ABLE Accounts Are Coming! Is It Really What You’ve Been Waiting For?

Jerry L. Hulick, CLU, ChFC, ChSNC, CLTC

March 16, 2016

Many individuals and families who live with special needs are eagerly anticipating the availability of ABLE accounts. What is an ABLE account? Is it something you’ll want? Or need? Are you even eligible to have one?

The ABLE Act was introduced in both 2009 and 2011, but neither bill was enacted. In February, 2013, the third bill [the Stephen Beck Jr. Achieving a Better Life Experience (ABLE) Act] was introduced. It wasn’t until the end of 2014 that the act was passed by the House of Representatives and the Senate, then signed into law by President Obama.

What kind of account is it?

It’s an account that allows persons with special needs and their families to:

  • save money (with a maximum annual contribution level and overall maximum account balance),
  • choose from a variety of investment options,
  • accumulate tax-free earnings,
  • have money to pay certain expenses not covered by other sources,
  • and have some protection against jeopardizing eligibility for government benefits because of exceeding the personal assets limitation.

The wait continues

The act added Section 529A of the Internal Revenue Code. Although the bill is now law, regulations to fill in the details of the law have yet to be finalized. They have been published, and the IRS will accept comments regarding them until mid-September and hold a public hearing in October. The regulations are expected to be finalized following that hearing. Meanwhile, ABLE programs must be established by each state. About 50% have already done so. Remaining states are being encouraged to do so by the U.S. Department of Treasury. “We’re looking forward to the completion of this process,” says Hulick. “We hope we can begin working with current and potential clients by year end to help them determine whether or not an ABLE account is appropriate for their needs.”

Who’s eligible?

“Not all persons with special needs will be eligible for an ABLE account,” explains Hulick. The IRS code defines the level of disability a person must have, and the disability must have begun before the person was 26 years old. Anyone who meets these eligibility rules who is currently receiving Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) benefits will automatically be eligible. Otherwise, individuals must qualify as disabled as defined by the SSI program. The IRS code will specify how individuals prove disability and what medical documentation will be required.

Limits on savings

The law will limit contributions to $14,000 per year (an amount equal to the IRS gift tax exclusion). This amount is subject to adjustment annually for inflation. The maximum amount that may accumulate in an account will be set by state law and is expected to be about $300,000, based on what many states have already decided.

ABLE and government benefits

Individuals who receive SSI and Medicaid benefits can save up to $100,000 in an ABLE account without jeopardizing benefits. However, if the balance exceeds $100,000, he or she will lose SSI monthly benefits. Medicaid benefits will continue regardless of the balance, but when the individual dies, states can access account funds to recover Medicaid benefits they’ve paid out. The account balance will not affect other needs-based benefits a person might receive, such as food stamps or housing assistance.

“Potential loss of SSI benefits and the Medicaid payback feature are important aspects to consider,” explains Hulick. “You’ll want to carefully monitor your account so you don’t jeopardize your SSI benefits. Or you may want to have a special needs trust instead. With a trust — unless it’s a pooled trust — you can name a family member or a charity, for example, to receive the money left when the trust beneficiary dies.” Other factors will also influence your decision to have a trust instead of, or in addition to, an

ABLE account. Talk to your team of personal legal and tax advisors and financial professionals who are trained to serve the special needs community to review your overall financial strategy, your family’s financial needs and goals, and the options available to you.

Covered expenses

The account will be a personal source of funds to pay certain expenses not covered by public and private sources such as SSI, Medicaid, and medical insurance policies. The types of expenses that can be paid include transportation, housing, education, medical and dental care, personal assistance, employment, financial management and legal services, and more as specified by the IRS.

Opening an account

ABLE accounts will be available through financial management professionals and possibly other sources, such as banks. The IRS code will specify what information will be required to open an account and what documentation is needed to prove your disability. No account may be opened until the regulations have been finalized, and only one ABLE account may be opened for any individual who meets eligibility requirements.

“Unlike ordinary bank savings accounts that earn interest, ABLE accounts will offer a variety of investment options,” says Hulick, “so you can choose an investment strategy with growth and risk levels that are right for you.” You may change your choices twice annually. A financial professional, such as a special care planner, can help you determine your potential expenses and your risk tolerance to help you meet savings goals and maintain government benefits.

“Individuals and families will contribute their own money to the account, but being able to save like this has never been an option for those who depend on SSI and Medicaid to help them manage expenses,” says Hulick. “Money a person earns from employment can be contributed to the account, as well as gifts of money from family members up to contribution limits. Additionally, the tax-exempt earnings feature will let them save without the tax burden.”

Making withdrawals

Withdrawals should not exceed the expenses you wish to pay. Otherwise, the proposed IRS code states excess funds will be counted as personal assets and, if the amount is $2,000 or more, may jeopardize

SSI and Medicaid benefits. Additionally, the excess amount will be subject to income tax and will be assessed a 10% penalty fee. The regulations will include other withdrawal regulations. Consult a tax attorney or other financial professional, such as a special care planner, to learn more.

Should you have an ABLE account?

“Just because you can put funds into this type of account doesn’t mean you should,” says Hulick. “You can’t be sure until you look at your overall financial picture, which is something your personal legal and tax advisors, a special care planner, or other financial professional with experience in special needs can help you do. Are you saving appropriately for other family members? Are you covered by life insurance, disability income insurance, and property insurance? It’s important to determine whether or not you need these things before contributing funds to an ABLE account.”