Good things are worth waiting for. After more than 10 years of fighting for the ears and hearts of Congress, disability advocates got a victory late last year with the passage of The Achieving a Better Life Experience (ABLE) Act and they’re seeing the fruits of their labor.
States are enacting laws to create ABLE accounts, which allow families to set aside money that can be used tax-free for a disabled person’s expenses without losing government benefits. Some 20 states have enacted ABLE laws to date, including Maryland and Virginia and ABLE bills have passed the legislature in six additional states. "States will begin to accept applications to establish ABLE accounts before the end of 2015," says Christopher Krell, a certified financial planner and principal with Cassaday & Company.
"ABLE accounts are an attempt by the federal government to encourage family members of disabled individuals to assume more of the financial expenses of their disabled loved ones and therefore reduce some of the burden on the Medicare system," says Len Hayduchok, president of Dedicated Financial Services.
The accounts could be a huge deal for the estimated 6 million individuals and families who stand to benefit from them.
Like anything that’s new, there’s a lot to learn. Here’s what you need to know.
An ABLE account can only be opened in a state where the beneficiary lives points out Jamie Hopkins, an attorney and professor of retirement at The American College. To find out the status in your state, check out, ABLE State Bills.
The ABLE Act expanded the tax code under Section 529 to allow a new tax-advantaged account to help fund an individual’s expenses. Individuals can contribute up to $14,000 a year into any one ABLE account.
The big question is who is eligible? Someone can qualify for an ABLE account in one of two ways, explains Hopkins. Someone who is disabled before age 26 and receives Social Security Disability Insurance (SSDI), or Supplemental Security Income (SSI) will be eligible. Second, if someone who files a disability certification under new IRS rules released in June of this year, will also be able to quality for an ABLE account. The newly proposed regulations can be found here. "You will still need to meet the age limitation of 26 and show severe functional limitations," says Hopkins.
What’s to love about ABLE?
The best feature of the ABLE account is that income earned in the account will not be taxable as long as it is a "qualified disability" expense. There’s more good news, In June, the IRS proposed rules clarifying the meaning of "qualified disability expenses". "They are very broad and include basic living expenses that would improve the life of the disabled person. Distributions would be eligible for education, housing, transportation, health, service fees, and general living expenses," explains Hopkins.
These accounts give you breathing room. The first $100,000 in the ABLE is excluded from SSI calculations. The amount of money in the ABLE account does not impact Medicaid eligibility.
The person who opens the account is the account owner and may change the way money is invested in the account up to two times a year. Assets can be rolled over without penalty into another ABLE account for either the qualified beneficiary or any qualifying family member.
One downer about ABLE is that contributions are not tax deductible to anyone who funds the account. Another major downside is that a beneficiary who dies with money in the ABLE account will have to repay public benefits received since it was opened.
"Families who think there may be money left over beyond a beneficiary’s lifetime, or who want to provide for expenses that would not be considered qualified spending, may prefer a trust," says Paul Jacobs, a certified financial planner and chief investment officer at Palisades Hudson Financial Group.
Then too, expect some confusion. These accounts are controlled by Federal Law but will be regulated and run by the state. "There could be variation between states," says Hopkins.
Timing is everything. Say you have an accident that leaves you disabled and you’re older than 26, ABLE offers no rescue.
But mostly, ABLE accounts are worth exploring. Says Krell, "Any individual or family with a disabled member would be wise to look in to this opportunity. This is an additional financial mechanism for many families to ensure their loved one has funding in place for a good quality of life."