As 2014 drew to a close, Congress, as expected, took steps to retroactively extend a variety of temporary tax provisions (see our previous blog on this topic, The Tax Extender Benefits for Your Clients). What was not expected was the section that was attached to the tax extender bill to create an entirely new tax-preferred savings vehicle.
For those clients who are supporting individuals with disabilities, the Achieving a Better Life Experience (ABLE) Act introduces a new type of tax-advantaged savings account that is specifically designed to address some of the challenges to savings that these individuals have faced in recent years. As long as the guidelines established by the ABLE Act are followed, these clients now have a viable method for saving to meet future expenses—without risking disqualification from the federal means-tested programs upon which many disabled individuals currently rely.
ABLE Act Basics
Under previously existing rules, disabled individuals were often discouraged from accumulating assets to meet future expenses because, absent the use of expensive trust vehicles, the individual could be disqualified from receiving Social Security and Medicaid benefits if he or she accumulated assets worth more than $2,000.
The ABLE Act modifies these rules to allow individuals to accumulate up to $100,000 in so-called “ABLE accounts” without becoming disqualified from receiving Social Security benefits (above and beyond the traditional $2,000 resource limit, so that a total of $102,000 can be accumulated without risk of disqualification). Medicaid benefits will not be impacted regardless of how much the individual deposits into the ABLE account.
ABLE accounts are modeled after IRC Section 529 college savings plans, so that after-tax funds are contributed to the account, but those funds are permitted to grow on a tax-free basis—so that distributions from the account are not taxed when received. Currently, the annual contribution limit is based upon the annual gift tax exclusion amount ($14,000 in 2015) and will be adjusted annually for inflation.
(The states must set up arrangements, similar to 529 plans, before individuals can start ABLE accounts, though it’s expected the states may do so quickly.-Ed.)
Eligible Individuals and Eligible Expenses
In order to qualify as an ABLE account beneficiary, the individual must have been diagnosed with a disability that causes severe limitations before that individual reaches age 26. Individuals who are currently receiving Social Security disability benefits also qualify. Regardless, eligibility for Social Security benefits is not a requirement for establishing an ABLE account—a severe, diagnosed disability is sufficient.
Much like a traditional 529 plan, ABLE account distributions must be used to fund certain specified expenses of the disabled beneficiary or will become subject to a 10% penalty tax, in addition to being taxed at the individual’s normal income tax rate. The range of qualified expenses is broad, and includes “expenses related to the individual’s disability”—such as expenses for health care, housing, transportation and job training.
Individuals are generally limited to establishing only one ABLE account. Amounts initially contributed to an ABLE account can be rolled over into another ABLE account established either for the same beneficiary, or for a sibling of that beneficiary who also meets the eligibility requirements discussed above.
The ABLE Act savings accounts create a valuable resource for clients seeking to establish funds to protect loved ones with disabilities—without risking disqualification from the federal funding upon which these individuals otherwise depend.
As long as the new guidelines are followed, ABLE accounts will allow savings for disability-related expenses to accrue in order to provide these individuals with financial independence later in life.
Originally published on National Underwriter Advanced Markets. National Underwriter Advanced Markets is the premier resource for financial planners, wealth managers, and advanced markets professionals who provide clients with expert financial and retirement planning advice.
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