On December 19, 2014, President Obama signed the Achieving a Better Life Experience Act (“ABLE Act”) into law. The ABLE Act amends Section 529 of the Internal Revenue Code, and under the amended statute, individuals with disabilities and their families and friends can establish income tax free savings accounts for qualified expenses and remain eligible for Supplemental Security Income and Medicaid.
Means tested public benefits such as Supplemental Security Income (SSI) and Medicaid limit a disabled individual’s assets to $2,000. As a result, a disabled individual will not qualify for SSI or MA if her assets exceed $2,000. This asset cap prevents direct control of an asset that would provide the means to purchase what are usually necessary but costly goods and services. The ABLE Act removes this limitation by allowing qualified individuals or their families to set up a special savings account for those disability related expenses. Any income earned on that asset will be exempt from income tax, and funds in an ABLE account, up to a certain limit, will not disqualify the disabled individual for eligibility for SSI, Medicaid or other federal means tested benefits.
Individuals with disabilities diagnosed prior to their 26th birthday may establish an ABLE account. Older individuals can also set-up an ABLE account as long as the onset of their disability began before their 26th birthday. The limit for total annual contributions to an ABLE account, which can be made by the individual or their family or friends, is $14,000 per year. (This amount, $14,000, is the current federal gift tax exclusion amount.) The first $100,000 of an ABLE account is exempt from the $2,000 resource limit. Once the balance of an ABLE account exceeds $100,000, the beneficiary becomes ineligible for SSI benefits. However, eligibility for Medicaid continues even if the balance of the ABLE account exceeds $100,000.
Funds in an ABLE account may be used for “qualified disability expenses.” Qualified disability expenses include education, housing, transportation, employment, training, assisted technology, health care expenses, financial management and administrative services. The United States Treasury Department is writing regulations that will detail qualifying expenses. The Treasury Department should have a draft of the regulations ready for public review and comment in 2015.
Each state must enact enabling legislation to establish an ABLE account program. The ABLE account programs will function in the same manner as a state’s 529 college savings program. Two bills, House Bill 444 and House Bill 583, that would authorized ABLE accounts are currently pending in the Pennsylvania House of Representatives.
Once Pennsylvania enables ABLE accounts, disabled individuals and their families will have an additional tool to consider for their estate plans. For example, the ABLE account can complement a special needs or testamentary trust by maintaining a separate and more readily available asset for qualified expenses. Or, the disabled individual and her family may design an estate plan without a special needs or a testamentary trust and rely only on an ABLE account to fund qualified expenses.
*This article is for general informational purposes only and is not intended as or a substitute for legal advice.