ARE YOU REALLY ABLE TO SAVE?
Most people in the disability community have heard about the “Achieving Better Life Experiences” (ABLE) Act over the last few years. Finally, after nearly six years of revisions, testimony and lobbying, ABLE won final congressional approval and was signed by President Obama on December 21, 2014. While adoption by states is voluntary, California will almost certainly adopt the ABLE Act. Now more than ever is the time for special needs families and advocates to become keenly aware of what it will…and won’t…do for them.
WHAT IS AN ABLE ACCOUNT?
The ABLE account was meant to be a version of the “529” (College Savings Plan), but with the tax-free withdrawals to be used for “qualified disability expenses.” Advocates had hoped that these accounts would be a viable alternative to special needs trusts: exempt from being counted against the eligibility limits for SSI, Medi-Cal/Medicaid, or other means-tested programs, while having the added bonus of tax-free growth. Unfortunately, the ABLE act that came out of Congress was neither the ABLE Act that went in…nor the Act that most advocates expected.
ABLE ACCOUNT LIMITATIONS
The Unfortunate but “Not so Bad” Limitations
- Limited to those with disabilities beginning prior to age 26, with required proof of qualifying disability.
- One ABLE account per disabled individual, with total annual contribution limit of $14,000 from all sources (other than qualified roll-overs).
- Lifetime contribution cap at State 529 limits (currently $371,000 in CA).
- Withdrawals must be for qualified disability expenses, with significant tax penalties for other expenditures.
The More Unfortunate Limitations
- If account balance grows to $100,000, there will be a loss of SSI benefits. This is significant loss, as the average qualified 25-year old might otherwise collect as much as $600,000 in SSI benefits over their life. To avoid this, an ABLE account must not be allowed to grow to more than $100,000.
- Failure to adequately monitor annual and lifetime contribution limits can lead to an account being disqualified, and the assets being counted by public benefits programs. This could lead to a surprise disqualification from needed benefits.
The Most Unfortunate Limitation
- ABLE accounts will have a Medi-Cal/Medicaid payback clause. This is by far the most unfortunate of the ABLE provisions, and the one that has caught most advocacy groups and families by surprise. Even for funds contributed by parents and family members, any balance left on the termination of the account or death of the beneficiary must be turned over to the State Medi-Cal (Medicaid) agency to pay them back for services provided. This is in stark contrast to “Third Party Special Needs Trusts,” which do not have these limitations. Accordingly, most who wish to provide for a family member with a disability will still want a third party special needs trust, as such trusts:
- Have no proof of disability needed or disability requirements;
- Have no annual or life time contribution limits;
- Can be used for anything, not just “disability” expenses (Trip to Disneyland!);
- Cannot be counted by SSI or Medi-Cal, no matter how much is in them;
- Have no payback clause! Assets, if any remaining, will go to the family members you select, not the state.
Even the so-called “tax advantage” of an ABLE account may be largely illusory. Most third party special needs trusts will be “Qualified Disability Trusts” which, combined with the personal exemptions of the beneficiary, would have approximately $14,300 in annual tax exemptions. An ABLE account with $100,000 (SSI limit) would accordingly have to earn more than 14.3% interest in a year to be tax-advantaged over the 3rd party special needs trust.
NOT A REPLACEMENT FOR SPECIAL NEEDS TRUSTS
For these reasons, ABLE accounts will integrate with, rather than replace, the third party special needs trust; the current cornerstone of most family special needs planning by parents and grandparents. We think, however, ABLE accounts will be excellent tools to help many with disabilities achieve more independence. Those able to work part-time, and who are constantly worrying about their $2,000 asset limitation for SSI and Medi-Cal, can use an ABLE account as a savings plan to park up to $14,000 per year of savings. These “savings” accounts could build up to $100,000 without effecting SSI, allowing the disabled individual the opportunity for thoughtful planning for their own benefit.
LEARN MORE ABOUT ABLE ACCOUNTS
San Diego Special Needs Law Center is currently offering a series of talks to educate consumers and professionals on what ABLE can do, some of the limitations and how it fits in the thoughtful family special needs plan. Please check our schedule of presentations on ABLE, and other topics, on our calendar, or call 619 235-4357 if you would like to discuss having Mr. Lindsley present to your group or organization.