Millions of individuals with disabilities and their families depend on a wide variety of public benefits for income, health care and food and housing assistance. Eligibility for these public benefits requires a means or resource test limiting eligibility to individuals to report more than $2,000 in cash savings, retirement funds and other items of significant value. To remain eligible for these public benefits, individuals must remain financially limited.
In recognition of the significant extra costs of living with a disability, the Achieving a Better Life Experience (ABLE) Act was signed into law last December by President Obama as part of the Tax Extenders package. Effective for tax years beginning after December 31, 2014, the ABLE Act allows each state to establish tax-free savings accounts for individuals with disabilities.
This was designed to ease financial strains by making tax-free savings accounts available to cover qualified expenses related to the individual’s disability, such as health, education, housing, transportation, employment training, assistive technology, personal support and related services and expenses.
The account would supplement, but not supplant, benefits provided through private insurance, the Medicaid program, the Supplemental Security Income (SSI) program, the beneficiary’s employment and other sources. The ABLE Act provides individuals with disabilities the same types of flexible savings tools that all other Americans have through college savings accounts, health savings accounts and individual retirement accounts.
Contributions into an ABLE account can be made by anyone and are not tax deductible. Distributions to an eligible individual for qualified expenses, including portions attributable to investment earnings generated by the account, are not taxable. However, distributions used for non-qualified expenses would be subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10% penalty on such portion.
Each disabled person is limited to one ABLE account, and the total annual contributions by all individuals to any one ABLE account could be made up to the gift tax exclusion amount for a particular year ($14,000 for 2015). Aggregate contributions are subject to the state limit for education-related Section 529 accounts. ABLE accounts can generally be rolled over only into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual.
Eligible individuals must be blind or severely disabled, and he or she must have become so before turning age 26, based on marked and severe functional limitation or receipt of benefits under the SSI or Social Security Disability Insurance (DI) programs. An individual does not need to receive SSI or DI to open or maintain an ABLE account, nor does the ownership of an account confer eligibility for those programs.
Individuals with ABLE accounts could maintain eligibility for benefit programs such as Social Security and Medicaid. Specifically, the bill exempts the first $100,000 in ABLE account balances from being counted toward SSI’s $2,000 individual resource limit. However, account distributions for housing expenses would be counted as income for SSI purposes. Assuming an individual has no other assets, if the balance in the individual’s ABLE account exceeds $102,000, the individual would be suspended, but not terminated, from eligibility for SSI but remain eligible for Medicaid.
Upon the death of an eligible individual, any amounts remaining in the account (after Medicaid reimbursements) would go to the estate of the deceased or to a designated beneficiary, and would be subject to income tax on investment earnings but not a penalty. States would be required to recoup certain expenses through Medicaid upon the death of the individual.
Before the enactment of the ABLE Act, the most common means of providing for expenses of a disabled person was through a Special Needs Trust. However, such trusts are normally more complex-they require a formal trust agreement (commonly drafted by an attorney), an annual tax return filing, and the earnings within the trust are considered taxable. However, since it is not subject to some of the ABLE account restrictions, it is still a very viable option in some cases. The good news is that we now have two alternatives to help provide additional funding to disabled individuals.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.