ABLE Act

After passing with overwhelming majorities in both the House and Senate, President Obama signed into law the Achieving a Better Life Experience (‘ABLE’) Act. Modeled after 529 Plans for education, the Act is designed to help those with disabilities save for affiliated expenses. Currently, a disabled individual cannot amass more than $2,000 in assets or earn over $700 a month without forfeiting their eligibility for crucial government benefits.

According to the National Disability Institute, about 5.8 million Americans will be eligible for an ABLE account, its an issue that can affect many of us. So let’s first go over the basics and then dig a little deeper about how these differ from 529s for college.

Who will run ABLE programs?

Each state is responsible for establishing and operating an ABLE program. Those states that do not wish to create their own program must contract with a state who does and offer it to its residents.

Who is eligible for an ABLE account?

An individual is eligible if you are disabled before the age of 26. Proof of disability includes:

  • Receiving Social Security Disability Insurance (SSDI) or
  • Receiving Supplemental Security Income (SSI) or
  • Receiving a disability certification under the rules the IRS will write

How much can be saved?

Aggregation limits are subject to the State limit for education-related Section 529 Plans

Qualified Expenses

Contributions to ABLE accounts are made with after tax dollars. Distributions are completely tax-free as long as the funds are used for qualified expenses. Qualified expenses have a much wider net in ABLE accounts as opposed to 529 Plans including:

  • Education
  • Housing
  • Transportation
  • Employment Training & Support
  • Assistive Technology
  • Health, Prevention & Wellness
  • Financial Management
  • Administrative Services
  • Funeral & Burial Expenses

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How they differ from 529 college savings plans

Beneficiaries of the account will now be able to save significant amounts of money without forfeiting benefits. ABLE Accounts (“529A accounts”) will operate much like college savings 529 Plans. Contributions will be made with after-tax dollars and be invested. Money in the account grows tax-deferred and distributions are tax-free when used for the qualifying expenses listed above.

Eligibility of Federal Benefits

Just as 529 Plan affect financial aid, 529As will have some affect on government benefits. The ABLE Act allows for an individual to have up to $100,000 in their account without affecting their eligibility for Supplemental Security Income. Any amount in excess of this will offset their $2,000 resource limit up until $102,000. At this point, the individual is suspended, but not terminated, from eligibility for SSI benefits. After the account drops back down below the $100,000 threshold, the individual will be eligible to receive SSI once again.

Medicaid, however, works much differently than SSI. An important aspect of the ABLE Act is that is has no affect on Medicaid Eligibility. Even if an individual surpasses the $100,000 threshold, they remain fully eligible.

Residency Requirements

There are some stark differences between 529A accounts and 529 Plans, first being the residency requirement. In 529s for college savings, an investor is permitted to open up any state’s plan. With ABLE accounts, individuals must open up their state’s plan. If a state does not have an ABLE program, they must open up the plan with the state that has contracted with their home state.

Account Funding

Funding of the accounts differs as well. The maximum yearly contribution, from all sources, is the annual gift tax exclusion, currently set at $14,000. This presents an interesting dilemma. When it comes to 529s for college, there is a very definitive time horizon for the investment. With ABLE accounts, the beneficiary could have bills, which needs to be paid off immediately, and could even be larger than the annual contribution limit. Be careful to structure a contribution/distribution plan that allows you to take advantage of tax-free gains. If money is not staying in the account, there will not be much room for growth.

And if you’re a planning to take advantage of a 5-year election to circumvent the above problem, don’t. There is no ‘superfunding’ of ABLE accounts. This restriction will lead to a smaller asset base so we could see some higher fees. As the marketplace will be fixed and you will not be able to shop around, this could be a large concern.

Age Restrictions

Another key difference is the age restrictions. As you know, 529 Plans can be opened up for anyone (even unborn children) at any age. With ABLE accounts, beneficiaries must be able to prove disability (with the above guidelines) before the age of 26. This has caused some pushback from those who tragically become disabled after this age.

Account Ownership

Unlike 529 plans, only one account may exist per beneficiary. The beneficiary of an ABLE account must also be the account owner, thus eliminating the attractive feature of an account owner ‘gifting’ money to the beneficiary; a valuable estate-planning tool.

Changing of beneficiaries will also have a much more restrictive net than the broad ‘qualified family member’ of 529 Plans for college. Beneficiary changes will still be allowed, but only to siblings and stepsiblings. Although the IRS has not given direction, these family members will most likely have to prove disability before the age of 26. If not, a very large loophole exists.

The passing of this legislation marks a triumph for individuals with disabilities by removing senseless roadblocks to their success. However, this is just the beginning. The IRS must still finalize and codify important ABLE Act language.