The ABLE Act, Achieving a Better Life Experience Act, was passed into law on December 19, 2014. The ABLE Act provides for a disability savings plan based on the educational savings plan under IRC 529. This act will help individuals with disabilities work and save money without losing access to Medicaid and SSI.
Beginning in 2015, states have the option to establish an ABLE program that would let eligible individuals establish an ABLE account. Eligible individuals are those who are severely disabled before turning 26. Each individual can have one, and only one, account.
Important features of the act include the following:
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Total annual contributions to an account are limited to $14,000 in 2015 (annual gift tax exclusion amount)
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Aggregate contributions are limited by the overall state limit for Section 529 accounts.
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Contributions to the account are not tax deductible.
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Anyone can make a contribution to the account.
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Income earned by the account is not taxed.
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Distributions, including portions attributable to investment earnings, are not taxable or penalized as long as the rules are adhered to.
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Qualified expenses are related to the person’s disability, including health, education, housing, transportation, employment training and support, assistive technology and personal support services, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight, monitoring, and funeral and burial expenses.
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Separate accounting for each designated beneficiary is mandatory.
Note that there is a Medicaid payback provision. If the beneficiary dies with assets left in the account, the assets are distributed to any state Medicaid plan that provided medical assistance to the beneficiary.
This legislation was originally conceived as a way to provide independence to persons with disabilities without requiring the retention of legal counsel to set up a special needs trust. But, the law as passed is very different from what was originally proposed. As Tom Trainer points out, because of the $14,000 annual contribution limit, special needs trusts will still be indispensable. If a person with a disability who is on Social Security Income receives a settlement of $100,000 from the car accident that disabled him, he will still need to set up a special needs trust for the amount over $14,000 to retain eligibility for government benefits.
For further discussion of the ABLE act, look for Using Special Needs Trusts and the Future Effect of the ABLE Act, a webcast that will be available at the end of February.