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Special Needs Planning Opportunity: the ABLE Account

What is an ABLE Account?

An ABLE Account (Achieving a Better Life Experience Act of 2014) is a savings account that can be established by a disabled individual for qualified disability expenses and is administered by the state’s programs, such as Fidelity in Massachusetts. Here is a helpful chart of different states’ plans. To be eligible for this account, the disabled individual must have been diagnosed with the disability prior to age twenty-six and have a disability certification from a doctor and meet the Social Security Administration of significant functional limitation. However, if the individual receives Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), then that individual is already eligible to open an account. Once an account is opened, the disabled individual is named the designated beneficiary for the account. When it comes to who can contribute to an ABLE account, there aren’t any restrictions and even the designated beneficiary can contribute to the account. The contributions to this account are not tax-deductible and are made with post-tax earnings, while the withdrawals and investment income earned is not taxed.

Closeup portrait happy, smiling business woman, bank employee holding piggy bank, isolated outdoors indian autumn background. Financial savings, banking concept. Positive emotions, face expressionsHow do ABLE accounts work?

The best advantage to an ABLE account is that the balance in the account will not be counted as a resource when applying for public benefits such as Medicaid, SNAP or Section 8. Some of these programs have a strict asset limit, some as low as $2,000.00, that a disabled individual may have in their account. With an ABLE account an individual can have extra funds set aside for their care without jeopardizing their eligibility for government benefits. There are limits on the amount that can be contributed and in 2020, the annual limit for each contributor is $15,000.00, and depending on what state you live in additional contributions can be made by designated beneficiaries up to the amount equal to their state’s poverty limit or the federal poverty line, whichever is less. Also, there are lifetime caps that are set by the states individually and many such lifetime limits are $300,000.00. Like previously mentioned, distributions are tax-free if they are used for expenses related to living with a disability that includes healthcare costs, living expenses, housing, transportation, and others.


New Rules for ABLE Accounts

In October of 2020, the IRS amended parts of the regulations to bring guidance under section 529A of the Internal Revenue Code, which authorizes states to create ABLE account programs. Some of the takeaways from the new final regulations are:

  • Funds from qualified tuition programs (529 plans) may be rolled over into ABLE accounts.
  • Distributions after the designated beneficiary’s death that are made for outstanding debts for qualified disability expenses, or for the funeral or burial expenses of the designated beneficiary, are not included in the designated beneficiary’s estate.
  • A change of a designated beneficiary is not treated as a distribution if the successor beneficiary is an eligible individual and a family member of the designated beneficiary. (A member of the family includes any “sibling, whether by blood or adoption, and includes a brother, sister, stepbrother, stepsister, half-brother, and half-sister.”)

If a change in designated beneficiary is to someone other than an eligible individual who is a family member of the designated beneficiary, then the change is considered a distribution to the former designated beneficiary.

  • A contribution in excess of the annual contributions limit is subject to an excise tax of 6% of the excess contribution.

An ABLE account is a great resource for individuals who are disabled to have access to funds for their medical care, and families can also make contributions in a meaningful way.

To learn more about this and other planning opportunities, contact our office for a consultation or register for a free discovery webinar.