ABLE Accounts: The Basics 1 of 3 Articles
January 20th, 2023
The Achieving a Better Life Experience Act (ABLE Act) was passed by Congress in December of 2014 and authorizes states to establish programs with special financial accounts for certain individuals with disabilities. The ABLE law refers to these individuals as “designated beneficiaries.” “DBs” are able to save, administer, control, and spend funds from ABLE accounts in their own names without being disqualified from means-tested public benefits like Supplemental Security Income (SSI) and Medicaid (called MaineCare in Maine).
ABLE accounts provide independence, dignity, and financial security.
In learning about ABLE accounts, it’s helpful to keep in mind that these are a product of tax law, not of Social Security law. They are tax-advantaged savings instruments, and they are based on Section 529A of (Title 26) the Internal Revenue Code. Contributions to an ABLE account are not tax deductible, but income earned in the account will not be taxed (similar to a Roth IRA) unless withdrawn to purchase anything “qualified disability expenses” (QDEs) which are broadly defined. In fact, it’s a challenge to think of purchases which would not be QDEs.
The beneficiary may save up to $100,000 in an ABLE account and not risk eligibility for SSI. If the ABLE balance exceeds $100,000, SSI eligibility will be placed in suspension. If the ABLE balance drops back below $100,000, benefits will resume with no need to re-apply for SSI.
Even more can be set aside and not affect eligibility for Medicaid. The limit varies according to the state within which the ABLE is located. The range in 2023 is from $235,000 (Mississippi) to $550,000 (Virginia). The maximum contribution to Maine’s ABLE account is $500,000.
The first ABLE program launched in Ohio in the summer of 2016, and most states now have developed their own ABLE programs. Generally, ABLE accounts are run by state treasurers’ offices, not by financial institutions. Maine’s ABLE ME Program opened October 1, 2021, and is unique in that it is based in a bank, specifically Bangor Savings Bank. Full details are available at www.bangor.com/able-home.
Before opening an ABLE account in Maine or in any other state, be aware of the differences among them. For example, currently the only deposit instrument at the ABLE ME Program is a transactional checking account while the Virginia’s ABLE now offers five investment options with Vanguard and Fidelity. Most ABLE programs allow residents from other states to create accounts. (Maine does not.) See the Compare State Programs tool on the website of the ABLE National Resource Center and “shop” for the best ABLE program for the individual’s circumstances and goals: https://www.ablenrc.org/compare-states/.
Although there are some differences between the ABLE programs in the various states these are the key features and restrictions for all ABLE accounts:
- In order to meet the criteria for an ABLE account, the beneficiary must:
- Be eligible for SSI based on disability or blindness that began before age 26 OR
- Be entitled to disability insurance benefits (DIB), childhood disability benefits (CDB), or disabled widow’s or widower’s benefits (DWB) based on disability or blindness that began before age 26 OR
- have certified that he or she met the criteria for a disability certification before age 26.
- The ABLE account may be established and administered by the individual or by another in the following hierarchy: individual selected by the DB; the DB’s agent under power of attorney, guardian or conservator; the DB’s spouse, then parent, then sibling, then grandparent; or the DB’s representative payee appointed by the SSA.
- A beneficiary can have only one ABLE account, but contributions can be from any source including that individual, family members, friends, or a trust.
- There is a maximum contribution amount per year which is equivalent to the federal gift tax exclusion, currently $17,000 (in 2023) in a single year. This is not per donee, but per account.
- ABLE DBs who are employed may contribute an amount equal to his or her compensation for the taxable year (up to a maximum of $13,590 in 2023) each year to their ABLE accounts in addition to the annual standard contribution limit of $17,000 – unless the DB or employer is contributing to a employer-based retirement plan (e.g. 401(k), 403(b), or 457(b)).
- An ABLE account may accept cash but not appreciated stock. The range of investments will be decided by the state which established the account, and the beneficiary may direct any investments or earnings no more than two times per year.
Note: Federal law provides that, after outstanding QDEs have been paid, a state’s Medicaid program may claim reimbursement for medical assistance provided since the ABLE account was opened. This is similar to the Medicaid payback required for first party special needs trusts (SNTs). But see the third article in this series about a recent Maine law which protects the ABLE accounts of Mainers.
Withdrawals from an ABLE account for QDEs will not be subject to income tax. The list of qualified expenses is very broad and essentially includes most purchases made to improve the health, independence, and quality of life of the beneficiary. Examples of non-taxable expenses include education, transportation, health, legal fees, and basic living expenses. Distributions may even be made for food and housing as explained in the second article in this series.
When an individual has excess income or assets and is at risk of losing SSI or MaineCare, an ABLE account may be the solution. In cases where there will be too many assets for an ABLE account to be the only solution, it may be necessary to establish a special needs trust, too. The two solutions can operate together. In other cases, the individual will be ineligible for an ABLE account due to the date of onset of the disability, and a special needs trust may be the only solution.
An attorney who focuses on special needs planning will have answers and tools to guide an individual with disabilities in maximizing all resources. For more details about ABLE accounts for individuals with disabilities, see the second and third articles in this series.