On September 7, 2017, the Centers for Medicare and Medicaid Services issued its letter to State Medicaid Directors regarding the implication of the ABLE Act for state Medicaid programs.1 The letter gives guidance and predictability as to how these new tools can provide more dignity, independence, and financial flexibility for individuals with disabilities.
The Achieving a Better Life Experience Act was passed by Congress at the very end of 2014. It allows states to set up programs that permit individuals with disabilities and their friends, family members, or trusts, to make contributions to 529A accounts, similar to 529 education accounts. The ABLE account is a tax-preferred savings account, and the funds in the account do not jeopardize the beneficiary’s eligibility for means-tested public benefits.
The first ABLE program was launched in Ohio in the summer of 2016, and as of August of 2017, ABLE accounts had been established in 28 states. Although there is no ABLE account in Maine yet, most of the ABLE programs allow enrollment from residents of other states.
These are the key features and restrictions on ABLE accounts:
- In order to meet the criteria for an ABLE account, the beneficiary must be determined to have met the disability criteria before age 26 or submit a doctor’s certificate that meets the disability criteria and includes a physician’s diagnosis.2
- An individual may only have one ABLE account, but contributions may be from any source.
- The account may be established and administered by the individual or by his or her agent under power of attorney, parent, or legal guardian or conservator.
- There is a maximum contribution amount per year which is equivalent to the federal gift tax exclusion, currently $14,000 in a single year. This is from all sources.
- Contributions are not tax deductible, but income earned in the account will not be taxed (similar to a Roth IRA).
- An ABLE account may accept cash but no appreciated stock. The range of investments will be decided by the state which established the account, and the beneficiary may direct the investment of contributions to the program or earnings no more than two times per year.
- Account withdrawals for “qualified expenses” will not be taxed. 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, healthcare expenses, and household costs.
- When ABLE account funds are used to pay for housing expenses, the payment will not be treated as income for the purpose of SSI.3 This is a new and valuable way to protect from the one-third reduction in SSI.
- If the ABLE balance exceeds $100,000, SSI eligibility will be placed in suspension but will not be forfeited. If the ABLE balance drops back below $100,000, benefits will resume with no need to re-apply for SSI.
- Funds of more than $235,000 or $452,210 (depending on the state in which the ABLE account is located) will be counted for the purpose of Medicaid eligibility.
- ABLE accounts include payback provisions. After the death of the individual, the remaining balance is first distributed to any state Medicaid plan which provided medical assistance but based only on assistance paid after the creation of the ABLE account.4>
- After payback, remaining funds may be distributed to family members or other beneficiaries.
ABLE accounts are run by state treasurers’ offices, not by financial institutions. The rules for the various accounts are different. For example, some allow for accounts for non-residents. Some offer debit cards.
ABLE accounts are a matter of dignity. They give individuals the opportunity to save money in their own names without being disqualified from the means-tested public benefits that provide basic support.
An ABLE account can avoid an unnecessary spend-down of assets and the expensive costs of creating a special needs trust.5> An ABLE account can also be a complement to a special needs trust.
An ABLE account may be ideal for individuals with disabilities who have a small amount of money over the asset eligibility requirement for public benefits. They are ideal for the working poor. They provide opportunities for creative planning.
2In the case of a developmental disability, the individual by definition will have been disabled before age 18. Mental illness is different. It’s common that something prevented the individual from receiving benefits until his or her late 20s or 30s. If a physician can certify that the individual would have met the criteria before age 26, that’s sufficient. In fact, the Ohio STABLE program wants the applicant to certify that there is a doctor’s certification but does not require that it be produced.
3From the STABLE site: “Money you withdraw and use for housing expenses may also affect your SSI benefits if you do not spend the money right away. To avoid any impact to your SSI benefits, be sure to spend housing money within the same calendar month that you withdraw the money. For example, if you withdraw $800 from your STABLE Account on June 3rd for rent, you must pay that money to your landlord by June 30th. As long as you do not hold housing funds over from one calendar month to the next, the funds will not affect your SSI benefits.” https://www.stableaccount.com/benefits/. This interpretation of the Act is confirmed in the CMS letter.
4Contrast this to a third party special needs trust which has no payback provisions and a first party special needs trust under 42 U.S.C. § 1396p(d)(4)(A) (established for just the individual) or (d)(4)(C) (pooled trust) which requires payback of Medicaid assistance during the beneficiary’s lifetime.
5There may be fees for ABLE accounts as well, but these costs are minimal compared to creating and administering a special needs trust. For example, the STABLE account program in Ohio has a free account set-up with a $5 per month fee and an asset-based fee. See http://www.stableaccount.com/.