The federal Achieving a Better Life Experience (“ABLE”) Act was enacted in December 2014. The federal law authorizes each state to develop their own ABLE programs, and many states have moved quickly to implement ABLE, including Pennsylvania, where on April 16, 2016, Governor Wolf signed into law Pennsylvania’s ABLE Act.
But what is it? The ABLE Act allows for the creation of a tax-free savings account for an individual with disabilities under the Internal Revenue Code Section 529A. Similar to a 529 college savings account that is used to pay for “qualified education expenses,” the ABLE savings account has a defined purpose – to pay for “qualified disability expenses” for an individual with disabilities. ABLE accounts are designed to encourage and assist individuals with disabilities and their families to save for the future expenses that will be necessary to support the disabled person and further enhance the quality of their life.
Why the Need for ABLE Accounts?
Individuals with disabilities can have only $2,000 in assets in order to remain eligible for certain federal and state means-tested governmental benefits such as Supplemental Security Income (SSI) and Medicaid. ABLE allows eligible individuals to save up to $100,000 and still be eligible for SSI, Medicaid, Medical Assistance and other governmental benefits.
What are the Tax Benefits?
An ABLE account is a tax-advantaged savings account for qualified individuals with disabilities. The disabled individual is the owner and beneficiary of the account. Such individuals can only have one ABLE account however; contributions to the account may be made by any number of people (the account beneficiary, family and friends).
Earnings from ABLE funds grow tax-free and withdrawals will be exempt from federal and state income tax when used for qualified disability expenses. Contributions may or may not be tax deductible depending on the specifics of the state ABLE law. In Pennsylvania, a second bill that would allow ABLE contributions (up to $14,000 annually) to be deducted from Pennsylvania state income tax is working its way through the legislative process. ABLE accounts are also exempt from Pennsylvania inheritance tax.
Who is Eligible?
An individual must meet two requirements to be eligible to open an ABLE account: (a) an age requirement (i.e., age 26); and (b) a disability requirement (i.e., essentially the Social Security definition of disability). For instance, an individual whose disability occurred prior to age 26 and is already receiving SSI is automatically eligible to open an ABLE account (only one account per eligible individual).
What are the Limitations?
- Annual Contribution Maximum. There are limits as to how much money can be deposited into an ABLE account. The total annual contributions allowed is $14,000.
- $100,000 Cap. The total amount of funds an ABLE account may hold is capped at $100,000. If the ABLE account exceeds the cap of $100,000, SSI benefits will be suspended and the beneficiary will lose his or her monthly benefits. This suspension will remain in place until the beneficiary properly spends down the account to reactivate the SSI benefits.
- Medicaid Payback. Upon the death of the beneficiary, federal law authorizes the states to file claims for Medicaid reimbursement. However, Pennsylvania opted to not subject the ABLE account to Medical Assistance reimbursement (this may not be the case in other states).
What Type of Expenses are Allowed?
The funds in the ABLE account may be used to pay for a variety of “qualified disability expenses” for the individual with disabilities. Examples of such qualified disability expenses may include medical/dental care, education, community-based supports, employment training, assistive technology, housing, transportation and financial management/ administrative services.
Should an ABLE Account replace a Special Needs Trust?
A special needs trust is designed to manage assets for an individual with special needs while not jeopardizing any governmental benefits he or she may be receiving. An ABLE account is merely another tool available to individuals with disabilities and their families. For many families, the ABLE account will be an important option in addition to, rather than instead of, establishing a special needs trust.
The Pennsylvania Treasury Department estimates that it will take approximately six months to make Pennsylvania ABLE accounts available. Because every individual’s circumstances are unique, it is important to consult with your estate planning attorney to determine the options that are most appropriate when planning for an individual with special needs.