Update: This blog was updated on January 25, 2023 for relevance.
Achieving a Better Life Experience, or more simply titled ABLE, and the ABLE Act offer a tax benefit specifically designed for savings and investment plans for special needs individuals. For families with special needs children, establishing an ABLE account allows you to save money on disability-related expenses, such as housing and transportation, without risking disability benefits. But, what is an ABLE account in terms of qualifications and investment options? We highlight the need-to-know specifics of ABLE accounts below.
Enacted in 2014, the ABLE Act (the Act) amends Section 529 of the IRS Code to add section 529A, which creates tax-free savings accounts, like 529 College Savings Plans, but are specific to individuals with special needs.
Under the Act, a special needs individual can save up to $100,000 without the risk of losing government benefits and they can use that money for qualified expenses without taxes or penalties.
California Assembly Bill 133
While the ABLE Act is a federal program, there is discussion as to whether government officials will enact legislation similar to what has been enacted in California with AB 133. California Assembly Bill 133, creates a two-phased approach to eliminating the $100,000 asset test for all Non-Modified Adjusted Gross Income (MAGI) Medi-Cal programs, including Medicare Savings Programs (MSP) and Long-Term Care (LTC).
Phase I, which is to be implemented by July 1, 2022, will increase the asset limit to $130,000 per individual, and $65,000 for each additional household member. Phase II, which is to be implemented no sooner than January 1, 2024, will eliminate the asset test entirely.
The California Department of Health Care Services (DHCS) is working collaboratively with counties, the Statewide Automated Welfare System (SAWS), consumer advocates, the legislature, and others to implement the asset test changes.
ABLE Account Qualifications
An ABLE account can be opened by a beneficiary or their authorized legal representative. The law allows, and encourages, eligible individuals with special needs, and their support network, to save money in this way to promote independence and enable planning for the future. However, not everyone is eligible for an ABLE account.
First and foremost, to be eligible for an ABLE account the individual must have a significant disability that began prior to age 26. The individual can be older than 26 when setting up an ABLE account, but the onset of the disability must have occurred before age 26. Accounts are limited to one per qualifying individual. However, starting January 1, 2026, the qualifying age of eligibility increases to 46 as part of the Secure 2.0 Act of 2022.
An advantage of establishing an ABLE account is that anyone has the ability to make a contribution. However, total annual contributions are limited to $16,000 per account. Rollovers from Section 529 accounts, up to $16,000 annually, are also allowed by the same beneficiary or for a family member of the beneficiary as defined by law. In this way, consumers with 529 college savings accounts can transfer such assets into an ABLE account, within limits, penalty free.
ABLE beneficiaries can make additional contributions as a result of employment, provided the beneficiary is not a participant in their employer’s retirement plan. The limit for such contributions, however, is capped at the Federal Poverty Level. Balances that exceed the $100,000 limit may cause a beneficiary to lose access to Supplemental Security Income (SSI) until the funds fall below that threshold again.
If SSI benefits are suspended, there is no effect on eligibility to receive medical assistance through Medicaid. SSI benefits are “means tested” to include in-kind receipts of food or housing, as well as income and assets by the beneficiary. ABLE accounts allow beneficiaries to enjoy financial assets without losing government benefits.
It is important to note here that not all states offer ABLE accounts and some states accept only state residents. However, the law does allow for a beneficiary to set up an account in any state that allows it.
Funds in an ABLE account can be utilized to pay qualified disability expenses, which are defined as any expense related to the designated beneficiary as a result of living a life with special needs. These expenses include education, housing, transportation, employment training and support, assistive technology, personal support services, health care, financial management, and administrative expenses.
Housing expenses can even be paid out of an ABLE account without any impact to government benefits. This is not the case if housing expenses are paid out of other accounts that could trigger in-kind support and maintenance reporting that could reduce SSI benefits by a third.
ABLE accounts do not replace Special Needs Trusts (SNT), but they should be included in a special needs plan for a disabled consumer to facilitate savings and spending while protecting government benefits that a beneficiary is entitled to.
Special Needs Trusts are not “means tested”, however, they can trigger a reduction in benefits if not administered properly. This emphasizes the importance of working with a qualified financial advisor who can map out the best course of action per individual. This is where a Chartered Special Needs Consultant (ChSNC) or a special needs focused Chartered Financial Planner (CFP) professional may be of special value.
Investment choices are available via each state’s investment guidelines. Fees vary per investment choice and changes between choices can be made up to two times per year.
Typically, choices would include an FDIC insured portfolio, or a conservative, moderate, or aggressive asset allocation portfolio.
There are no enrollment fees for ABLE accounts, but there are asset management charges that would apply per the investment choices utilized. It is important to read through the state’s offering to gain an understanding of the fees and expenses that would apply to the beneficiary’s account.
There are some complexities and nuances when defining exactly what is an ABLE account. Still, the value in protecting a special needs individual’s government benefits and providing a sense of financial independence is critical. If you’re ready to open an ABLE account, you can use this helpful state-based program comparison tool from the ABLE National Resource Center, which comes complete with qualifying questions, like whether the program is FDIC insured and state income tax deductions. You can also lean on an experienced special needs planning investment advisor, who can assist you with harmonizing your ABLE account and SNT while also providing unique financial insight.
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