ADVANTAGES AND DISADVANTAGES OF ABLE ACCOUNTS
by: Begley Law Group
by Thomas D. Begley, Jr., Esquire, CELA
Congress enacted and the President has signed legislation known as the Achieving a Better Life Experience (ABLE) Act of 2014. The Act is modeled on 529 Plans and will provide tax-favored accounts for individuals with disabilities to pay for qualified expenses. Before these accounts can be implemented, two things must happen: (1) the federal government must adopt regulations governing the accounts, and (2) state must either create their own ABLE accounts or contract with other states to do so. It is likely that these accounts will operate in a manner similar to existing 529 accounts.
The advantages of ABLE accounts are as follows:
- Low Cost Set-Up. The other advantage is that there is little or no cost in establishing these account.
- Non-Countable Resource. Assets in the ABLE account are not counted for SSI eligibility purposes, so long as the total account size does not exceed $100,000 and for Medicaid purposes until the account exceeds the state maximum for 529 Plans.
- Tax-Free Income. The investment income earned on ABLE accounts is not taxed, so long as it is distributed for the individual’s qualified expenses related to the disability, such as health, education, housing, transportation, training, assistive technology, personal support, related activities and expenses. This benefit is likely to be minimal, since income earned on a relatively small account would be small.
There are a number of disadvantages to these accounts. The disadvantages to these accounts are as follows:
- Medicaid Payback. There is a Medicaid payback from the account on funds remaining in the account on the death of the designated beneficiary.
- Contribution Limit. For 2020, contributions are limited to $15,000 aggregate from all contributors in any one year. Accounts that size would generate very little income.
- Prior to Age 26. The disability must have occurred prior to the beneficiary attaining age 26.
- Asset Cap. The total assets in the account cannot exceed $100,000. If the assets do exceed this amount, the beneficiary’s SSI is suspended, but not terminated. The individual would again be eligible for SSI when the account limit dropped below $100,000. The individual would continue to be eligible for Medicaid until the account exceeded the State limit for 529 Plans.
- Loss of SSI Benefits. If the account exceeds $100,000. Since the 2020 SSI benefit is $783 and most states have a small state supplement, a loss of the SSI benefit would likely cost more than the value of the income tax exemption.
- Qualified Disability Expenses. The use of the funds is limited to qualified disability expenses. A Third Party Special Needs Trust is much more flexible with respect to distributions.
A Third Party Special Needs Trust (TPSNT) is always a better solution for larger sums of money. In many instances, a Third Party Pooled Trust might be a better alternative than an ABLE account. Presumably, an ABLE account would be managed by either the disabled beneficiary or a parent or other family member. If distributions from the account were made improperly, this would presumably cause a loss of public benefits. A TPSNT and an ABLE account can be used in conjunction with one another.