How an ABLE Account Helps Those with Special Needs
The Achieving a Better Life Experience (ABLE) Act was signed into law in December of 2014. The purpose of the ABLE Act was to provide individuals and families the ability to finance disability needs tax-free. The savings vehicle provided by the ABLE Act is similar to the 529 education savings plan. The Act allows families to save up to $100,000 in a special ABLE account to pay for disability-related care without risking eligibility for benefits such as Medicaid or Supplemental Security Income (SSI) because these assets aren’t counted towards the need-based asset thresholds for these programs.
Who is eligible for an ABLE Account?
To be eligible for an ABLE account, the beneficiary must be someone who had an onset of a disability before age 26, and either receives Social Security Disability Insurance (SSDI) or files a disability certification under IRS rules. (The beneficiary doesn’t have to be under age 26 at the time the ABLE account is set up, but rather have had the disability onset before 26 years of age).
The expenses which are exempted from taxation under an ABLE account include expenses for education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, and funeral and burial expenses. Also, states may choose to approve other expenses under their own regulations.
What happens if my ABLE account value exceeds $100,000?
If the assets in an ABLE account exceed $100,000, then the beneficiary’s SSI benefit payments will be placed in suspension (not terminated) until the account value returns below the $100,000 threshold. When the account value returns to under $100,000, the SSI benefit payments will automatically resume with no need for re-application.
The assets held in an ABLE account will not affect eligibility for Medicaid even if they increase above $100,000.
How does an ABLE account work?
Any earnings made in the account from contributions will accumulate tax free at the federal level if the earnings are used to pay for disability-related expenses. This may also be true at the state level (in Maryland, as long as the money in your Maryland ABLE account is used for eligible expenses, it won’t be counted as income for your state taxes) depending on which state one lives in. If the funds are used for non-qualified expenses, then the earnings portion of the withdrawal will be taxed at one’s normal rate and subject to a 10% federal penalty. There are no federal tax breaks for contributions made into the account, only the earnings are tax-deferred. However, individual states have the option to provide tax incentives for contributions (for, Maryland residents, Maryland offers up to $2,500.00 income tax deduction per contribution, per beneficiary, on your Maryland State tax return). In the event that the beneficiary of the account passes away, the state-run Medicaid agency may have the right to claim reimbursement up to the value of the Medicaid services provided to the beneficiary, depending upon state estate recovery laws.
Is the ABLE account program available in all states?
Currently, the ABLE account program is available in 35 states and the District of Columbia. However, if one lives in a state that doesn’t offer an ABLE account, he or she can still take part in this program. Anyone may enroll in another state’s ABLE account program (even if one’s home state offers an ABLE program) as long as that other state stipulates they are accepting out-of-state resident applications.
Are there limits on how much I can contribute to an ABLE account?
Currently, the total annual contributions that are allowed into an ABLE account is $15,000, which includes contributions made by family and friends. This amount may be adjusted periodically to account for inflation. The total contribution limit for an ABLE account differs by state, but remember, if the value exceeds $100,000, SSI payments will be suspended.
The ABLE Act can be a life-changing savings vehicle for those with special needs and their families. If you would like to learn more, or have questions about anything you have read, please do not hesitate to contact Andre O. McDonald, a knowledgeable Howard County estate planning, special needs planning, and Medicaid/long-term care planning attorney at (443) 741-1088 for a no obligation consultation.
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT ENTENDED TO CONVEY LEGAL OR TAX ADVICE.