The ABLE Act (S. 313/H.R. 647) was signed into law by President Obama on December 19, 2014. The Act amended Section 529 of the Internal Revenue Service Code of 1986 to create tax-free savings accounts for individuals with disabilities.
To be eligible under the ABLE Act, an individual must have “significant disabilities” that begin before he or she turns 26 years of age. This doesn’t mean he or she must be under 26 when the account is opened, just that there is documentation showing the disability began before the age of 26 years.
ABLE accounts, when established and properly managed, will not affect the disabled individual’s eligibility for SSI and Medicaid needs – based public benefits, at least within certain limits, as discussed further in this article.
The ABLE plan limits a designated beneficiary to one ABLE account. The individual may put his or her own money into the amount, or family members or friends may put money into the account on the individual’s behalf. Contributions to the ABLE account made by any person are not tax-deductible, although they do qualify as completed gifts to the donor. Income earned while held in an ABLE account is not taxed. Distributions from an ABLE account are not taxed as long as the distributions do not exceed the qualified disability expenses of the designated beneficiary. If the distributions exceed the qualified disability expenses, then the earnings portion of the excess is taxed to the distributee.
The maximum annual contribution to an account, no matter from whom received, is capped at $14,000 per year for 2015. This amount will be adjusted annually for inflation. Cash is the only asset that may be funded into the ABLE account. No stocks or securities can be funded into the account. If the funds are not used, they may accumulate. With growth, and the passage of time, the maximum amount of assets that can be held in an ABLE account is set by the individual states 529 plan savings accounts limit. Michigan’s maximum account value is $235,000.
Larger ABLE accounts will have some affect upon an individual’s receipt of public benefits. Only the first $100,000 in an ABLE account is exempted from the SSI $2,000 individual resource limit. On the other hand, the Medicaid limit is the total amount permitted in a 529 account. If there are any funds left in the account on the death of the disabled individual, such funds are required to first be paid back to Medicaid. However, balances remaining in the designated beneficiary’s account after death may be rolled over to another disabled and eligible family member, if there is one, within 60 days.
All distributions from an ABLE account must be for a “qualified disability expense,” which means an expense related to the designated beneficiary as a result of living a life with disabilities. Expenses include education, housing, transportation, employment training and support, assistive technology, personal support services, healthcare expenses, financial management and administrative services. Note that this does not include expenses that often are allowed under Special Needs Trusts, such as the purchase of televisions and other electronic devices, entertainment, hobby expenses, pet care and the like. If an unpermitted distribution is made, then the account loses its exempt status related to government benefits and a 10% income tax penalty is incurred.
These accounts cannot yet be set up. The Department of Treasury is in the process of developing regulations that will help guide the states regarding the information required to open an ABLE account, documentation needed for the designated beneficiary to meet the requirements of eligibility for a person with a disability, definitions for qualified disability expenses and documentation that will be needed for tax reporting.
Each state is responsible for establishing an operating the ABLE plan. States will have the option to contract with another state to participate in another’s state’s ABLE plan. Hopefully states will begin to accept applications after these regulations are distributed.
Please contact Brian R. Jenney, Thomas V. Trainer or Elisabeth D. Brin with any questions.
For further information regarding these matters, please contact Mr. Jenney 248.740.5688 or via email.