ABLE (Achieving a Better Life Experience) accounts are a specific type of 529 plan available for some people with disabilities, first introduced in 2014. Before 2014, people with disabilities could not save in a tax-advantaged account without the risk of accumulating too many assets and jeopardizing potential needs-based government benefits. It’s important to note that ABLE accounts and government benefits vary greatly depending on which state you live in.
How to qualify for an account
To qualify to be the beneficiary of an ABLE account, there are certain criteria that must be met. Importantly, not every individual with a disability will be eligible to open and use an ABLE account.
Presently in 2024, the person must have been considered disabled prior to their age 26. Starting in 2026, this will change so that the person must have been considered disabled prior to 46. This will allow more individuals to qualify for these accounts.
ABLE accounts are limited to benefit those with significant disabilities. The individual must meet one of two criteria:
- They are receiving Supplemental Security Income (SSI) or Social Security Disability Income (SSDI) or
- They possess a disability (certified by a licensed physician) that
- Meets the “marked and severe functional limitations” standard outlined in the ABLE statute. You can find the Social Security Administration’s listing of functional limitations that meet, medically equal, or functionally equal the required severity here.
- Has lasted or can be expected to last for at least 12 months or result in death
The person with the disability can open the account if they are older than 18 and do not have a cognitive disability. Otherwise, a parent, legal guardian, power of attorney, or representative payee could open an account for their benefit. Either way, the individual with the disability is the owner of the account.
Similarities to and coordination with 529 college savings vehicles
States offer and administer ABLE plans, just like they do 529 college savings plan. Right now, most states offer and administer an ABLE plan. Additionally, there are many states that allow you to enroll in their ABLE plan even if you are not a state resident. Some states offer a state income tax deduction for contributions if you are a resident of that state. Each ABLE program determines what is needed to establish eligibility to open an ABLE account.
Money in an ABLE account can be invested and, if used for qualified expenses, any growth is tax-free. The qualified expenses are different than those in a 529 account (detailed in the next section). If money is used for non-qualified purposes, just like with a 529 plan, the growth would be subject to a 10% penalty and tax on any gains. Rollovers are permitted from a 529 college savings plan to ABLE, however; rollovers are not permitted from an ABLE account to a 529 college savings plan.
Unique to ABLE accounts
ABLE accounts function differently from 529 college savings plans in several important ways.
A beneficiary is only permitted one ABLE account in total. For example, if mom opens an ABLE account for a minor child, grandpa cannot also open an ABLE for that child’s benefit.
In 2024, ABLE account contributions are limited to $18,000 total. At most, $18,000 can be contributed from all potential funding sources in one year. In our example before, if mom contributes $18,000 in one tax year, grandpa cannot contribute anything to the account. Additionally, a rollover from a 529 plan is also considered a contribution. The rollover amount cannot exceed the annual contribution limit.
There is one exception to this $18k annual contribution limit. If the beneficiary of the ABLE account has earnings, they are permitted to save above and beyond the $18,000 in this account (up to $14,580 from their earnings for 2024) if they do not participate in an employer’s retirement plan.
What are Qualified Disability Expenses (QDEs)?
Qualified Disability Expenses sound very restrictive, but the actual definition is very robust. Like a 529 plan, qualified expenses include expenses related to education but also so much more! These expenses are meant to be broadly understood and not limited to those that are medically necessary. QDE’s are expenses that help a disabled individual maintain their independence, health, and quality of life. Qualified expenses can also include:
- Food
- Housing
- Employment training and support
- Transportation
- Assistive technology and personal support services
- Health, prevention and wellness
- Financial management and administrative services
- Expenses for ABLE oversight and monitoring
- Legal fees
- Funeral and burial
Distributions for non-qualified expenses may be subject to tax, penalties, and may affect a beneficiary’s eligibility for means-tested government benefits. For example, gifts for someone else do not qualify as a QDE. An ABLE account owner/beneficiary should maintain records of their distributions from the account over time to ensure funds were used for QDEs in case of an audit.
ABLE accounts can help preserve government benefits
There are several types of government benefits that are needs-based and require an individual to have very limited resources for them to qualify for benefits.
Medicaid is one example of a federal and state needs-based program. To qualify for Medicaid, an individual must have less than $2k in countable financial assets (among other criteria). An ABLE account can allow someone to accumulate more than $2k of financial resources without jeopardizing their Medicaid benefits. Assets in an ABLE account are not countable (for purposes of Medicaid eligibility) unless the value of the account exceeds $100k.
It is still important to note that if an ABLE account balance grows to be above $100k, that can impede Medicaid benefits until the account value falls below that level. Medicaid can be an incredibly valuable resource, so you want to be cautious funding an ABLE and approaching this value.
Medicaid payback provisions may apply
If the beneficiary of an ABLE account dies before depleting their account, any remaining funds (after covering any remaining QDEs for the beneficiary) could potentially be used to reimburse the state for any Medicaid benefits the individual received since the account was opened. Importantly, because Medicaid is in part a state specific program, this Medicaid payback provision varies from state to state. For example, in California there is no Medicaid payback on ABLE accounts. If the state doesn’t require Medicaid payback or the beneficiary never utilized Medicaid benefits, these assets could pass to a named beneficiary or to their estate.
Why should you consider an ABLE account?
They are easy to set up and low cost. If the beneficiary already has some financial assets in their name and they need to consider needs-based government benefits, they could consider shifting those funds into an ABLE account (all at once or over time if assets are greater than $18k).
Even if an individual isn’t eligible or relying on needs-based government benefits, an ABLE account is a tax-free savings tool! While $100k is the limit for an ABLE account to maintain Medicaid eligibility, you can save more than $100k to an ABLE account if the individual is not eligible or not planning to utilize Medicaid resources. Each state plan has their own maximum accumulation balance that ranges from $235k – $597k.
Despite the name, QDEs are very extensive!
Having and using an ABLE account can help promote autonomy for an individual with a disability without risking essential benefits. Financial participation and decision making can help build self-esteem and self-reliance. Importantly, if this individual may be someone susceptible to financial abuse, keeping ABLE account balances low or utilizing a special needs trust (perhaps in congress with an ABLE account) may be more appropriate.
An ABLE account is an important tool to consider using as part of a financial and estate plan for an individual with disabilities. We recommend speaking with your special needs planning professionals to help determine whether this tool should be incorporated in your plan. Funding and spending for these accounts should be monitored over time based on any changes pertaining to any changes in law and/or government benefits and to ensure it is working alongside any other parts of your plan.
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