resource test. Because individuals who have more than $2,000 in assets may lose their eligibility for these much needed public benefits, they may not be able to save for retirement, education, or even general living expenses.

But with the passage of the ABLE Act, saving for the future may now be easier. The stated purpose of the legislation is to (1) encourage and assist individuals and families in saving private funds for the purpose of supporting individuals with disabilities to maintain health, independence, and quality of life; and (2) provide secure funding for disability-related expenses of beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, title XVI (Supplemental Security Income) and title XIX (Medicaid) of the Social Security Act, the beneficiary's employment, and other sources.

ABLE accounts are modeled after 529 college savings accounts and have many similar features and benefits. Once an account is established for a beneficiary, account contributions will accumulate tax deferred and any earnings will be tax free at the federal level if the money is used for qualified expenses. If any funds are withdrawn and not used for qualified expenses, then the earnings portion of the withdrawal will be taxed at the recipient's rate and subject to a 10% federal penalty. There are no federal tax incentives for contributions, but states may offer their own income tax incentives to residents such as a tax deduction for contributions.

One feature unique to ABLE accounts is a Medicaid payback provision. Any funds remaining in an ABLE account upon the beneficiary's death may be claimed by the state as repayment for assistance the state has provided under the state's Medicaid plan before any remaining assets are passed on to heirs. This is a potential drawback of establishing an ABLE account that will need to be weighed against the potential benefits.

When will ABLE accounts become available?

The IRS and the Treasury Department have six months from the date of enactment (which was December 19, 2014) to issue regulations and provide guidance, and there will also be a public comment period. After this, states may establish their own ABLE programs (or contract with another state) and begin accepting applications. This means that ABLE accounts may not become available until the third quarter of 2015 at the earliest.

What are the criteria for opening an ABLE account?

The account beneficiary must meet the definition of an "eligible individual." The beneficiary can be any age, but his or her disability must have begun before age 26. In addition, to be eligible, the beneficiary must be entitled to Social Security Disability Insurance (SSDI) benefits or SSI benefits, or obtain a disability certification that meets IRS rules.

Only one ABLE account can be opened for each beneficiary, and the beneficiary must use the plan offered by his or her state of residence (or the plan offered by the contracting state, if any, that provides ABLE account services for his or her state of residence).

How much can be contributed to an ABLE account?

Contributions to an ABLE account may be made by the beneficiary, parents, grandparents, friends, or others, but the total annual contribution limit from all sources is $14,000 (the annual gift tax limit). This limit may increase from year to year since it is indexed for inflation. The lifetime contribution limit will be tied to each state's 529 contribution limit, which in most states is $300,000 or more. However, if an individual with a disability is eligible for SSI, only $100,000 is exempted from the state's individual resource limit. That means that if the ABLE account balance exceeds $100,000, the individual's monthly SSI benefit will be suspended until the account balance falls below $100,000. Eligibility for Medicaid will not be affected.

What investment options will be offered?

States may offer various investment options for ABLE account funds. Of course, it will be up to account owners to select investment options that match their financial need and tolerance for risk. Investment allocations can be changed twice per year.

All investing involves risk, including the possible loss of principal, and there can be no guarantee that any investing strategy will be successful.

What can account funds be used for?

Funds may be used for disability-related expenses. These qualified expenses may include the following:

  • Education
  • Housing (but a distribution for housing expenses is not disregarded for purposes of the SSI program)
  • Transportation
  • Employment training and support
  • Assistive technology and personal support services
  • Health, and prevention and wellness expenses
  • Financial management and administrative services, legal fees, and expenses for oversight and monitoring
  • Funeral and burial expenses

Will ABLE accounts replace other planning tools such as special needs trusts?

No. ABLE accounts give individuals with disabilities and their families an additional tool to address financial challenges. Which tool or tools work best will depend on individual needs and circumstances, and each individual or family will need to determine how an ABLE account might fit into a comprehensive special needs plan.