The financial implications for young people with disabilities are far-reaching. Federal and state law, while intended to support the neediest among us, often unintentionally perpetuate impoverishment among people with disabilities. Eligibility for most federal and state disability benefits, such as Social Security Disability Insurance or state Medicaid, require means-testing. Earning and saving even a pittance can disqualify a person with disabilities from a lifetime of federal or state support.
Two of the most common forms of state and federal assistance to people with disabilities come through Medicaid and Social Security Supplemental Security Income. Medicaid programs typically disqualify those with $2,000 or more of assets, while Social Security Disability Insurance disqualifies those making $1,260 per month. Supplemental Security Income is reduced when food or shelter is provided for recipient. How can you get ahead in life, when you can’t own anything?
In response to this challenge, families resorted to special needs trusts to protect loved ones with disabilities from being disqualified from other forms of support. Rather than having a person with disabilities own a savings account directly, a special needs trust owns the account instead. However, special needs trusts require the expertise of an attorney to establish, plus annual tax filings and trust accounting. Further, these trusts are subject to the highest tax rates and special tax reporting each year. Trust income over $12,950 in 2020 is taxed at the highest federal rate of 37%. Combined with state tax, tax on each dollar of income over the threshold can easily exceed 40 cents per dollar.
ABLE accounts were created to offer a solution to this dilemma. These accounts permit people with disabilities to save and invest in tax-advantaged accounts without fear of losing sources of federal and state aid. Signed into federal law in late 2014, the Achieving a Better Life Experience Act added to Section 529, permitting states to create tax-advantaged savings accounts, known as ABLE savings trusts for people with disabilities. Virginia passed new legislation in 2015, authorizing the creation of these accounts which would be governed by the state body overseeing the 529 education savings program, Virginia529. Recent changes to Virginia law in 2020 make ABLE accounts even more attractive for residents of the state, now that the “Medicaid payback” rule has been largely dismantled.
What is an ABLE account?
ABLE savings accounts (also known as ABLE savings trusts) allow people with disabilities to save and invest while maintaining eligibility for most state and federal aid. In addition, ABLE accounts offer tax-advantaged saving and investing, which are superior to the taxation of special needs trusts.
ABLE accounts also offer financial independence by giving an eligible individual the chance to build wealth in their own name – without fear of disqualification from other forms of support. There is, however, one caveat to the means-testing exemption. For those receiving Supplemental Security Income, an ABLE account becomes a countable resource if it exceeds $100,000.
Who can open an ABLE account?
Unlike a special needs trust, ABLE accounts are always owned by the beneficiary. The beneficial owner can open the account independently. If an eligible individual is a minor or not able to open the account independently, an authorized representative may open the account for the beneficiary.
ABLE accounts can be opened for a beneficiary who became blind or disabled before age 26.
Blindness or disability is defined by Social Security Act Title II or XVI, or by the List of Compassionate Allowances Conditions. Alternatively, it can be certified by a parent or guardian with a signed physician’s letter stating the beneficiary has a “medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which lasted or can be expected to last for a continuous period of not less than 12 months, or is blind.”
The account owner or representative must certify the disability each year, except in the case of blindness.
What are the unique tax benefits?
Although contributions to an ABLE account are made with after-tax dollars, ABLE accounts are eligible for tax-free growth and tax-free distributions for qualifying expenses. Tax-free growth can amount to a significant benefit over time.
Additionally, some states offer a state tax deduction for contributions. In Virginia, contributions to an ABLE account are eligible for a state tax deduction of up to $2,000. Gifts in excess of that amount can be carried-forward and deducted in future years. Donors age 70 and above can deduct the full value of their gift in the year given.
Who can contribute to the account?
Anyone may contribute to an ABLE account, including the account beneficiary. An ABLE account is a convenient place to hold money that would otherwise be deemed as a “countable resource” which might disqualify the beneficiary from federal and state benefits.
Annual contributions to an ABLE account are capped at the federal gift limit, which is $15,000 in 2020. However, working beneficiaries may contribute an additional amount up to the federal poverty limit for the previous year. In 2020, this amounts to an additional contribution of $12,490 for a total funding cap of $27,490.
In Virginia, new contributions to an ABLE account are not permitted when the account exceeds $500,000.
What is a qualified disability expense?
ABLE accounts offer the benefit of tax-free growth and tax-free distributions so long as the distributions are for a quailed disability expense. The definition of what qualifies is broad and affords those with disabilities a great deal of flexibility in the way the account can be used. Federal law under 26 US Code S529A defines a qualified disability expense as “any expense related to the eligible individual’s blindness or disability” and goes on to name a list of such expenses including: education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management, administrative services, legal fees, expenses for oversight, and funeral expenses.
Distributions for non-qualified expenses are subject to a penalty of income tax and an additional 10% penalty applied to the earnings portion of the non-qualified withdrawal. This will also result in a recapture of the state tax deduction to the donor.
The nuts and bolts.
Most states operate their own ABLE program. Virginia operates two ABLE programs, one called “ABLEnow” and the other, “ABLEAmerica.” Both are administered by Virginia529 which also oversees the state educational savings plan. ABLEnow uses the custodial services of PNC Bank and offers both depository accounts and investment portfolios. The ABLEAmerica plan is available only to those working with a financial advisor and is offered through the American Funds Service Company.
Eligible individuals may only open one ABLE account.
Recent changes to Virginia law
The federal law which created ABLE accounts also includes a bitter pill, knows as the “Medicaid payback” rule. Upon the death of the account owner, federal law allows the state to claim the remaining ABLE account balance as reimbursement for Medicaid assistance paid by the state for the beneficiary. The state may not claim more than the amount of total benefits paid.
The Medicaid payback risk poses a serious threat which has turned many away from ABLE accounts. A handful of states have enacted laws indicating they will not seek payback from ABLE accounts.
In 2020, Virginia passed legislation stopping the state from seeking reimbursement from Virginia ABLE accounts, unless required to do so by federal law. The Virginia code section 23.1-707.G.1 now reads, “Unless required by federal law, the Commonwealth, its agencies, and its instrumentalities shall not seek payment pursuant to 26 USC S 529A from any ABLE savings trust account or its proceeds for benefits provided to the beneficiary of the account and shall not undertake estate recovery from any ABLE savings trust account….”
The recent changes to Virginia law makes ABLE accounts an even more attractive means to save and invest for the future.
ABLE accounts offer people with disabilities a new opportunity to save and invest for the future –which is dignifying.
Photo by Jenny Galloway on Unsplash