ABLE Act establishes tax-free accounts that enable individuals with disabilities to invest with financial institutions without losing their government benefits.
U.S. President Barack Obama signed the Achieving a Better Life Experience Act of 2014 (ABLE Act) on December 19, 2014. The ABLE Act is a major victory for disability advocates who have long sought a way for individuals with disabilities to save money without losing their Medicaid eligibility and Supplemental Security Income (SSI). The legislation creates a new form of tax-exempt savings account (ABLE Account) akin to section 529 college savings accounts and is codified at Internal Revenue Code section 529A. There are 58 million individuals with disabilities in the United States, many of whom may seek to establish ABLE Accounts.
Qualified ABLE Programs and ABLE Accounts
Like section 529 college savings programs, a qualified ABLE program is established and maintained by a state and managed by a financial institution. The assets held in an ABLE Account are not subject to current income tax and thus accumulate on a tax-free basis. Although contributions to an ABLE Account are not tax deductible for federal income tax purposes, they may be deductible for state income tax purposes. ABLE Account contributions generally are treated as completed gifts eligible for the gift tax annual exclusion. An eligible individual is limited to one ABLE Account, and total annual contributions may not exceed the annual gift tax exclusion (currently $14,000). Each state may set the maximum amount of contributions to ABLE Accounts under its program, and excess contributions are subject to tax. Individuals are not limited to the ABLE program of their own state and may choose another state’s ABLE program.
Like college savings plans, distributions from ABLE Accounts are not subject to taxation as long as the accounts are limited to an individual’s qualified disability expenses. In addition to being includible in gross income, distributions not used for qualified disability expenses are subject to an additional 10% tax. Qualified disability expenses may include expenses for the individual’s
An individual with a disability is eligible for an ABLE Account if that person is diagnosed with blindness or a disability prior to his or her 26th birthday. There are two ways of establishing eligibility.
An ABLE Account may be rolled over into another ABLE Account of the same designated beneficiary or an ABLE Account of a family member of the beneficiary. Distributions may be rolled over tax-free within 60 days after distribution, but only one rollover is permitted in a 12-month period.
Treatment of ABLE Accounts Under Federal Programs
Millions of individuals with disabilities and their families depend on public benefits for income, healthcare, food, and housing assistance. Individuals who report more than $2,000 in cash savings, retirement funds, and other items of significant value are subject to means testing that limits their eligibility for programs such as SSI, Supplemental Nutritional Assistance Program, and Medicaid. As a result, public policy has required individuals to remain poor and without savings to be eligible for these public benefits.
The ABLE Act addresses this problem by treating assets held in an ABLE Account, and any distribution for qualified disability expenses, as disregarded for purposes of determining an individual’s eligibility to receive, or the amount of, any assistance or benefit authorized by any federal means-tested program, including Medicaid. There are limitations, however. In the case of the SSI program, distributions for housing expenses are not disregarded, nor are amounts in an ABLE account in excess of $100,000. In the case that an individual’s ABLE account balance exceeds $100,000, such individual’s SSI benefits shall not be terminated, but instead shall be suspended until such time as the individual’s resources fall below $100,000.
How Individuals with Disabilities and Their Families Are Likely to Use ABLE Accounts
There are many scenarios in which an ABLE Account will be useful to individuals with disabilities and their families. Here are a few examples:
States are beginning to enact legislation to establish state-level ABLE Account programs, and financial institutions are working with states and the U.S. Department of the Treasury to implement the section 592A legislation.
Full text of the legislation is available here.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
. See National Disability Institute, Congress Passes ABLE Act: Major Victory for Persons with Disabilities and Their Families (Dec. 17, 2014).