ABLE Act Helps Individuals with Disabilities

Included in the Tax Increase Prevention Act of 2014 is a new type of tax-advantaged savings program for individuals with disabilities that begins in tax years after December 31, 2014. The new provisions are provided in the Achieving a Better Life Experience (ABLE) Act of 2014.

Overview

The ABLE Act allows each state to establish tax-exempt ABLE accounts to assist persons with disabilities in building an account to pay for qualified disability expenses. Similar to a qualified tuition program, a tax exemption would be allowed for an ABLE account. Amounts in these accounts would accumulate on a tax-exempt (or, in some cases, tax-deferred) basis.

Anyone can make contributions to an ABLE account, but they won’t be tax deductible. Income earned by the accounts would generally not be taxed. Distributions, including portions attributable to investment earnings generated by the account, to an eligible individual for “qualified expenses” also would not be taxable. Qualified expenses are those related to the individual’s disability, such as health, education, housing, transportation, employment training, assistive technology, personal support, and related services and expenses.

Details and Exceptions

Distributions used for nonqualified expenses would be subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10 percent penalty.

Each disabled person would be limited to one ABLE account. Total annual contributions by all individuals to any one ABLE account could be made up to the gift tax exclusion amount ($14,000 in 2014, which is adjusted annually for inflation). Aggregate contributions would be subject to state limits for education-related Section 529 accounts.

ABLE accounts could 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.

Requirements Eligible individuals must be blind or severely disabled (or become so before turning age 26) based on marked and severe functional limitation or eligibility for benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (DI) programs. An individual doesn’t need to receive SSI or DI to open or maintain an ABLE account. Ownership of an ABLE account also doesn’t confer eligibility for those programs.

Individuals with ABLE accounts could maintain eligibility for means-tested benefit programs such as SSI and Medicaid. Specifically, the law exempts the first $100,000 in ABLE account balances from being counted toward the SSI program’s $2,000 individual resource limit. However, account distributions for housing expenses are counted as income for SSI purposes. Assuming the individual has no other assets, if the balance of an individual’s ABLE account exceeds $102,000, the individual would be suspended, but not terminated, from eligibility for SSI benefits but would remain eligible for Medicaid.

Upon the death of an eligible individual, any amounts remaining in the account (after Medicaid reimbursements) would go to the individual’s estate or to a designated beneficiary. The funds would be subject to income tax on investment earnings but not to a penalty. States would be required to recoup certain expenses through Medicaid upon the death of the individual.

In addition, the law protects contributions to an ABLE account by a parent or grandparent of a designated beneficiary in the case of bankruptcy. But certain limits and restrictions apply.