ABLE Accounts: A New Tool in the Special Needs Planning Toolbox, 0617 COBJ, Vol. 46 No. 6 Pg. 27
| Author | Susie Germany, J. |
Elder Law
Susie Germany, J.
ABLE Accounts: A New Tool in the Special Needs Planning Toolbox
This article discusses the benefits and pitfalls of accounts under the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014.
On December 19, 2014, President Obama signed into law the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE or the Act) as part of the Tax Increase and Prevention Act of 2014.1 ABLE is a tax advantaged savings plan for people who have been determined to be disabled or blind before age 26.2 ABLE allows people who meet this criteria to establish, or have established for them, investment accounts under IRS § 529A. These ABLE accounts are not considered countable resources for purposes of public benefits eligibility.
For individuals with disabilities and their families whose income is meager and who may live in poverty, ABLE accounts can provide relief in meeting healthcare and housing costs, leading to increased independence and autonomy.[3] Given the resource and income limitations imposed by means-tested public benefits programs, the Act offers new opportunities for the disability community, their families and loved ones, and estate and special needs planners. This article outlines these opportunities and discusses some possible pitfalls for ABLE account beneficiaries.
Scope of Coverage
The Act recognizes the unique financial burdens on families raising children with disabilities and the struggles that those with special needs face in achieving and sustaining a satisfactory quality of life. The purpose of the Act is to “provide secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits”[4] otherwise available to these individuals. Examples of benefits that may be supplemented include private sources; employment; public programs, such as Medicaid benefits provided for individuals with disabilities under title XIX of the Social Security Act, and Supplemental Security Income (SSI) under title XVI of the Social Security Act; or tax-advantaged savings plans.5 States can implement the Act in two ways: by making the program available to the state’s residents only, or by allowing participation nationwide.
On June 3, 2015, Governor Hickenlooper signed enabling legislation allowing ABLE accounts to be administered in Colorado.[6] As of September 2016, 46 states and the District of Columbia have implemented ABLE legislation. As of February 1, 2017, 19 states have launched ABLE programs. To date, the following states have nationwide programs: Alabama, Alaska, Illinois, Iowa, Kansas, Michigan, Minnesota, Nebraska, Nevada, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, and Virginia. Florida and Kentucky have programs available to their state residents only.[7]
It is anticipated that Colorado’s plan, which will be operative in late 2017, will also allow national participation. In Colorado, ABLE accounts will be administered by College Invest, a nonprofit agency operating under the Department of Higher Education that administers traditional IRC § 529 college plans (529 plans) in managed investment portfolios.
To be eligible for an ABLE account, the individual must be:
• eligible for SSI based on disability or blindness that began before age 26;
• entitled to disability insurance benefits, childhood disability benefits, or disabled widow’s or widower’s benefits based on disability or blindness that began before age 26; or
• someone who has certified, or whose parent or guardian has certified, that he or she:
• has a medically determinable impairment meeting certain statutorily specified criteria; or,
• is blind; and,
• the disability or blindness occurred before age 26.[8]
ABLE’s Legislative History
In 2007, Representative Ander Crenshaw (R-FL) sponsored the original ABLE Act proposal for a tax-free savings plan for individuals with disabilities. At that time, it was called the Financial Security Accounts for Individuals with Disabilities Act of 2007 (H.R. 2370). It was introduced in May 2007 and underwent many changes. The second version of the bill, later known as H.R. 1205, became the “Achieving a Better Life Experience” or ABLE Act and was introduced in February 2009 with the bipartisan support of 203 members of Congress. However, without any action, H.R. 1205 died at the end of the 111th Congress.[9]
The ABLE Act of 2011, H.R. 3423, was introduced in the 112th Congress in November 2011 and gained the support of 235 members of Congress. Notwithstanding this support, the bill did not make it to committee or the floor of the House. On its third round in February 2013, the final draft of the ABLE Act was re-introduced in the 113th Congress as the ABLE Act of 2014, H.R. 647. The final version included minor changes, and H.R. 647 gained 380 co-sponsors in the House. Its Senate counterpart, S. 313, gained 78 Senate co-sponsors. The bill passed the House in December 2014 by a vote of 404 to 17 and in the Senate by a vote of 76 to 16.[10]
Substantive Requirements
There are specific eligibility and contribution requirements for ABLE accounts.
Eligibility
To meet the threshold eligibility for establishing an ABLE account, the beneficiary must have been determined to be disabled before age 26, as defined by § 1614(a)(2) of the Social Security Act.11 The beneficiary must be receiving Social Security benefits based on a disability determination or otherwise meet the Social Security disability test.12 Individuals opening accounts must certify under penalty of perjury that they meet these requirements.13 An individual who is receiving SSI or Social Security Disability Insurance (SSDI) meets this definition.
However, if an individual did not begin receiving public benefits before age 26, he can prove disability by obtaining a signed physician statement confirming his diagnosis and that the onset of the disability was before age 26.[14] This statement must be retained by the beneficiary and made available upon request by the plan administrator or the IRS.
The original ABLE Act allowed beneficiaries to open ABLE accounts only in their home states. However, Congress amended ABLE in December 2015 as part of the Tax Extenders Package and eliminated the home state residency requirement.15 Now, an individual can open an ABLE account in any state that offers a nationwide ABLE program,16 but each beneficiary may only maintain one ABLE account.17
Who May Contribute
Although ABLE accounts were established under IRC § 529 and thus have a tax advantage aspect, they are administered very differently from traditional 529 plans. Anyone may contribute to ABLE accounts: the beneficiary can contribute her own money to the account, and third parties may also make contributions to the account.18 Third parties include individuals, trusts, estates, partnerships, associations, companies, and corporations.19 Currently, there is no prohibition on a special needs trust funding an ABLE account.20
Distributions may be made only to or for the benefit of the designated beneficiary.21 “A person with signature authority can establish and control an ABLE account for a designated beneficiary who is a minor child or is otherwise incapable of managing the account. The person with signature authority must be the designated beneficiary’s parent, legal guardian, or an agent acting under power of attorney.”22 For SSI purposes, the designated beneficiary is always considered to be the owner of an ABLE account, regardless of whether someone else has signature authority over it.23
Contribution Limits
The total amount that can be contributed to an ABLE account varies by state. In Colorado, as of July 2016, the aggregate account contributions cannot exceed $400,000, which amount is based on Colorado’s limit on contributions to any 529 account.24 All contributions must be in cash, and ABLE accounts may not hold real property.[25] Contributions can be made using credit cards, debit cards, and personal checks.
There is no limit on how many people may contribute to an ABLE account, but total yearly contributions cannot exceed $14,000.26 This amount is expected to increase by $1,000 every few years, as it is linked to the federal gift tax exclusion amount, adjusted for inflation. There is an important restriction on ABLE funds for SSI recipients: if an ABLE account balance exceeds $100,000, the beneficiary’s SSI will be suspended until that individual spends down the ABLE account below the $100,000 threshold.27 However, there is currently no similar restriction as to Medicaid, and the beneficiary’s Medicaid eligibility will not be affected if the account balance exceeds $100,000.[28] The beneficiary’s regular SSI eligibility may be reinstated for any month in which the individual’s ABLE account balance no longer causes the recipient to exceed the $100,000 limit and he or she is otherwise eligible. A beneficiary may not direct the investment of contributions more than twice a year.[29]
Tax Treatment
ABLE accounts receive similar tax treatment to traditional 529 plans in that investment growth on these accounts will not be taxed. Contributions must be made with post-tax money. Unlike traditional 529 plans, contributions to an ABLE account are not tax deductible. Distributions are not taxed, so long as they are for qualified disability related expenses (QDEs) (see below).
If non-QDEs are paid from an ABLE account, these distributions will be taxed at a rate of 10% and included in the beneficiary’s personal income.[30] Across...
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