On Friday, December 19, 2014, President Barack Obama signed into law the Achieving a Better Life Experience Act (the “ABLE” Act). The ABLE Act, which was met with wide-spread bipartisan support in both the House and the Senate, is an amendment to Section 529 of the Internal Revenue Code of 1986 and calls for states to create programs under which tax-free saving accounts for individuals with disabilities may be established.
While the Act has been entered into law and takes effect beginning in 2015, ABLE accounts are not available until individual states establish ABLE programs. Accordingly, an individual only qualifies to be an ABLE account beneficiary if he or she resides in a state that has an authorized ABLE program.
While this legislation is seen as a step in the right direction towards recognizing the financial restraints placed on individuals with disabilities and their families, critics are quick to point that that it may not provide protections beyond those already offered by properly established special needs trusts.
Who Qualifies for an ABLE Account?
To qualify for an ABLE account, an individual must have become disabled before the age of 26, AND;
1) Be the recipient of Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), OR;
2) If not receiving SSI or SSDI, he or she may qualify based upon certification by a doctor as having a “medically determinable physical or mental impairment, which results in marked and severe functional limitations, and that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, or as being blind”.
What Are The Benefits of an ABLE Account?
Generally, the ABLE Act provides two (2) important benefits:
First, it enables money to be set aside for the benefit of qualified individuals using after-tax dollars for “qualified disability expenses,” without being required to pay tax on any income earned by these accounts. “Qualified disability expenses” are defined by the Act to 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.
In many respects, ABLE accounts are similar to qualified tuition plans (commonly referred to as “529 Plans”). As with 529 Plans, penalties will be imposed if funds from an ABLE account are used for non-qualified expenses, such as a 10% penalty and all earned portions would be subject to regular income tax. A separate state penalty may also be imposed.
Second, ABLE accounts are savings accounts that will not affect an individual’s eligibility for SSI, Medicaid, the beneficiary’s employment, and other private and/or public benefits. Prior to this Act, individuals with disabilities risked ineligibility for Social Security, Medicaid, and other benefits if they accumulated savings. This presented particular problems for disabled individuals with gainful employment. Now, under the Act, if an account’s balance exceeds $100,000, SSI will be suspended, but Medicaid eligibility continues. Then, if the balance falls below $100,000, SSI eligibility will resume without the individual having to reapply.
Previously, without a properly established special needs trust, a limited savings could exceed the SSI limitation and both SSI and Medicaid would be lost.
Will ABLE Accounts Replace Special Education Trusts?
We do not anticipate that schools will receive requests for ABLE account contributions in lieu of establishing special education trusts when making compensatory education disbursements. In almost all cases, it would not be advantageous to any school, or the parents and/or guardians for that matter, to dedicate funds to such an account.
ABLE accounts are not adequate replacements for special education trusts as an independent third party would not be monitoring use of the funds to ensure they are being used only for “legitimate educational purposes.”
Further, with the typical negotiated special education trusts, any funds that remain in the trust when the student dies or turns 21, whichever occurs first, is returned to the coffers of the school. It is unlikely that such a condition could be placed on an ABLE account, at least not without incurring substantial penalties at the time of the withdrawal for the money to be returned. Unlike special needs trusts generally, the Act specifically provides that after the death of an ABLE account beneficiary, or where the beneficiary ceases to be an individual with a disability, any funds that remain in the account must be used to repay state Medicaid that was used by the beneficiary after the establishment of the account.
Parents and/or guardians are also unlikely to request ABLE account contributions since each qualified individual may have only one ABLE account and while anyone may contribute to an ABLE account, the amount of the total contribution is not unlimited. The Act provides that the total annual contribution made to any one account may not exceed the current gift tax limit, which for 2014 was set at $14,000. Aggregate contributions to an ABLE account are also subject to an overall limit matching a state’s limit for Section 529 account, which in Pennsylvania, is currently set at $452,210.
Furthermore, except for the cases of the exceptionally wealthy, ABLE accounts are also unlikely to provide any tax benefits beyond that already provided by special education trusts since many distributions from those trusts are tax-deductible resulting in no federal earned income. In addition, there are various types of special needs trusts already available that protect SSI and Medicaid benefits of individuals with disabilities.
The Bottom Line
Though schools are unlikely to encounter ABLE accounts when making compensatory education disbursements, these accounts are an integral part of financial planning for individuals with disabilities. In particular, these accounts are likely to serve the important role of making protections already available through the more complicated and expensive special needs trust more accessible to disabled individuals within your school community.
If presented with a request to contribute to an ABLE account, it is best to consult your solicitor or an attorney in the special education department at KingSpry.
School Law Bullets are a publication of the KingSpry Education Law Practice Group. John E. Freund, III, is our editor. The article is meant to be informational and does not constitute legal advice.
