ABLE Account Overview

By Julie Ford

At the end of 2014, President Obama signed into law the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act). Its purpose is to provide a way for people with disabilities to grow tax-deferred savings. If you’re familiar with 529 college savings plans, ABLE is a very similar concept. You can add money to the account and it will grow tax-free as long as the money is used for “qualified expenses” when you take it out.

Why is this significant? Historically, it has been very challenging for people with disabilities to accumulate money in their own name. The backstory is complicated, but basically, eligibility for federal and state programming for the disability community is often based on how much money a person has in his or her name. Many people rely heavily on these benefits, and therefore have no way to save for the future.


Status of Leading States

There is a great deal of positive collaboration between leading disability organizations (e.g., National Down Syndrome Society, Autism Speaks, and the National Disability Institute) and federal and state departments. Parties are eager to create and launch the best ABLE program possible, but it is a slow moving process.

Currently, 41 states have enacted ABLE legislation and are now in program development. Most of the remaining states have pending legislation. At the moment, Virginia, Massachusetts, and Florida are among the leading states.


What You Need to Know

The following are significant details to keep in mind regarding ABLE accounts. There could easily be changes to the below based on final regulations issued by the IRS and the final product launched by each state.


Am I qualified for an ABLE account?

This is one area where we are waiting for more clarity. The proposed rule uses the phrase “marked and severe functional limitations” and points to the Social Security Administration for definition and guidance. Age of onset must be prior to age 26. We also know that eligibility is determined on an annual basis and applies for that entire taxable year. At the moment it appears that the account owner can self-certify and will not have to produce a written diagnosis to the ABLE program but will be required to provide such documents upon request (e.g., in a tax audit).


I’m eligible for an ABLE account. Should I open one?

As with most finance questions, it depends. I believe ABLE accounts will provide a lot of value to many people. However, they will not replace the need for other savings vehicles such as 529 accounts and special needs trusts. An ABLE account will provide benefits these other accounts do not and vice versa. For anyone eligible, I recommend you continue to monitor progress at the federal and state level and coordinate with your financial advisor (and attorney if you have a special needs trust) when the states begin to open their programs to the public. A high level understanding of how all of your accounts and benefits work together will be crucial.

A significant benefit of ABLE accounts is the simplicity and ease of access to funds as compared to a special needs trust. Opening an account will not require an attorney, and the process of using the funds in the account should be simpler. Also, an ABLE account can receive assets belonging to account owner where a special needs trust can only receive assets not belonging to the beneficiary. For example, if the ABLE account owner has income, he or she could shelter assets by putting income earnings into the ABLE account.


When can I open an account?

Qualifying individuals may be able to open accounts as early as mid 2016, though this is an aggressive estimate. At the moment, Florida's program is set to launch on July 1, 2016. Individuals are not restricted to their state of residence when opening an ABLE account, but can shop around and open an account with any state program they choose. This is similar to 529 college savings accounts that may be opened in the state of your choosing. Each individual is allowed only one account and is to be both the account owner and beneficiary.


How much can I contribute?

Contributions must be in cash (so no appreciated stock), and the combined annual contribution allowed per account per year is the same as the federal gift tax limit, currently $14k. Anyone can contribute to an ABLE account, including businesses. Lifetime contributions for these accounts are only limited by account value and will follow 529 plan rules (which vary by state, currently $375k in New York). Additionally, most states will not permit a state tax deduction for contributions.


How will the account affect means-tested benefits?

Assets will be disregarded or receive favorable treatment when determining eligibility for most federal means-tested benefits. For example, assets are disregarded for Medicaid benefits, though once the account owner is deceased, there is a Medicaid payback on remaining assets (once other obligations are paid). This lien only applies to Medicaid benefits received after the ABLE account has been opened. For SSI, only $100k (possibly $102k) will be disregarded, and if the account exceeds this threshold, SSI payments will stop (but not benefits). When the account drops below $100k, SSI payments will resume without needing to reapply. There is a lot we don’t know about how ABLE accounts will work in conjunction with SSI and Medicaid. We are waiting to hear from the Social Security Administration for guidance.


How can I use the money in the account?

One of the most positive aspects of ABLE accounts will be the broad definition of qualified distributions. Defined as “expenses that maintain or improve health, independence or quality of life,” they are not limited to expenses solely benefiting the account owner or those for which there is a medical necessity. An example of a likely qualified expenses is a cell phone. Non-qualified distributions will subject to federal income tax and a 10% federal penalty. We have yet to hear how states will tax non-qualified distributions.


Best Resources

The ABLE National Resource Center has been formed out of collaborative efforts of individuals across many different disability organizations. Their website is a great source for information and status updates on the happenings at every state.

The National Down Syndrome Society is doing an excellent job tracking updates at the federal and state level.