They’re not in wide circulation yet, but financial advisors working with families dealing with disabilities should begin to get familiar with ABLE (Achieving Better Life Experience) plans.
These plans allow families to save and invest funds on a tax-advantaged basis for the benefit of a person with disabilities, helping to finance a more independent future for that child or adult.
Their funds can be used to pay for “qualified disability expenses,” which are broadly defined. They include payments for housing, transportation, education, employment training, health care and other other expenses that help improve health, independence, and/or the quality of life of the account owner.
Most important, the balances in ABLE accounts under $100,000 are not counted toward the maximum assets allowed to qualify for collecting SSI (Supplemental Security Income), the federal income program to help the disabled and blind, Medicaid or food stamps.
More ABLE Plans Coming, Including an Advisor-Sold Plan
ABLE plans are state-based, but like 529 College Savings Plans they are often sold nationally, allowing non-state residents to open accounts. To date there are three national ABLE plans – from Nebraska, Ohio and Tennessee — and a Florida plan open to only Florida residents.
Oregon, Utah and Virginia are expected to introduce plans before the end of this year, and a consortium of 10 other states is working to introduce a plan most likely in early 2017, according to Chris Rodriguez, senior public policy advisor at the National Disability Institute. All of these plans involve direct sales to consumers, but in early 2017, American Funds expects to open the first national advisor-sold ABLE fund, says spokeswoman Hannah Coan. American Funds already manages Virginia’s advisor-sold 529 plan.
To date, all states plus the District of Columbia have passed ABLE legislation except for Alaska, Wyoming, Idaho and Mississippi, according to the ABLE National Resource Center, and that paves the way for even more ABLE plans in the future.
ABLE plans are similar to 529 College Savings Plans but much more limited, not only in their numbers but in their benefits. Here are some of the basics advisors should be familiar with:
- Contributions are after-tax (for federal tax purposes), though some states allow for state tax deductions, and money is withdrawn tax-free if the funds are used for expenses related to living a life with disabilities.
- Any recipient of SSI or SSDI (Social Security Disability Insurance) is eligible to have an ABLE account if the onset of their disability occurred before age 26. Others, however, may also be eligible if, in addition to the age of onset requirement, they meet the government’s definition of functional limitations, certified by a licensed physician.
- Only one account is allowed per person though multiple people can contribute to a single account.
- Contributions are limited to $14,000 a year, which is the same as the annual gift tax exclusion.
- Account balances of $100,000 or less are not counted toward the maximum $2,000 in assets for purposes of collecting SSI (Supplemental Security Income) or Medicaid. Balances above $100,000 will disqualify the account owner from receiving SSI, but payments can resume once the account balance drops to $100,000 or below.
- Account holders, however, can keep more than $100,000 in their accounts, depending on the maximum of the particular state plan. Maximums set by the laws of different states range between roughly $300,000 and $400,000.
- Investment choices are usually limited to three basic strategies: conservative, moderate and growth, which contain one or several index funds, plus a savings account and possibly a checking account.
- Investment changes are usually limited to twice a year.
Nebraska’s ENABLE Savings plan, for example, has all three basic investment options, each comprised of several Vanguard funds plus a savings account and, starting this fall, a checking account with a debit card. Account holders will have the option to have money transferred monthly from the bank savings account into checking without breaching the two-change limit for investments per year.
All four operational plans currently use Vanguard funds, but Tennessee’s ABLE TN Plan also offers Dimensional Fund Advisors funds, and Florida’s ABLE United also offers a BlackRock international fund choice.
Deborah Goodkin, the managing director of savings plans for First National Bank, which operates the Nebraska ENABLE Savings Plan in conjunction with the State Treasurer’s Office, says that financial advisors can use ABLE plans to help build relationships with existing clients and to attract new clients who have the need for such a plan.
“Even though you’re not going to get paid for it, you deepen that relationship with that family and that’s important,” says Goodkin. “Word is getting out.”
In other words, financial advisors can’t afford to not talk with clients about ABLE plans if they have the need for one.
The alternative is usually a special needs trust set up for a disabled family member, but they can be expensive to set up and administer. Moreover, a person can have both – a special needs trust and ABLE account.
“We’re offering a very low-cost alternative,” says Goodkin.
Nebraska Enable charges 50 to 56 basis points for each account plus a $45 annual fee, which is in line with what other current ABLE plans cost. “The owner of the account is the person with the disability, not the grandparents, and they don’t have a lot of money.”
First National Bank and the Nebraska State Treasurer’s Office are looking to contract with other states to run their ABLE plans, says Goodkin, who hopes to announce the formation of more plans before year-end.
“It’s very complicated,” says Goodkin, about starting new plans. “Many states say they don’t have the money for this.”
In addition, says Goodkin, the disabled community is skeptical. “They have faced so many obstacles for so long that it’s difficult for them to believe that their SSI won’t be negatively impacted, that they’ll still have Medicaid.”
–Related on ThinkAdvisor:
- ABLE Accounts Yield Tax-Preferred Special Needs Savings
- States Roll Out 529 Plans for Disability Expenses