DECEMBER 22, 2014 VOLUME 21 NUMBER 46
The Achieving a Better Life Experience Act passed the U.S. Senate last week, and President Obama signed it over that same weekend. But what does it mean for people with disabilities, and for their families? How will you be able to use the accounts authorized by the ABLE Act?
The ABLE Act is loosely connected to Section 529 of the Internal Revenue Code. You might recognize that number — the prior law created very popular accounts for prepaid tuition. There is lots of information about 529 Plans, including the popular “Saving for College” website. To better understand ABLE, it might make sense to first describe how 529 plans work.
There are dozens of 529 Plans available. Almost every state has adopted at least one 529 Plan (some states have more than one). They often look very much like mutual funds; you put your money into the account, it is managed by the administrator, and it grows along with the market (or the segment of the market utilized by your particular plan).
You can invest your money in a 529 Plan set up by a state other than yours, or where your prospective student lives. So you might live in Arizona, have a grandchild in Arkansas, decide to invest in Alaska’s plan (it happens to be administered by T Rowe Price), and ultimately use the account to pay for your grandchild’s education in Alabama (just to stay in the “A” states). Not every state’s plan allows out-of-state investments, but most do. There are also “Prepaid Tuition” plans available in many states; they are just what the name implies, though usually the funds can be used for other colleges when the time comes (though there may be incentives to keep the money, and the student, at the predetermined college).
You can set up a 529 Plan for, say, your child — and both sets of grandparents can set up separate accounts for the same student. The multiple plans for a given child can be from different states. The maximum asset limit is set in each plan; if you make more than a $14,000 contribution to a plan for a given student in one year, you may have to file a federal gift tax return (there’s a special rule if you contribute up to $70,000 in one year, but that’s going too deeply into 529 Plans for our purposes).
If you do set up a 529 Plan for a child or grandchild, and that prospective student dies, decides not to go to college, or gets a really good scholarship, you can change the beneficiary of your plan to another family member. You keep pretty impressive control over the plan — and yet it is not considered part of your estate for federal estate tax purposes.
Though you do not get any income tax deduction when you do set up a plan, any later withdrawals for qualified education expenses come out of the plan tax-free. That means that no one has to pay the income tax on the interest and investment income over the years the plan is in place. That’s one of the best parts of a 529 Plan.
The new ABLE Accounts will be similar to 529 Plans in a number of ways, but very different in others. In fact, the ABLE Act creates a new section, right after Section 529, of the tax code. It’s numbered as Section 529A, just to make the connection clearer. Here are some of the highlights of the new Section 529A:
- A person with a disability can only have an ABLE Account if they were severely disabled by age 26. Why this limitation? It’s mostly about federal budgets; if every person with a disability could open an ABLE Account, the projected cost of the program would mushroom. What does it mean to have a disability before age 26? The easy answer is that someone who was receiving Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI, or SSD) benefits by that age qualifies. Others might qualify, but it will be harder to establish eligibility.
- Each person with a disability can have just one ABLE Account, and it must be set up in the state where they live. If they move to another state, the account probably will not have to move. But that raises a fairness issue: if the state where the person with a disability resides just doesn’t offer an ABLE Account, he or she will not have the option available.
- Contributions to an ABLE Account may not exceed $14,000 in a given year. That’s total contributions — if the person with a disability puts in, say, $5,000, then other family members may not contribute more than $9,000. That figure is indexed to the maximum annual gift tax exclusion amount (though gift taxes are mostly irrelevant to ABLE Accounts), so it should go up to $15,000 in a year or two.
- The maximum size of an ABLE Account will be set by state law. Expect it to be in the range of several hundreds of thousands of dollars. But if the account grows to more than $100,000, the beneficiary will lose Supplemental Security Income (SSI) benefits — but not state Medicaid eligibility.
- When the ABLE beneficiary dies, remaining assets in the account go to the state Medicaid program which provided benefits during life (after payment of other pending bills, and limited to the amount the Medicaid program actually paid for the beneficiary’s care).
- If ABLE Account funds are used to pay for “qualified disability expenses,” there will be no income taxation on the interest or gain in value of the ABLE assets, and the expenditure will not be counted as income to the beneficiary. We don’t yet know exactly what “qualified disability expenses” will mean, as we’ll have to wait for the government to define the term. The law does say, though, that the categories for “qualified” expenditures will include “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, funeral and burial expenses”.
What does that mean for a given person with a disability (and for his or her family)? Who will be good candidates for ABLE Accounts, and who will not? Should you consider an ABLE Account as an alternative to a special needs trust? Those questions — and more — will be addressed in our newsletter next week. Stay tuned.