The ABLE Act
The long-awaited ABLE Act was signed into federal law by President Obama on December 19, 20141, with New York’s version signed into state law by Governor Cuomo on December 22, 20152. Standing for “Achieving a Better Life Experience Act,” the primary purpose of the ABLE Act is to allow a disabled individual to be the beneficiary of a single, qualified ABLE account, the funds of which can be applied to any expenses related to the individual’s blindness or disability. According to the National Down Syndrome Society, “the ABLE Act recognizes the extra and significant costs of living with a disability” and finally provides a disabled individual “the same types of flexible savings tools that all other Americans have through college savings accounts, health savings accounts, and individual retirement accounts.”3
An account opened under the ABLE Act (an “ABLE account”) may be opened by a “qualified beneficiary” or by the beneficiary’s guardian, parent, or agent. A qualified beneficiary is defined as someone who either (a) already receives Social Security Disability (“SSD”) or Supplemental Security Income (“SSI”) and whose disability began before the age of 26, or (b) can provide a certification that the designated beneficiary meets or has met, prior to age 26, the requirements of being “disabled” pursuant to the Social Security Act, whether he/she actually receives SSD or SSI benefits, including having in his/her possession a signed diagnosis from a physician regarding the beneficiary’s relevant impairments.
Under the ABLE Act, up to $100,000.00 in New York, in the form of cash only (i.e., no securities or other assets are permitted), may be saved for the qualified beneficiary without affecting his eligibility for government-funded assistance. Currently, any resource that provides a disabled individual with assets of a value in excess of $2,000.00, can disqualify an individual from receiving government benefits. Similar to the funds in a Supplemental Needs Trust, the funds in an ABLE account are designed to supplement, not supplant, the benefits a disabled individual receives from privately held insurance or the government. More specifically, the account is used to finance any expenses that may be related to the individual’s disability, but which are not typically covered by government assistance (known as “qualified disability expenses”), such as expenses related to education, transportation, employment training and support, assistive technology and personal support services, health and financial management services, and funeral and burial expenses. In addition, housing expenses qualify as a disability-related expense, however, a distribution for housing expenses will be factored into the individual’s eligibility for SSI benefits. In any event, it is the beneficiary’s responsibility for maintaining detailed and accurate records of all distributions made from the ABLE account in order to prove that the distributions qualify as “qualified disability expenses.”
Similar to 529 plans, ABLE account earnings are exempt from income taxation. Distributions made from an ABLE account to pay for the beneficiary’s qualified disability expenses are also exempt, so long as the distribution amount does not exceed the value of the qualified disability expense. If a distribution exceeds the value of the qualified disability expense, a portion of that distribution will be includable in the designated beneficiary’s gross income. Furthermore, if a distribution is made for a non-qualified disability related expense, not only will the amount of the distribution be taxed as income to the designated beneficiary, but a penalty of 10% will be added.
In addition to a total contribution limit in New York of $100,000.00, there is an maximum annual contribution limit restricting the amount of cash that may be deposited by all contributors to an ABLE account on an annual basis. This annual limit equals that of the annual gift tax exclusion amount, which, for 2015, is $14,000.00. In other words, on an annual basis, an individual may receive in his or her ABLE account a total of $14,000.00 from all contributors without penalty. Contributions will be considered a completed gift for purposes of annual exclusion gifts, but do not qualify as education/medical exemptions.
Upon the death of the designated beneficiary, and after the payment of any of the designated beneficiary’s outstanding qualified disability expenses (including burial expenses), the remaining funds are subject to “pay pack provisions,” similar to a self-settled Supplemental Needs Trust. That is to say, the State may file a claim for reimbursement for the total amount of medical assistance that was paid to the designated beneficiary following the establishment of the account, net any premiums the designated beneficiary paid to the State’s Medicaid Buy-In program. The amount of reimbursement to the State, however, cannot exceed the amount of money that remains in the ABLE account. Any balance that remains in the account will likely be distributed to the beneficiary’s estate.
While the importance of this Act and the creation of ABLE accounts should certainly not be overlooked, it is essential that families recognize that financial planning for individuals with disabilities will remain highly individualized. When comparing an ABLE account to a Supplemental Needs Trust, for instance, there will be pros and cons to both options. For example, while one family may welcome the ease with which a disabled individual can access funds from an ABLE account, this availability may cause concern for another family. Additionally, as mentioned above, an ABLE account will be subject to a claim by the State at the designated beneficiary’s death. A Third-Party Supplemental Needs Trust, on the other hand, is not subject to recoupment from the State and the balance of the Trust may be distributed in the manner provided for by the original Grantor of the Trust and has no funding limits. Consequently, just like any important financial decision, a professional should be consulted.
ABLE-accounts are currently scheduled to be available in New York beginning on April 1, 2016.
1The full text of the federal law is available at https://www.congress.gov/bill/113th-congress/house-bill/647/text
2The full text of New York’s law is available at https://www.nysenate.gov/legislation/bills/2015/s4472d
3“Achieving a Better Life Experience (ABLE) Act.” The National Down Syndrome Society. Available at http://www.ndss.org/Advocacy/Legislative-Agenda/Creating-an-Economic-Future-for-Individuals-with-Down-Syndrome/Achieving-a-Better-of-Life-Experience-ABLE-Act/. Last visited February 2, 2016.
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