ABLE Accounts


The Need for ABLE Accounts

July 29, 2021

Millions of individuals who are blind or disabled depend on public benefits for income, health care and food and housing assistance. Eligibility for these benefits (SSI, SNAP, Medicaid) require meeting a means/resource test that restricts eligibility to individuals with less than $2,000 in liquid resources, such as cash, checking and savings accounts and some retirement funds. To remain eligible for this assistance, an individual must remain below the federal poverty line, preventing them from saving for emergencies or for a down payment on a car or house and forcing them to quickly “spend down" any lump sum back payment they received when first approved for SSI.

The ABLE Act recognizes the significant costs of living with a disability. These include costs related to accessible housing and transportation, personal assistance services, assistive technology and health care not covered by insurance, Medicaid or Medicare. For the first time, eligible individuals and their families will be allowed to establish an ABLE savings account that will generally not affect their eligibility for SSI, Medicaid and means-tested programs such as FAFSA, HUD and SNAP (food stamp) benefits.

What is an ABLE Account?
ABLE Accounts, which are just now gaining popularity, are tax-advantaged savings accounts for individuals with disabilities, created as a result of the enactment of the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014 or better known as the ABLE Act. Contributions to the accounts are made using post-taxed dollars and are not tax deductible for purposes of federal taxes (although some states may allow for state income tax deductions). Contributions are, however, excluded from the federal gift tax. And the funds within the account grow tax-deferred, and allow deposits and income earned to be withdrawn tax-free for qualified expenses. The ABLE Act limits the opportunity to one ABLE account per eligible individual.

There are 5.8 million individuals blind or with disabilities in the United States. Only about 10% of that group meet the requirements established by legislation to be eligible to create an ABLE account. At the end of 2018, more than 35,000 individuals opened ABLE accounts in one of the 41 state programs, or the District of Columbia, with a combined savings of over $170 million.

ABEL Account Details
• Accounts can be established by or on behalf of a disabled person, provided that the beneficiary's onset of disability began before age 26. If you meet this age requirement and are also receiving benefits under SSI and/or SSDI, you are automatically eligible to establish an ABLE account. If you are not a recipient of SSI and/or SSDI, but still meet the age of onset disability requirement, you could still be eligible to open an ABLE account if you meet the Social Security Administration’s definition and criteria regarding functional limitations and receive a written letter of disability certification from a licensed physician, indicating that individual has a physical or mental impairment that: (1) is medically provable, (2) results in severe limitations in functioning, and (3) is expected to last at least a year or result in death.

• Annual combined contributions to an account are limited to the same amount as the gift tax exclusion for an individual ($15,000 since 2014, which is adjusted for inflation). The upper limit for lifetime contributions is the same as that for a 529 educational plan used to save for college education tuition in the disabled person's state of residence. This limit is $300,000 to $500,000 in most states.

• Tax-free withdrawals can be made for "qualified disability expenses", including, but not limited to, education, housing, transportation, employment-related expenses, assistive technology, and healthcare.

• The first $100,000 in an ABLE account is not counted as an asset for purposes of SSI eligibility. Once an ABLE account balance exceeds $100,000, the beneficiary's SSI payments are suspended until the account balance drops below $100,000. However, the beneficiary remains covered by Medicaid regardless of the account balance. This special rule only applies if savings, other than in the ABLE account, do not exceed the $2,000 resource limit.

Am I Eligible for an ABLE Account?
You do not have to be younger than 26 to be eligible for an ABLE account. You can be over the age of 26, but must have had an documented age of onset before your 26th birthday. There is proposed legislation into congress regarding age adjustment, requesting that the age of onset be extended to include individuals who have a significant disability with onset prior to age 46.

Who Can Contribute to an ABLE Account?
Contributions to an individual’s ABLE account may be made by the account beneficiary, family, friends, or any “person.” A person is defined as an individual, trust, estate, partnership, association, company or corporation. The total annual contributions by all participating persons for a single tax year is $15,000. The amount may be adjusted periodically to account for inflation.

Exception for Employment
An employed ABLE account owner who does not participate in an employer sponsored retirement account can make an additional contribution up to the lesser of: (1) the ABLE account owner’s compensation for the tax year, or (2) the poverty line amount for a one-person household in 2021 of $12,880 in the continental U.S. and Washington, D.C., $16,090 in Alaska, and $14,820 in Hawaii. This encourages the disabled to work by permitting them to save all or part of their earnings in an ABLE account.

Exception for 529 College Saving Accounts
The 2017 Tax Cuts and Jobs Act reform also made it possible to “roll over” some funds from a 529 college savings account to an ABLE account without incurring any tax or penalty. Such transfers apply toward the $15,000 annual contribution limit. The beneficiary of the ABLE account must also be the designated beneficiary of the tuition account or an eligible family member.

Only Qualified Disability Expenses are allowed by ABLE accounts
A “Qualified Disability Expense” is any expense related to the designated beneficiary as a result of living a life with disabilities. These may include education, food, housing, transportation, employment training, assistive technology, personal support services (such as home health aids), health care, financial management, legal fees, funeral and burial expenses, administrative services and other expenses which help improve health, independence, and/or quality of life. Withdrawals made for nonqualified purposes will be taxed as income, with a 10% penalty tax.

Medicaid Pay-Back
When an ABLE account beneficiary dies, after payments are made for funeral and burial expenses, the state he or she lived in may file a claim to all or part of the money in the account equal to the amount the state spent on the beneficiary through the state Medicaid program. This is commonly known as the "Medicaid Pay Back." California, Oregon, and Pennsylvania have shielded their ABLE accounts from Medicaid repayment.

ABLE Programs Are Run by the States
While most of the rules regarding ABLE accounts are enumerated in federal law, ABLE accounts are only available in states that have passed laws and regulations to make them available. States are not required to participate in the ABLE program, however, most states are. ABLE account enrollment is open in California, New York, Florida, Illinois, Pennsylvania, Texas, and about 35 other states. Seven states—Hawaii, Idaho, Maine, North Dakota, South Dakota, Utah, and Wyoming—don't have active ABLE programs.

Each state is responsible for establishing and operating its own ABLE program. Money placed in an ABLE account is invested by the state. Each state sets its own annual fees and investment options. The account holders have only limited choices about how aggressively or conservatively the money should be invested. The ABLE Act Account limits contributors or designated beneficiaries to change the way their money is invested in the account up to a maximum of two times per year.

However, an eligible individual doesn't have to establish an ABLE account in the state in which they reside. Regardless of where you might live and whether or not your state has decided to establish an ABLE program, you are free to enroll in any state’s program provided that it is accepting out-of-state residents (not all are).

ABLE Accounts

Key Differences between ABLE Accounts and Special Needs Trusts (SNTs)
While ABLE accounts and Special Needs Trusts (SNT) both exempt funds so an individual with a disability financially qualifies for public benefits—they also have significant differences.

(1) Control – ABLE accounts belong to the individual with a disability. Individuals with disabilities (or their parent, guardian, or agent) can open their own ABLE accounts and control how the funds are spent making the person less reliant on others for assistance and making it easier to access funds.

In contrast, a trustee of a SNT decides how to control the funds in a SNT. Some people with disabilities can be exploited if they have control of their own funds. If a SNT is utilized to hold the funds instead, a trustee has a legal obligation to safeguard the funds.

(2) Disability Onset– ABLE accounts can only be established for the benefit of people who developed their disabilities before turning 26 years old.  By contrast, if a SNT is established with funds from the trust beneficiary, it does not matter when the person developed the disability.

(3) Amount of Funding –  ABLE account, total yearly contributions are limited to $15,000, and up to $26,000 per year if the individual is working. ABLE accounts will begin to impair SSI eligibility once a beneficiary has over $100,000. Unlike ABLE accounts, SNTs do not limit annual deposits and can hold an unlimited amount of funds (although gift taxes could apply).

(4) How the Funds are Used – The funds in an ABLE account must be used only on “qualified disability expenses.” Unlike an ABLE account, the funds in a SNT do not need to be spent on disability-related expenses. Typically, funds in a SNT must be used for the benefit of the individual with a disability.

(5) Payback to State – When an ABLE account and certain types of SNTs terminate, whatever funds remain in the account must be paid back to the state for medical costs (Medicaid benefits) that it paid on behalf of the individual with a disability. However, for ABLE accounts, the payback is more limited than for SNTs. With ABLE accounts, the state is only paid back for the monies spent from the date the account was opened. For SNTs the state is paid back for all monies spent on the individual.

If there are funds remaining in an ABLE account upon the death of the account beneficiary, the remaining funds will have to pass through probate (an often onerous court process) in order to be transferred to the beneficiary's heirs. If a SNT is used, there will be no probate and, in the case of a SNT established with funds that don't belong to the beneficiary, there will be no Medicaid payback.

Determining which option is the most appropriate will depend upon individual circumstances. For many families, the ABLE account will be a significant and viable option to help secure a disabled individual's financial future in addition to, rather than instead of, a SNT.