Congress Passes the ABLE Act, Permitting the Disabled to Own Savings Accounts while Preserving Eligibility for Public Benefits

Earlier in December, Congress passed the Achieving a Better Life Experience Act of 2014, or the ABLE Act. The ABLE Act provides individuals with special needs and disabilities to own tax-free savings accounts while preserving their needs-based government benefits. President Obama is expected to sign the legislation into law.

Beginning in 2015, the disabled and those with special needs will be permitted to establish accounts modeled on 529 college savings plans. Funds in ABLE accounts, subject to limitations, will not be considered when establishing eligibility for needs-based government benefits such as Medicaid and Supplemental Security Income (SSI).

The new law has a number of significant limitations. To qualify, an individual must have become disabled prior to age 26. Only one ABLE account may be established for each disabled person. Total annual contributions cannot exceed the federal gift tax limit ($14,000 as of 2014), while total contributions are capped at the limit established by each state for its 529 accounts. However, for SSI eligibility, only the first $100,000 in each ABLE account will be disregarded. Income earned by ABLE accounts is not taxed. Funds remaining in an ABLE account at the beneficiary’s death must be used first to repay the State in which the account owner resides for Medicaid expenses paid by the State on the account owner’s behalf.

Funds in an ABLE account can be used for ‘‘disability-related expenses.” Expenses are considered to be “disability-related” if they are related to the disability are used for the benefit of the disabled individual. ‘‘Disability-related expenses” include education; housing; transportation; employment support; health and wellness costs; assistive technology and personal support services; and other expenses.

A summary of the principal provisions of the ABLE Act follow. Section 101 states as the purposes of the Act to: (1) encourage and assist individuals and families in saving private funds for the purpose of supporting individuals with disabilities to maintain health, independence, and quality of life; and (2) provide secure funding for disability-related expenses of beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, SSI and Medicaid, the beneficiary’s employment, and other sources.

Section 102 amends the Internal Revenue Code to exempt from taxation a qualified ABLE program established and maintained by a state, or by an agency or instrumentality of the state, to pay the qualified disability expenses related to the disability of a program beneficiary.

Section 103 requires funds in ABLE accounts to be disregarded in determining eligibility for means-tested federal programs, except distributions for housing expenses under the SSI program and for amounts in an ABLE account exceeding $100,000. The payment of SSI benefits to an individual during any period in which such individual has excess resources in an ABLE account is suspended, but the Act does not suspend Medicaid eligibility.

Since the ABLE Act applies only to those who became disabled prior to age 26, and since financial limits apply to ABLE accounts owned by SSI beneficiaries, a special needs trust may still be needed to preserve eligibility for public benefits. Vanarelli & Li, LLC is ready to provide information to those interested in learning how the new law works, and how the new ABLE accounts, as well as traditional special needs trusts, can provide for the special needs of persons with disabilities. Please feel free to contact our office.

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