An ABLE account is a savings account that allows an individual with a qualifying disability to pay for numerous disability-related expenses while not affecting eligibility for “means-tested” benefits such as Supplemental Security Income (SSI) and Medical Assistance (as Medicaid is known in Pennsylvania). In other words, when set up and administered according to the applicable laws and regulations, this account will not cause the disabled person to have countable income or assets that are too high to receive certain public benefits that are based on the recipient being virtually destitute. Before reviewing some important details about the ABLE account, we first should look at the federal and state laws that created this tool.
The ABLE Act of 2014
President Obama signed the Achieving a Better Life Experience (ABLE) Act of 2014 on December 19, 2014. Its two main purposes were “[t]o 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 “[t]o provide secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, (medical) benefits.” This amended the Internal Revenue Code (IRC) to allow qualified ABLE programs in Section 529A.
Federal law now permitted disabled individuals and their family members to access tax-free savings and investment options as an incentive to save funds to be used to support the health, independence, and quality of life of the individuals with disabilities. However, states would have to establish programs to permit individuals to establish these ABLE accounts – this means that a person must make sure that a state also passed legislation before trying to set up an account. Since states need to follow the definitions regarding ABLE accounts, the IRC is the starting point in understanding the meaning of this savings tool for disabled individuals.
After the passage of the new law, the Internal Revenue Code allows an individual with a “qualifying” disability to have a tax-preferred savings account that would not affect eligibility for SSI or Medical Assistance. The framework for Section 529A accounts was based on the IRC’s 529 college-savings plans and permits payments, including an ABLE account’s earnings, to pay for “qualified” expenses. The meanings of “qualifying” and “qualified” need to be defined.
“Individual with a Qualifying Disability”
A person must meet the definition of an individual with a qualifying disability to have an ABLE account. Section 529A(e) of the Internal Revenue Code provides guidance here. An individual must be entitled to benefits based on blindness or disability under title II (Social Security Disability) or XVI (SSI) of the Social Security Act, and this condition had to start prior to the person reaching the age of 26. There is an exception to this definition, though.
This involves the person submitting a disability certification to the Secretary of the Treasury (or an official designated by the Secretary) for the year in question. The certification can be submitted by the individual, a parent, or a guardian of the individual.
It would state that the person has a medically determinable physical and/or mental impairment causing “marked and severe” functional limitations, which is expected to last (or has lasted) at least 12 consecutive months or is expected to result in death (if this is likely to occur prior to the 12-month period) or is blind as defined by the Social Security Act. The certification must include that the disabling impairment began before the person’s 26th birthday and needs to include a copy of a physician’s diagnosis of the relevant impairment(s). If any of these are done to the satisfaction of the Treasury secretary, the individual would have a qualifying disability under the criteria of the ABLE Act.
“Qualified Disability Expenses (QDE)”
As for Qualified Disability Expenses (QDE), these must be related to the beneficiary’s disability and are made for the benefit of an eligible individual who is the designated beneficiary. Under IRC Section 529A(e)(5), these can include the following eleven categories of 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 miscellaneous expenses approved by the Secretary of the Treasury (or a designee of the Secretary) under regulations and consistent with the purposes of this section.
If the person is receiving SSI, distributions from an ABLE account could trigger a one-third reduction in SSI due to in-kind expense rule when they pay for shelter expenses. However, according POMS SI 01130.740 from the Social Security Administration, the beneficiary’s SSI benefits will not be impacted as long as any funds from an ABLE account that are used to pay housing expenses are spent in the same calendar month that those funds are withdrawn.
In addition, a person who uses funds from the account for purposes that are not considered to be Qualified Disability Expenses faces another type of penalty. Amounts for “non-qualified expenses” are likely to be subject to federal and state tax consequences. Although the IRS has not provided much specific guidance, it has indicated that “Qualified Disability Expenses” will be interpreted broadly and will include “basic living expenses.”
Post-2014 Federal and Pennsylvania Legislation
There also were two federal amendments in December, 2017: the ABLE to Work Act and the ABLE Financial Planning Act. The first change allows individuals with disabilities to save additional amounts in their accounts above the annual maximum contribution of $15,000 for 2018 if they earn income while the latter amendment permits rollovers from a regular 529 account for college savings to an ABLE account. More expansive changes on the federal level have been mentioned but not enacted to date. The more important development in Pennsylvania after the passage of the initial federal law is the Pennsylvania Achieving a Better Life Experience (ABLE) Act, which was signed into law as of April 16, 2016 and introduced the ABLE program to this state.
Pennsylvania’s law follows the federal legislation. For this reason, most of the following aspects of Pennsylvania’s program will reference federal law, regulations, and rules. However, state-specific choices will be identified as pertaining to an ABLE account established pursuant to Pennsylvania’s program, as overseen by its Department of the Treasury.
The ABLE Account is Only One Tool to be Considered
There is an important thought to keep in mind before deciding to set up an ABLE account. The individual needs to remember that this is only one option for seeking to enhance the life of someone who is disabled. Any decisions about which tools merit consideration will depend on the situation, which includes the needs of the disabled person and the financial ability to implement whichever tool(s) seem to be most advantageous.
In addition to an ABLE account, there are various special needs trusts that can be useful. These include first-party (d)(4)(C) pooled special needs trusts, third-party pooled special needs trusts, first-party (d)(4)(A) non-pooled special needs trusts, and third-party non-pooled special needs trusts. Depending on the circumstances, each of these can be the “right” choice. For example, when proceeds from life insurance or an inheritance are involved, then an ABLE account would not be the best choice. Instead, this is a case in which the third-party special needs trust makes more sense.
At the same time, ABLE accounts have their own benefits as tools to enhance the lives of people with disabilities. An ABLE account allows individuals to live more independently and is ideal for avoiding the need for spend down. It also preserves small amounts of money while not incurring the expense of creating a first-party special needs trust. An additional strength is that permits beneficiaries who otherwise would refuse to give up control of their own funds to preserve SSI and Medical Assistance eligibility to retain this eligibility without surrendering control.
Additionally, the account allows a disabled individual who works to accumulate of wages over time and, as noted previously, avoids the penalty of the SSI one-third reduction rule for receiving assistance with housing expenses. Also, while an individual is able to withdraw and spend money any time for any reason, an even bigger benefit of an ABLE account is being able to save over time so that the account can grow and provide the opportunity to pay for more major or future disability expenses.
Overall, these planning tools share an ability to protect eligibility for SSI and Medical Assistance while providing a means to pay costs for goods and services that can enhance the disabled person’s quality of life. However, each is covered by its own rules and regulations, which means that any choice among this group can be beneficial depending on the circumstances (as noted in the prior paragraph when life insurance or an inheritance is the reason behind the plan) and when it is managed properly.
Furthermore, they generally are not mutually exclusive and can co-exist in ways to provide more benefits together than any of them could on an individual basis. As will be detailed, ABLE accounts offer flexibility in the ways that they help their beneficiaries. On the other hand, an individual is limited to having only one ABLE account (POMS SI 01130.740). A special needs trust can be used to handle additional assets, and, when it is a third-party special needs trust (whether pooled or non-pooled), it also can avoid payback provisions for Medical Assistance that ABLE accounts are likely to face. The best advice is to avoid thinking that the existence of one of these tools renders the others irrelevant. Since each has its own strengths and weaknesses, a combination of them, when possible, should be considered.
Setting Up an ABLE Account
While knowing what can be done with an ABLE account is important, anyone who wants to obtain its benefits should know some of the steps and requirements involved in setting up the account. Enrolling in Pennsylvania’s ABLE program (known as PA ABLE) is the starting point. The beneficiary of the PA ABLE account has to have a disability that began before the age of 26 and must be eligible each year that she or he is in the program. During the enrollment process, the individual is asked to certify that, if the disabling condition changes to make the person ineligible for an ABLE account, the person will notify the PA ABLE program. Based on that certification, PA ABLE assumes that eligibility continues unless notified of any change.
The person who actually sets up the account can be any of the following: the beneficiary, the designated beneficiary’s parent, her or his legal guardian, or an agent acting under power of attorney. Then, after the account has been created, any person can contribute to the account – this includes the beneficiary designated on the account. Because any “person” can make contributions, one needs to bear in mind how a person is defined legally. The IRS defines a “person” as an individual, trust, estate, partnership, association, company, or corporation under 26 U.S.C. S7701(a)(1).
Federal law establishes assets that can fund an ABLE account. Cash assets are permitted while real estate and other non-cash assets cannot be used (26 USC 529A).
In addition, when an account has been established, deposits into the ABLE account are irrevocable. However, POMS SI 01130.740 does specify that funds in an ABLE account can be transferred to another qualifying beneficiary if that person is a sibling (which includes brothers and sisters, stepbrothers and stepsisters, and half-brothers and half-sisters). Furthermore, the ABLE account can be transferred without tax consequences as long as the sibling is an individual with a qualifying disability. Otherwise, the transfer is considered a non-qualified withdrawal, which will incur federal and state income taxes on earnings plus an added 10-percent federal tax.
Contributions when the beneficiary receives SSI need to be handled carefully. In this situation, gifts should be deposited directly into the beneficiary’s account because, if the funds are given to the SSI recipient to deposit, the gift likely will affect the SSI to be received.
To help others make gifts, the beneficiary can provide account information for others to make contributions that will be credited to the correct account. If the beneficiary has a Ugift code, this can be given to family and friends to allow direct contributions to the individual’s PA ABLE account using the website at UgiftABLE.com.
PA ABLE’s Investment Options for ABLE Accounts
The program for each state provides different investment options. The choice of investment options can be changed twice annually. The beneficiary or the person designated with signing authority over the account must make financial records available that show all account activity according to 26 USC Section 529A.
PA ABLE’s savings program currently has seven investment options, and contributions can be made to one, or a combination, of these options. Six are asset-allocation options with varying blends of stocks, bonds, and cash while the final one is an FDIC-insured interest-bearing checking account with a debit card provided through Fifth Third Bank.
Also, one should bear in mind that contributions are not deductible for federal tax purposes, but there can be tax incentives offered by states for in-state eligible beneficiaries. (POMS SI 01130.740). For non-residents of Pennsylvania, they need to check with their state benefits agency to verify that the PA ABLE savings account will not affect the benefits’ treatment where they reside.
In 2018, the following numbers define thresholds involving ABLE accounts. A total of $15,000 can be contributed annually, although federal law permits account owners who are employed to exceed this total. The maximum applies to the total amount contributed by everyone – it is not an amount per each contributor. In addition to the limit on annual contributions, there is a maximum amount for an account, beyond which no further contributions can be made. This is $511,758 in 2018; while no further contributions would be possible, the account funds still can earn interest so the total balance could exceed this maximum.
Two final items should be noted. First, when someone contributes to a PA ABLE account, the person is entitled to an equivalent deduction from the Pennsylvania personal income tax for that year. Finally, a person can rollover money currently in a 529 college savings account into a PA ABLE account, as long as the annual contribution limit is not exceeded.
The 2017 amendments introduced some important changes regarding contributions to these accounts – some of them have been mentioned already. The ABLE to Work Act allows the designated beneficiary to contribute an amount beyond the current contribution limitation, up to the lesser of the Federal Poverty Line for a one-person household ($12,060 for 2018) or the beneficiary’s compensation during the tax year.
The law also allows the beneficiary of the ABLE account who contributes to the account to claim a nonrefundable tax credit for eligible taxpayers who make qualified retirement savings contributions. The idea behind these is that people who have incentives to contribute to their accounts will become less dependent on the government over time.
ABLE Accounts and the Treatment of SSI & Medical Assistance
Other ways that ABLE accounts are made more attractive to qualifying individuals concern the treatment of SSI and Medical Assistance. With SSI, disbursements for qualifying expenses, coupled with an account balance not exceeding $100,000, will not affect SSI eligibility while, if the account balance does exceed $100,000, SSI eligibility is suspended but not terminated and will resume when the balance drops below $100,000 (POMS SI 01130.740). As for Medical Assistance, the beneficiary remains eligible if disbursements are for qualified expenses, and the account does not exceed the state’s aggregate contribution limit adopted from its 529 college-savings plan (26 USC Section 529A (b)(6)).
Operation of an ABLE Account
In terms of the operation of the account, an eligible individual generally has complete control of the account and can enter into contracts without needing a trustee or a representative to handle these affairs. For minors or adults who lack the capacity to contract, a parent, guardian or person with a Power of Attorney must open and handle the account.
An eligible beneficiary or person with signing authority (such as the beneficiary’s parent, legal guardian, or agent acting under power of attorney) is responsible for documenting disbursements and must categorize these in order to determine federal income tax obligations (IRS Notice 2015-81). Also, disbursements can be made by checks or credit cards, according to POMS SI 01130.740.
As for fees in Pennsylvania, there is no fee to open an account, and the initial contribution has a minimum of $25. There is an annual account maintenance fee of $60, with $15 deducted from an account each quarter. Using electronic delivery of statements reduces the total to $45 per year. Other fees may be assessed depending on the beneficiary’s choice among the six asset-allocation options, and Fifth Third Bank may assess banking charges if the option of the checking account is chosen. (See PA ABLE).
Fees vary with each state’s ABLE program. Set up and ongoing costs are nominal and are typically less than those associated with setting up a special needs trust. In addition, there is an account maintenance fee of $15 per quarter, which may be reduced to $11.25 per quarter if you choose to have program statements and information sent electronically. For the Fifth Third Bank checking account option there is an additional fee of $2.00 per month, which is waived if you elect to receive bank statements electronically or maintain an average monthly balance of $250. Additional bank fees may apply.
When an ABLE Account Terminates
Finally, the issue of what happens when an ABLE account ends needs to be considered. A person can keep an account open after she or he is no longer a qualifying individual as a buffer in case the person’s condition again becomes disabling so that the person is considered a qualified individual who is eligible for an ABLE account. When the individual is not qualified for an account, no one can make contributions to it, and withdrawals from it are treated as paying for non-qualified expenses.
When the beneficiary of an ABLE account dies in Pennsylvania, the funds in it can pay for any unpaid Qualified Disability Expenses, in addition to funeral and burial expenses. There are questions regarding whether or not the account should be part of the qualified individual’s estate. Until this is decided on the federal level, Pennsylvania will allow an account to be transferred to a sibling who is an individual with a qualifying disability.
If the assets in the account become part of the deceased beneficiary’s estate, investment gains while the assets are in the estate will face income taxation. However, prior to this, the account can be used to pay for Qualified Disability Expenses (which include funeral and burial expenses) to benefit from tax-free treatment.
Under Pennsylvania law, the Department of Human Services (DHS), which administers the state Medical Assistance program, cannot file a claim against a PA ABLE account. When these assets become part of the estate, the DHS then can file a claim to be repaid. Actually, there are two types of repayments for Medical Assistance to review.
The Pennsylvania DHS can make a claim against assets from a PA ABLE account that have become part of the estate of the disabled person who owned the account. This is limited to a decedent who was at least 55 years old and received Medical Assistance for nursing facility services, home and community-based services, and related hospital and prescription drug services paid after turning 55. Additionally, DHS repayment may be delayed when there is a surviving spouse, a child under 21, or a disabled child of any age.
The second type of payback is equivalent to payback from self-settled special needs trusts. The amount subject to payback is calculated from the date that the ABLE account was created and equals the amount of Medical Assistance paid by the DHS minus any premiums paid by, or on behalf of, the beneficiary to a Medicaid Buy-In program. Also, Qualified Disability Expenses that remain outstanding (including funeral and burial expenses) reduce the funds available for payback. The Medical Assistance repayment will total the extent to which the remaining funds cover the DHS claim.
This has been a look at a complicated but potentially useful financial tool for individuals who are disabled. With an ABLE account, there are a few points to remember. The individual can have only one account. Any disbursements from the account should be for Qualified Disability Expenses (QDE), and – due to income-tax consequences – the person must keep track of QDE and non-qualifying withdrawals that are not tax free. In addition, contributions have to be tracked because there is a maximum amount that can be contributed to the account each year. At this point, there is one final point of emphasis: an ABLE account can face Medical Assistance payback claims after the death of the disabled individual. This list touches on just some of what is important when setting up, running, and ultimately terminating such an account.