On December 19, 2014, President Obama signed into law the Achieving a Better Life Experience (ABLE) Act of 2014. The ABLE Act authorizes states to establish programs allowing qualifying disabled individuals to maintain special tax-favored accounts without compromising their rights to certain means-tested benefits, such as Medicaid or Supplemental Security Income (SSI).
Operation. ABLE accounts will combine certain attributes of both Internal Revenue Code Section 529 college savings accounts and special needs trusts. Contributions will be nondeductible, but earnings will be tax deferred and distributions will be nontaxable to the extent used to pay “qualified disability expenses.” Generally, neither the account balance nor any qualified distributions may be considered for determining eligibility for Medicaid, SSI, or similar government programs.
There are two exceptions, both of which relate to SSI:
- Distributions made from an ABLE account to pay housing expenses will be included in the recipient’s income.
- Any balance in an ABLE account in excess of $100,000 will be considered an available resource of the designated beneficiary.
Eligible Beneficiaries. A beneficiary will be limited to one ABLE account and generally must be a resident of the state maintaining the ABLE program or a resident of a state lacking an ABLE program but contracting with another to provide such a program to its residents. Only individuals who became blind or disabled before age 26 can qualify for an ABLE account. In addition, an individual is eligible for the tax year if (1) the individual is entitled to benefits based on blindness or a disability under the Social Security Disability Insurance program or the SSI program or (2) a “disability certification” has been filed with the IRS for the tax year.
Contributions. Contributions to an ABLE account must be made in cash. Excluding qualified rollovers, aggregate contributions from all contributors to an ABLE account for a tax year cannot exceed the federal gift-tax annual exclusion for that tax year ($14,000 for 2015). Additionally, a qualified ABLE program must have adequate safeguards to prevent aggregate contributions from exceeding the limit established by the state under its 529 qualified tuition program. (States have established different amounts as applicable limits.)
Distributions. Distributions in excess of “qualified disability expense” are taxed under the IRC Sec. 72 annuity rules, meaning they will be treated as containing pro rata shares of nontaxable contributions and taxable earnings. Moreover, any portion includable in gross income generally will be subject to an additional 10% tax.
Among others, qualified expenses include those related to education, housing, transportation, employment training and support, assistive technology and personal support, and, generally, “health, prevention, and wellness.” The ABLE Act directs the IRS to issue regulations or other guidance regarding which specific expenses qualify, as well as on several other specific aspects of the ABLE Act. This guidance is scheduled for release within six months of December 19, 2014.
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