Skip to Content
Retirement

A Rapidly Evolving Tool for Special Needs Planning

Here's how ABLE accounts can be used alongside other tools to effectively protect the assets of special needs clients.

By Helen Modly, CFP, CPWA, and Tiffiny Dimel, CFP

ABLE accounts, also called Disabled 529s or 529A, were created as part of the Stephen Beck Jr. Achieving a Better Life Experience (ABLE) Act of 2014. This act amended Section 529 of the IRS code to include tax-advantaged accounts for individuals with disabilities that would not immediately disqualify the account owner from receiving benefits from means-tested public assistance programs.

Mirroring many of the rules of a 529, the act is focused on empowering the individual with disabilities without displacing other tools, such as special needs trust, for providing financial care. Since its inception, the law has been amended multiple times, the most recent being as a part of the Tax Cuts and Jobs Act.

How the Accounts Work Individuals are eligible for an ABLE account if they are either entitled to benefits based on blindness or disability under Title II or XVI of the Social Security Act (or obtain a disability certification), and the onset of the blindness or disability occurred before the individual turned 26 years of age. The ABLE program is run at the state level but is not yet available in every state. An amendment to the act passed in 2015 lifted residency requirements so there are no longer barriers to opening an account based on state residency or availability.

ABLE accounts are limited to one account per designee, and funded with post-tax dollars for which there is no federal deduction. There are no age restrictions for opening an account as long as the onset of disability for the account beneficiary occurred before age 26.

The purpose of the ABLE account is to pay for qualified disability expenses that help maintain or improve health, independence, and quality of life. The list of eligible expenses is expansive and includes basic living expenses, education, housing, transportation, employment training, assistive technology and personal support services, health, prevention and wellness, and funeral and burial expenses.

An ABLE account will not disqualify the account owner from public assistance programs such as SSI, SSDI, and Medicaid, as it is exempted from the $2,000 asset limitation; however, receipt of SSI benefits can be affected once the account grows beyond a certain threshold. SSI benefits are suspended, not terminated, when the account balance exceeds $100,000 (with no adjustments for inflation). Once the balance is reduced below the threshold, SSI benefits will resume. States are required to send monthly account balances to the Social Security Administration, so expect this to be regularly monitored. Eligibility for Medicaid is not affected as long as distributions are used for qualified disability expenses.

ABLE accounts have one very significant drawback: Upon death of the account owner, Medicaid can file a claim for repayment of benefits used since the account was opened. However, the state does not have first rights to the funds within the account. Before any claw-back can begin, any remaining qualified expenses and funeral/burial costs can be paid for from the account. In addition, the payback amount excludes premiums paid to a Medicaid buy-in program by the account owner since inception of the account. Any remaining funds after the Medicaid payback will be disbursed to the beneficiary of the account on file.

Contributions Annual contributions are restricted to the same limit as a 529 plan--to the annual gift exclusion amount, which is $15,000 for 2018. Anyone can make a contribution to the account--relatives, friends, or the account owners themselves.

There is no provision for a lump-sum contribution up to five years' worth of annual gift exclusions as there is for a standard 529. Some states offer deductions or exemptions for state taxes, so participants should check their local plans first. Maximum balances and contributions are set by each state's limit for 529 plans, many of which are $400,000 or more.

There were a number of important provisions in the recent Tax Cuts and Jobs Act which benefit the account beneficiary who is making their own contributions. The tax law allows account owners with earned income the ability to personally make contributions in excess of the annual contribution limit up to an amount equal to the poverty line, although clarification is needed on the exact amount.

The tax law also enables rollovers from existing 529 plans into ABLE accounts as long as it is for the benefit of the same beneficiary (or a qualified family member same as for regular 529 accounts). The amount that can be rolled over each calendar year is subject to the annual contribution limit as well. This is a long awaited change that will allow parents who have saved in a regular 529 plan to fund an ABLE account if their child has been or becomes disabled.

Earnings contributed to the account by its owner are not exempt from being classified as "countable earnings" by the Social Security Administration in determining substantial gainful activity. This only applies to deposited funds by the account owner that were earned; contributions from others will not be considered in determining substantial gainful activity.

Management and Withdrawals Funds within an ABLE account can be invested, and any resulting investment income is tax-free to the account owner. Investment choices from within the plan can be changed twice per year. Accounts may be subject to monthly administrative fees, and require minimum balances to open.

Withdrawals should be made for qualified disability expenses only, so be sure to keep receipts of these expenses in case the IRS has questions. Any earnings in the account that are withdrawn for non-qualified expenses are subject to income taxes and a 10% penalty. This is calculated on a pro-rata basis similar to withdrawals from nondeductible IRAs. Withdrawals made for a nonqualified expense may be countable as income for Medicaid purposes, so it is imperative that distributions be made for qualified disability expenses only.

ABLE Accounts Versus Special Needs Trusts ABLE accounts are not a replacement for special needs trusts. Any individual who was disabled after the age of 26 is not eligible to open an ABLE account, and the SSI restriction along with the Medicaid claw-back provision make it an unattractive option for accumulating large balances. Also, the restrictive contribution limits and maximum account balances impede the ability to accumulate a lifetime of care expenses in a single account.

However, it is a gift of independence to individuals with disabilities by giving them the ability to directly manage more than $2,000 of assets in their name without disqualifying them from means-tested public assistance programs. ABLE accounts should be a complement to other special needs planning.

ABLE Accounts Are Still Evolving ABLE accounts are still being refined by Congress, with each amendment thus far expanding the restrictions placed by the initial act. A number of acts were made into law with the new tax law, but there are more on the horizon as special needs groups look to increase the age requirement to include disabilities which occur in later in life, such as multiple sclerosis.

The Able National Resource Center publishes regular updates for state and federal changes, and is a consumer-friendly site for clients who want to learn more about ABLE accounts in general. It is best to keep abreast of these changes, as each amendment thus far has provided a planning opportunity for the diligent advisor.

More on this Topic

Brace Yourself for Higher RMDs in 2024
Following a banner year in the stock market, investors subject to required minimum distributions could be in for a nasty tax surprise, Ed Slott says.

Sponsor Center