Some personal injury victims and their families will have a new tax-preferenced funding option following enactment of the Achieving a Better Life Experience Act (ABLE Act) of 2014 which was signed into law last month by President Barack Obama.
The ABLE Act will allow eligible, disabled individuals and their families to establish ABLE savings accounts with tax-exempt earnings that will not affect their eligibility for SSI, Medicaid and other public benefits. Individuals with $2000 or more in assets currently are not eligible for SSI or Medicaid. Although ABLE accounts may be used to supplement special needs and/or pooled income trusts, their anticipated cost will be considerably less. They will also provide more control for beneficiaries and their families.
Qualification will require proof of onset of a disability prior to age 26. Recipients of SSI and/or SSDI who meet this criteria will be automatically eligible. Non-recipients of SSI and/or SSDI who meet the age 26 criteria must also prove their blindness or disability meets Social Security Act definitions. Treasury Department regulations are expected to provide additional explanations concerning standard of proof and required medical documentation.
The ABLE Act was promoted by numerous disability organizations and advocates including the American Association for People with Disabilities (AAPD). “The ABLE Act unlocks the doors of financial freedom for many Americans with disabilities,” according to Mark Perriello, president and CEO of AAPD. “It allows people with disabilities to start saving for their future.”
ABLE accounts, which will not be available until the Treasury Department publishes regulations, are expected to resemble qualified college savings programs (“529 accounts”) available under IRC section 529 since 1996. Qualifying Individuals will be limited to one ABLE account. Total annual contributions by all individuals (including family and friends) to any one account for each year cannot exceed the gift tax annual exclusion ($14,000 in 2015).
Although ABLE account investment income will be tax exempt, contributors will not receive any tax deductions for their deposits. Similar to (d)(4)(A) special needs trusts, ABLE accounts will be required to repay any funds remaining in the account to the Federal government or the state upon the death of the disabled beneficiary.
Distributions from ABLE accounts must be used for “qualified disability expenses,” including higher education expenses, a primary residence, transportation, obtaining and maintaining employment, and certain other health, wellness and personal support expenses. Any non-qualifying distribution will cause an ABLE account to lose its exempt Medicaid status and subject the account to a 10 percent income tax penalty.
Individual states will be responsible for setting up and managing their own ABLE programs. Individual states will also determine the total amount of lifetime contributions to an ABLE account consistent with their limits for education-related 529 accounts. Many states currently have established 529 account limits of $300,000 or more.
Similar to 529 accounts, states are expected to offer multiple investment options for ABLE accounts. The ABLE Act limits changes to the types of account investments to two times per year. For disabled individuals who receive SSI and/or Medicaid, the ABLE Act imposes additional limitations. If a state decides not to establish an ABLE program, it has the option of contracting with another state to allow qualifying residents the opportunity to open an ABLE account.
It remains to be determined who will promote ABLE accounts and what impact they will have upon various markets including settlement planning, special needs planning and structured settlements. The Congressional Budget Office has estimated the ABLE Act will increase the number of beneficiaries of means-tested programs and federal spending from such programs.