ABLE Act creates Tax Deferred Savings Accounts for Persons With a Disability
1. PURPOSE OF THE ABLE ACT. On December 19th of this year, President Obama signed into law the Achieving a Better Life Experience (ABLE) Act of 2014. The bill, approved by the Senate on December 16th with a 76-16 vote, is considered the broadest legislation to help people with disabilities in nearly a quarter century since Congress passed the Americans with Disabilities Act. The bill passed the House earlier in the month with a final vote of 404-17
The simple truth is that to remain eligible for “means tested” benefits, an individual must remain poor! The ABLE Act is a public acknowledgment of the extra and significant costs of living with a disability. The costs related to raising a child with significant disabilities or a working age adult with disabilities, include those for accessible housing and transportation, personal assistance services, assistive technology and health care not otherwise covered by insurance, Medicaid or Medicare.
The text of the ABLE Act expresses its purposes as follows:
○ to encourage and assist individuals and families in saving private funds for the purpose of supporting individuals with disabilities to maintain health, independence, and quality of life; and
○ to provide secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, the Medicaid program, SSI, the beneficiary's employment, and other sources.
While an ABLE Account is a tool which can be used to augment traditional Supplemental Needs Trusts (SNT), it has several advantages over a Pooled SNT or an individually trusteed SNT. The ABLE Account will, most likely, provide more choice and control for the beneficiary and family than a Pooled SNT. For instance, an ABLE account will allow the designated beneficiary to exercise greater control over investment of their funds and distributions from the account. Further, cost of establishing an ABLE Account will be considerably less than those required to establish an individually trusteed SNT.
2. FEATURES OF AN ABLE ACCOUNT. – A Qualified ABLE Program must be established and maintained by the States (similar to “529" Accounts); and New York is expected to establish such a program after the Federal Regulations are issued (later in 2015). Once established, the New York program will authorize accounts (called an “ABLE Account”): (i) to which a person may contribute cash only: (ii) for the benefit of an “eligible individual” residing in New York; (iii) for the purpose of meeting the “qualified disability expenses” of the “designated beneficiary” of the account.
○ Each designated beneficiary is limited to only one ABLE Account. If an ABLE Account is established for a designated beneficiary, no account subsequently established for the designated beneficiary will be treated as an ABLE account.
○ Not more than twice a year, the designated beneficiary may (directly or indirectly) select how amounts in the ABLE Account are invested.
○ No portion of an ABLE Account may be used as security for a loan.
○ Any distributions from the ABLE Account for qualified disability expenses of designated beneficiary are not subject to the income tax.
○ Any distribution from the ABLE Account which is not for a qualified disability expense of the designated beneficiary is subject to the income tax and to a 10% penalty.
○ Contributions to an ABLE Account are eligible for the annual Gift Tax Exclusion ($14,000 in 2015) and therefore no Gift Tax Return must be filed by the person making the contribution to the ABLE Account.
3. Limits on Contributions. – The total annual contributions to an ABLE Account by all participating individuals, including family and friends, is $14,000. The amount will be adjusted annually for inflation. Under current tax law, $14,000 is the maximum amount that individuals can make as a gift to someone else and not pay a gift tax. The maximum aggregate amount which an ABLE Account can contain in New York is $375,000 (which would take 27 years of fully funding the ABLE Account). It is worth noting here the $100,000 account limit for the SSI disregard discussed below.
4. DISREGARDED RESOURCE. – For the purposes of any “means tested” Federal benefit (i.e., Medicaid, SNAP, and SSI): (i) any amount (including earnings) in the ABLE account; (ii) any contributions to the ABLE account, and (iii) any distribution for qualified disability expenses from the ABLE Account will be disregarded with respect to any period during which the individual maintains, makes contributions to, or receives distributions from the ABLE account.
○ There is an exception to this general rule for SSI benefits under the following two circumstances:(i) a distribution for housing expenses will not be disregarded; and (ii) any amount (including earnings) in an ABLE Account in excess of $100,000 will be considered a resource of the designated beneficiary.
○ SSI benefits will not be terminated if the amount contained in the ABLE Account exceed $100,000, Instead they will be suspended until the amount in the ABLE Account falls below the $100,000. Threshold.
○ The suspension of SSI benefits by reason of amounts in excess of $100,000 in an ABLE Account will have no impact on the individual’s eligibility for Medicaid.
5. MEDICAID PAYBACK. – Any amounts remaining in the ABLE Account at the death of the designated beneficiary must be paid to the State(s) which provided Medicaid assistance; up to the amount of Medicaid paid to the designated beneficiary after the date of the establishment of the ABLE Account. Contrast this with the pay back provisions of a “first party” SNT which requires reimbursement of all amounts paid by the State(s) for Medicaid, even amounts paid before the establishment of the “first party” SNT.
An ABLE Account may not be the best option for a parent or grandparent to provide for a loved one with a disability. If the parent or grandparent intends to use their own money to benefit a loved one with a disability, a “third party” SNT is a more appropriate vehicle, for two reasons.
○ First, the parent or grandparent can direct where amounts remaining in the SNT can be paid on the death of the beneficiary. An ABLE Account requires that those amount be used to “pay back” the State.
○ Second, the use of a “third party” SNT will not limit the contribution to the SNT to the $14,000 annual limit imposed on an ABLE Account. Often, the parent’s or grandparent’s plans involve an amount far in excess of the $14,000 limit; such as a bequest under a Will.
6. DEFINITIONS. Because the ABLE Account is a new concept in the Law, it is important to define certain key terms. The following is a paraphrase of the ABLE Act.
QUALIFIED DISABILITY EXPENSES- means any expenses related to the eligible individual's blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary, including the following expenses: 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, and other expenses, which are approved by regulations.
ELIGIBLE INDIVIDUAL- means an individual who: (i) is entitled to Social Security Disability Insurance benefits (SSDI) or Supplemental Security Income (SSI) and the onset of his or her disability occurred before the individual attained age 26; or (ii) has a physician’s certification that he or she has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, or is blind (within the Social Security definition) and such blindness or disability occurred before the date on which the individual attained age 26.
DESIGNATED BENEFICIARY- means the eligible individual who established an ABLE account and is the owner of such account..
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