ABLE Act: What is it?

On December 19, 2014, the President signed into law the Achieving a Better Life Experience Act of 2014 (H.R. 647), commonly known as the ABLE Act. The Act now becomes Section 529A of the Internal Revenue Code and is modeled loosely on the Section 529 college savings programs already within the Code.

According to the Act, its purpose is to “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,” by providing “secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits,” provided by private insurance, Medicaid, Supplemental Security Insurance (SSI), the beneficiaries employment, and other sources.

That statement says many things in Legalese, but what does it mean in English and how does it apply in the real world…

Who is eligible to have an ABLE Account? The beneficiary of an ABLE Account must be entitled to receive benefits from SSI or SSDI based on blindness or disability; the beneficiary must have been disabled prior to age 26 and meets the Social Security Income program’s standard for disability; and the individual will file a disability certification under rules the IRS will write.

What is a disability-related expense? Any expense related to education; housing; transportation; employment training and support; assistive technology and personal support services; health, prevention, and wellness; financial management and administrative services; legal fees; expenses for oversight and monitoring; funeral and burial expenses; and any other expenses approved by the Secretary of the Treasury under the regulations.

How does the money in the ABLE Account affect my eligibility for SSI and Medicaid? Amounts up to $100,000 in an ABLE Account will be disregarded in determining eligibility for SSI, except those distributions made for housing expenses. Amounts exceeding $100,000 in the Account will cause a suspension of SSI until those excess resources are spent. Medicaid eligibility is completely unaffected by the amount of funds in an ABLE Account.

Who can establish and contribute to an ABLE Account? The beneficiary or any family member of the beneficiary can contribute to the Account; however the primary beneficiary has to be the owner of the ABLE Account.

What is the tax treatment of the ABLE Account and distributions made from it? All amounts in an ABLE Account are exempt from taxation while remaining in the Account. Any distribution from the Account to a beneficiary for a qualified disability-related expense is also considered a tax-free distribution to the beneficiary.

Sounds too good to be true, what’s the catch? There are limitations within the ABLE Act, but the most important ones appear to be the following:

  1. A disabled person can be the designated beneficiary of only one (1) ABLE Account;
  2. A disabled person can only have an ABLE Account in the State in which they reside, or a State that provides ABLE Account services for their home state;
  3. All contributions to an ABLE Account must be after-tax income (cash);
  4. Annual contributions to an ABLE Account cannot exceed the annual federal gift-tax exemption (in 2015, that is only $14,000 per year);
  5. Aggregate contributions to an ABLE Account cannot exceed the State’s limit on current 529 account contributions (in Pennsylvania the limit is $452,210 and in New Jersey the limit is $305,000); and
  6. Upon the death of the beneficiary, all amounts remaining in the ABLE Account shall be distributed back to the State in an amount equal to the total medical assistance (Medicaid) paid for the beneficiary after the establishment of the Account.

i.e.: The beneficiary establishes an ABLE Account in 2015, he begins receiving medical assistance in 2020, and he passes away in 2050. If there is $300,000 remaining in the Account in 2050 and the State provided $279,000 in medical assistance from 2020-2050, then the State takes $279,000 from the Account and the remaining $21,000 will be distributed to the beneficiary’s descendants.

The ABLE Act is a big leap forward in legislation for disabled people, but there are many factors that go into planning for the future of a disabled loved one. It is important to understand how an ABLE Account works and then decide whether it may or may not be the right choice to include, based on the unique situation, in your disabled loved one’s plans for the future.

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At HighPoint Law Offices we support individuals, families, and businesses of all backgrounds with estate planning services that address their unique wishes, goals, and challenges.

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