The ABLE (Achieving a Better Life Experience) Act was passed by the U.S. Senate and House of Representatives late last year and was signed into law by the President on December 19, 2014. Initially hailed as a victory for individuals with special needs, the process of regulating ABLE accounts goes on. What started out as a straightforward way to save and plan without the need for a lawyer, the regulatory process is resulting in a product with much complexity.
The ABLE creates an investment and savings instrument specifically for people with special needs. The law adapts the structure of a 529(b) plan–a tax free savings account used for specific purposes–for an ABLE account. The most popular and widely known 529(b) plan is used for tuition and education expenses. The original version of ABLE was much simpler and is qualitatively different than the new law’s final language.
The above demonstrates the major rule changes that occurred during the legislative process. Other regulations are being promulgated now by the states as well as the U.S. Treasury, detailed below.
How an ABLE Account Operates
Family members and caregivers can open an ABLE account for a beneficiary. And only one ABLE account is permitted per beneficiary. The beneficiary must be a disabled person as defined by Title II or Title XVI of the Social Security Act or a person for whom a disability certification has been filed and approved by the Secretary of the Treasury. As stated above, the beneficiary must have been disabled before the age of 26.
The person opening the account on behalf of the beneficiary is the account’s owner and all contributions to the ABLE account must be in cash unless it is an in-kind rollover. Contributions are not deductible for federal income tax but they are deductible from state income tax and this amount will vary from state to state. Amounts in the account accumulate on a tax-deferred basis.
An ABLE account may not receive aggregate contributions during a taxable year in excess of the amount of $14,000. An ABLE account may not have more than $100,000; beneficiaries that have accounts exceeding $100,000 will have his/her SSI benefits suspended until the account falls back below that threshold.
Qualified expenses from an ABLE account are similar to those expenses allowed from a special needs trust or a special needs pooled trust. These include (but are not limited) to the following:
–health, prevention and wellness
–personal support services
Just like a Medicaid payback trust, ABLE accounts are required to repay federal and state governments from any funds remaining on beneficiary’s death for cost of benefits received.
Utility and Concerns
Potential of loss of SSI or Medicaid benefits to an individual is definitely a concern with respect to an ABLE account; parties wishing to establish such an account for a beneficiary should be thoroughly familiar with the final state and federal regulations. While there are caveats to these plans, they will likely be appealing for those that don’t want the cost of drafting a special needs trust and may also be helpful to augment a special needs trust, allowing a portion of the funds to grow tax-free.
Proposed rules for ABLE accounts were released by the IRS in late June and are undergoing a 90 day public comment period. So far, 22 states have enacted ABLE but it is likely the accounts won’t be available at all until the final regulations are issued and that appears to be sometime in late 2015.