Paving the way for millions of disabled Americans to have tax-free accounts to help them save for their disability expenses, in December 2014, Congress passed, and President Obama signed into law, the Achieving a Better Life Experience (ABLE) Act of 2014, which went into effect this year.
ABLE allows people with disabilities, and those who love and support them, to open savings accounts for disability-related expenses without jeopardizing Medicaid coverage and other federal benefits and, so long as the balance doesn’t exceed $100,000, without risking eligibility for Supplemental Security Income (SSI) benefits.
What is an ABLE account and who can open one?
An ABLE account is maintained under a qualified ABLE program, established by an eligible individual, who essentially owns the account.
An ABLE account can only be opened for an eligible individual–one who’s entitled to benefits based on blindness or disability under title II or XVI of the Social Security Act, and whose blindness or disability occurred before the age of 26.
In addition, a person with a “disability certification” is also eligible. A disability certification, which must be filed with the Secretary of Treasury, involves a certification under which an individual (or the parent or guardian of the individual) verifies that he or she: (1) has a medically determinable physical or mental impairment that results in marked and severe functional limitations, which can be expected to result in death or has lasted or can be expected to last for a continuous period of not less than 12 months, or (2) is blind. And, again, the individual’s blindness or disability occurred before the age of 26.
A copy of the individual’s diagnosis relating to his impairment(s) must be included with the disability certification.
A qualified ABLE program is one that’s established and maintained by a state, or agency or instrumentality of a state, under which contributions for the benefit of an eligible individual to an ABLE account can be made for qualified disability expenses of the designated beneficiary of the ABLE account.
In addition, a qualified ABLE program must limit: (1) a designated beneficiary to one ABLE account, and (2) an ABLE account to its resident or residents of a contracting state. A contracting state is a state without a qualified ABLE program that has entered into a contract with a state that does have a qualified ABLE program in place.
Patterned after Section 529 of the Internal Revenue Code of 1986 (the Code), ABLE accounts carry some exclusions.
For instance, a qualified ABLE program can only accept cash contributions, the total of which can’t exceed the current year’s limitation for gift tax exclusion under Section 2503(b) of the Code, currently $14,000.
In addition, each qualified ABLE program must establish a maximum contribution limit under which additional contributions wion’t be permitted. A designated beneficiary may not, directly or indirectly, direct the investment of any contributions (or the earnings thereon) to a qualified ABLE program more than twice in any calendar year.
What permissible expenses are covered?
An ABLE account can only be used for qualified disability expenses—those related to the eligible individual’s blindness or disability, including:
- Employment training and support,
- Assistive technology and personal support services,
- Prevention and wellness,
- Financial management and administrative services,
- Legal fees,
- Expenses of oversight and monitoring,
- Funeral and burial expenses, and
- Other expenses approved by the Secretary of Treasury.
What are the benefits?
The primary benefit of ABLE accounts, like the 529 Plan accounts on which they’re patterned, is that they allow for tax-free growth while the funds are in an ABLE account and then allow for tax-free distributions when the funds are used for qualified disability expenses.
In addition, like 529 Plan accounts, ABLE accounts allow for a change in the designated beneficiary of an account, so long as the new designated beneficiary is a member of the family of the prior one.
Rollovers from one qualified ABLE program to another are also permissible for the same designated beneficiary (so long as there has been no other rollover within the previous 12 months) or for a new designated beneficiary who’s a member of the family of the prior one.
What are some of the limitations?
If an ABLE account isn’t used to pay for the qualified disability expenses of the designated beneficiary, then the portion of that distribution that represents earnings on that account is includible in income by the recipient.
Moreover, an additional 10 percent tax penalty applies on the amount that’s includible in income for such a non-qualified distribution from an ABLE account.
Another important limitation on ABLE accounts is that account balances in excess of $100,000 will have a negative effect on the designated beneficiary, since at that time eligibility for SSI benefits will be suspended, but not terminated. The designated beneficiary will not receive SSI benefits while the balance on the ABLE account is in excess of $100,000, but will retain eligibility under the SSI program.
This treatment will most likely have a chilling effect, capping the amounts that most ABLE accounts will accumulate. However, since an eligible individual can only have one ABLE account and since total annual contributions are capped at the annual gift tax exclusion, the ability to grow ABLE accounts is already limited.
Another important consideration to take into account when opening an ABLE account is that funds remaining in a qualified ABLE account on the death of the designated beneficiary must be distributed to the state that holds the account. This treatment will also have a chilling effect on the size of contributions to and the balances of many ABLE accounts.
States will need to establish qualified ABLE programs, and many are currently working on establishing such programs or becoming contracting states.
Since the balances on these accounts will, at least initially, be low, it remains to be seen what fees will be charged and what underlying expenses on these accounts will look like, since economies of scale will be difficult to achieve any time in the near future.
The Treasury Department is also charged with promulgating regulations to, among other things:
- Enforce the limitation of one ABLE account per eligible individual;
- Provide for the information required to be presented to open an ABLE account;
- Develop, in consultation with the Commissioner of Social Security, the conditions needed to meet the disability certification and determination of disability thereunder; and
- Prevent fraud and abuse with respect to amounts claimed as qualified disability expenses.
What additional requirements these regulations will impose on those who wish to open ABLE accounts for their disabled loved ones remains to be seen.
ABLE accounts will hopefully provide an opportunity for a brighter economic future for individuals with disabilities and some level of comfort for those that love and support those individuals. The promise of ABLE accounts is that they will help disabled individuals maintain their health and independence and improve their quality of life.
James W.C. Canup is a partner and tax practice chair in the law firm of Hirschler Fleischer (Richmond, Va.).His practice is focused on the taxation of LLCs, partnerships, corporate transactions, financial products, real estate and REITS, and tax-exempt organizations. He also advises issuers of municipal fund securities and counsels clients on transactional tax matters. He may be reached by email at [email protected].