If you are suffering from election season fatigue, here’s a refreshing bit of political news: Right now, state governments are in the process of rolling out a bipartisan solution to a real problem faced by millions of Americans.
Four states – Florida, Ohio, Nebraska and Tennessee – have rolled out their versions of 529A, or ABLE, account programs to provide tax-sheltered investments for beneficiaries with special needs. Congress created ABLE accounts in late 2014, but like 529 college savings accounts, the programs themselves were left in state hands. Three of the four programs are open to qualified individuals nationwide, and more states have programs on the way. As of this writing, every state except Wyoming, Idaho and Mississippi has passed some form of ABLE legislation, with many programs due to open for registration within the next year.
I wrote about ABLE plans soon after the law creating them passed, and as I observed at the time, they are not a cure-all. They offer less flexibility than special needs trusts, for instance, and operate within some particular limits beneficiaries and guardians will need to keep in mind.
Since my original article, however, some legal modifications have made the plans even more useful. For instance, the original law restricted beneficiaries to the programs offered by their home states. After an amendment, beneficiaries may now select any state’s offering, meaning that Americans with disabilities nationwide can consider opening accounts right away rather than waiting for their own state’s plan to roll out. A beneficiary may also switch between plans, though he or she may not participate in more than one at a time. This opens the option of comparison shopping, much the same way that investors can compare states’ 529 college savings offerings.
Guidance from the Internal Revenue Service, issued late last year, also simplifies participation. In the original legislation, ABLE beneficiaries who did not qualify for Supplemental Security Income (SSI) before age 26 had to submit a letter from a doctor certifying that the patient met Social Security’s strict definition of disability. The IRS has since clarified that individuals applying for ABLE accounts will not have to submit this documentation upfront, though they will have to certify under penalty of perjury that they qualify and will need to provide documentation of their disability if the IRS requests it.
In addition, the IRS won’t require ABLE program administrators to provide taxpayer identification numbers from individuals contributing to an account, as long as the contributions do not exceed the annual $14,000 gift tax exclusion amount. This change will make it much simpler for relatives and loved ones to fund a beneficiary’s account, as well as making life easier for the administrators running state programs. Program administrators also no longer face the administrative burden of categorizing account distributions, though beneficiaries will need to do so when handling their federal income tax.
All these changes reflect the fact that lawmakers and regulators clearly want to make it as easy as possible for disabled individuals to take advantage of ABLE plans. As Bloomberg recently observed, many disabled Americans are afraid to build any sort of savings cushion because of the real risk of losing access to Medicaid and SSI benefits. While ABLE accounts are effectively capped at $100,000 for beneficiaries who participate in the SSI program, an overage results in a suspension, rather than loss of access to the program indefinitely; once the account balance falls below $100,000, SSI benefits resume. And even with the cap, ABLE accounts offer a much larger margin for saving or giving than existing rules allow – $2,000 in savings in a non-ABLE account is typically enough to disqualify an individual from Medicaid.
ABLE accounts also allow parents and grandparents to equalize giving among children when a child’s disability means he or she is unlikely to go to college. It has become common for grandparents to contribute to 529 college savings accounts, but giving equivalent gifts directly to children who were not college-bound could do more harm than good. ABLE accounts offer a more equal playing field.
For those considering ABLE accounts, it’s worth keeping in mind that not all of the drawbacks were amended away. Beneficiaries who receive Medicaid remain subject to a clawback provision that requires the beneficiary’s estate to repay benefits out of the remaining account balance. This could easily wipe out an account balance if a beneficiary dies unexpectedly before he or she can spend down the assets.
Beneficiaries and their guardians should also carefully compare state plans before committing to a program. Congress may have set the ground rules, but each state’s plan will be a little different. As with 529 college savings accounts, individuals will benefit from comparing the plans’ investment options and fees, which can both significantly affect the account balance over time. Some states may also offer tax incentives for contributions, making their plans more attractive to their residents.
It is nice, if unusual, to see politicians crossing the aisle at both the federal and state levels to make this solution available as quickly as possible. While the account limits and the Medicaid clawback rules mean this law is ultimately small potatoes where the government’s bottom line is concerned, for many families and individuals, ABLE accounts could make a big difference in their quality of life and peace of mind.