ABLE Accounts: New 529s for Those with Special Needs

This past December, President Obama signed into law an act that allows states to create tax-advantaged accounts for persons with special needs or disabilities, known as “Achieving a Better Life Experience,” or ABLE, accounts.  The ABLE Act was named after Stephen Beck, a father from Burke, Virginia, whose daughter Natalie has Down Syndrome, and who died unexpectedly, just days after Congress passed the bill in December.

Who.  Individuals who have become blind or severely disabled before the age of 26 may be eligible for an ABLE account.  The individuals themselves or their families can establish and contribute to the account.

What.  An ABLE account is a tax-deferred savings vehicle.  It is funded with after-tax dollars, which can grow tax-free, provided the funds are used for expenses that are 1) for the benefit of an individual with a disability, and 2) related to the disability.  Qualified expenses include education, housing, transportation, employment training and support, health and wellness costs, etc.  Like 529 accounts for college savings, if any distributions are used for nonqualified expenses, the earnings on those investments will be subject to income tax as well as a 10 percent penalty.

When/Where.  In March, Virginia became the first state to implement the legislation, and many other states are in the process of following suit.  The accounts will be administered by states’ college savings programs but will likely not be available until the first half of 2016, at the earliest.  Unlike college savings 529s, eligible individuals will be allowed to open only one ABLE account, and it must be in their home state.

Why.  Under current law, individuals with disabilities and their families are limited in their ability to save for the future if they are to maintain eligibility for federal benefits such as Medicaid and Supplemental Security Income (SSI).  Previously, an individual could have no more than $2,000 in assets in order to qualify for these programs, but assets in ABLE accounts will have no impact on Medicaid eligibility and will only affect SSI benefits if they exceed $100,000.  Families will be permitted to contribute up to the annual gift tax exclusion amount (currently $14,000 per year) to their children’s ABLE accounts.

Advocates of the ABLE Act hope that this new law will assist parents who may not have sufficient assets to fund a special needs trust but wish to provide financial help to their children now and in the future.