The New Able Savings Plan
March 13, 2015
By: Constance D. Smith
The tax laws have long encouraged Americans to save for college for their kids and to save for their retirement, but for families of those with disabilities, there was no government sponsored tax-advantaged way for them to save for those individuals. At the end of 2014, Congress passed the law which applies for tax years beginning in 2015, allowing states to create “Achieving a Better Life Experience” (ABLE) accounts, which are tax-free accounts that can be used to save for disability-related expenses. Here are the key federal features of ABLE accounts:
- . . . ABLE accounts can be created by individuals to support themselves or by families to support their dependents. .
- . . . Eligible individuals must be blind or severely disabled, and must have become so before turning 26, based on marked and severe functional limitation or receipt of benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (DI) programs.
- . . . Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the gift tax exclusion amount ($14,000 in 2015, adjusted annually for inflation). Aggregate contributions are subject to the State limit for education-related Section 529 accounts… currently $350,000 in Colorado.
- . . . No federal tax benefits are provided for those who contribute to an ABLE account. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren't deductible).
- . . . There is no federal taxation on funds held in an ABLE account. Assets can be accumulated, invested, grown and distributed free from federal taxes if the money is used for disability-related expenses.
- Expense distributions qualify as disability related if they are for the benefit of an individual with a qualifying disability and are related to the disability. Qualified expenses include education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services; and other expenses.
- . . . Distributions used for nonqualified expenses are subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10% penalty on that portion.
- . . . ABLE accounts can generally be rolled over only into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual. This is less flexibility than a 529 account.
- . . . ABLE accounts have no impact on Medicaid, but, in certain cases, SSI payments are suspended while a beneficiary maintains excess resources in an ABLE account. Specifically, the first $100,000 in ABLE account balances is exempted from being counted toward the SSI program's $2,000 individual resource limit. Assuming the individual has no other assets, if the balance of an individual's ABLE account exceeds $102,000, the individual is suspended, but not terminated, from eligibility for SSI (disability not social security) benefits, but remains eligible for Medicaid.
- . . . Upon the death of an eligible individual, any amounts remaining in the account (after any reimbursements to Medicaid) will go to the deceased's estate or to a designated beneficiary and will be subject to income tax on investment earnings, but not to a penalty.
- . . . Contributions to an ABLE account by a parent or grandparent of a designated beneficiary are protected in bankruptcy. In order to be protected, ABLE account contributions must be made more than 365 days prior to the bankruptcy filing.
Summarizing the benefits of an ABLE account over traditional supplemental needs trust planning funded by life insurance, the ABLE account is exempted for SSI qualification up to $100,000, grows and can be used for qualified expenses free from income tax, and is protected in bankruptcy. Negatives are qualification requirements of disabled individual and qualified expenses with penalties for nonqualified use, funding limits, limited investment options, limited rollover or successor use, plus automatic reimbursement of Medicaid at death with income tax on earnings passing to a non-qualified beneficiary.
Look for an ABLE plan being established in your state for state-specific details. Colorado has not currently created this plan.
This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.
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