ABLE Accounts: 10 Things You Must Know
1. What is an ABLE account?
An ABLE account is a tax-advantaged savings accounts that qualified individuals with disabilities will be able to open as a result of the passage of the ABLE Act of 2014 and subsequent enactment of state ABLE laws. Earnings on ABLE accounts will not be taxed. Contributions to the account may be made by any person (the account beneficiary, family and friends) and may or may not be tax deductible depending on the specifics of the state ABLE law.
2. Why the need for ABLE accounts?
Millions of individuals with disabilities and their families depend on a wide variety of public benefits for income, health care and food and housing assistance. Eligibility for these public benefits (SSI, SNAP, Medicaid) requires meeting a means or resource test that limits eligibility to individuals who report no more than $2,000 in cash savings, retirement funds and other items of significant value. To remain eligible for these public benefits, an individual must remain poor. For the first time in public policy, the ABLE Act recognizes the extra and significant costs of living with a disability. These include costs related to raising a child with significant disabilities or a working age adult with disabilities, for accessible housing and transportation, personal assistance services, assistive technology and health care not covered by insurance, Medicaid or Medicare. Under ABLE, eligible individuals and families will be allowed to establish ABLE savings accounts that will not affect their eligibility for SSI, Medicaid and other public benefits. The legislation explains that an ABLE account will, with private savings, "secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, Medicaid, SSI, the beneficiary's employment and other sources."
3. Am I eligible for an ABLE account?
Passage of legislation is a result of a series of compromises. The final version of the ABLE Act limits eligibility to individuals with significant disabilities with an age of onset of disability before turning 26 years of age. You need not be under the age of 26 to be eligible for an ABLE account. You could be over the age of 26, but must have documentation of disability that indicates age of onset before the age of 26.
If you meet this criteria and are also receiving benefits already under SSI and/or SSDI, you are automatically eligible to establish an ABLE account. If you are not a recipient of SSI and/or SSDI but still meet the age of onset disability requirement, you are still eligible to open an ABLE account upon obtaining a disability certification from your physician.
4. Are there limits to how much money can be put in an ABLE account?
The total annual contributions by all participating individuals, including family and friends, is $14,000. The amount will be adjusted annually for inflation. Under current tax law, $14,000 is the maximum amount that individuals can make as a gift to someone else and not pay taxes (gift tax exclusion). The total limit over time that could be made to an ABLE account will be subject to the individual state and their limit for education-related 529 savings accounts. Many states have set this limit at more than $300,000 per plan. However, for individuals with disabilities who are recipients of SSI and Medicaid, the ABLE Act sets some further limitations. The first $100,000 in ABLE accounts will be exempted from the SSI $2,000 individual resource limit. If and when an ABLE account exceeds $100,000, the beneficiary will be suspended from eligibility for SSI benefits and no longer receive that monthly income. However, the beneficiary will continue to be eligible for Medicaid. States will be able to recoup some expenses through Medicaid upon the death of the beneficiary.
5. Which expenses are allowed by ABLE accounts?
A "qualified disability expense" means any expense related to the designated beneficiary as a result of living a life with a disability. These include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services and other expenses to enhance the person's quality of life. In November 2015, the Treasury Department issued guidance indicating that states do not have to scrutinize expenses but beneficiaries will be required to maintain documentation to prove that their expenses are qualified.
6. Where do I go to open an ABLE account?
As of December 2015, no state is offering ABLE accounts because those that have passed ABLE bills are still in the process of developing their programs. We anticipate that some states may have programs running in 2016 but most will not be ready until 2017.
Most states will provide online applications for ABLE accounts or families may work with a financial advisor to open an account.
7. Can I have more than one ABLE account?
No. The ABLE Act limits the opportunity to one ABLE account per eligible individual.
8. Will states offer options to invest the savings contributed to an ABLE account?
Like state 529 college savings plans, states are likely to offer qualified individuals and families multiple options to establish ABLE accounts with varied investment strategies. Each individual and family will need to project possible future needs and costs over time, and to assess their risk tolerance for possible future investment strategies to grow their savings. According to the ABLE Act, account contributors or designated beneficiaries may change the way their money is invested in the account up to two times per year.
9. How many eligible individuals and families might benefit from establishing an ABLE account?
There are 58 million individuals with disabilities in the United States. To meet the definition of significant disability required by the legislation to be eligible to establish an ABLE account, the conservative number would be approximately 10 percent of the larger group, or 5.8 million individuals and families. Further analysis is needed to understand more fully the size of this market and more about their needs for new savings and investment products.
10. How is an ABLE account different than a special needs or pooled trust?
An ABLE Account will provide more choice and control for the beneficiary and family. The cost of establishing an account will be considerably less than either a Special Needs Trust (SNT) or Pooled Income Trust. With an ABLE account, account owners will have the ability to control their funds and, if circumstances change, still have other options available to them. Determining which option is the most appropriate will depend upon individual circumstances. For many families, the ABLE account will be a significant and viable option in addition to, rather than instead of, a Trust program.