TAXES: THE ABLE ACTBy
Much of the press has described the ABLE Act as just another tax-deferred savings vehicle. Yet when fully implemented, it can lead to substantial financial assistance for qualified individuals.
The Tax Increase Prevention Act of 2014 (P.L. 113-295), which included the much anticipated tax extenders for the 2014 tax year, also included another piece of important legislation under IRC §529A: the Achieving a Better Life Act, or ABLE Act. Many of the tax articles reporting on the new ABLE Act focused on it as another tax-deferred savings vehicle much like the Internal Revenue Code (IRC) §529 tuition savings plan, otherwise known as the Qualified Tuition Program (QTP). Even the Proposed Regulations to §529A (REG-102837-15) published June 22, 2015, note that the ABLE Act was “loosely modeled” after the §529 plan. But the potential impact of the ABLE Act can be far more significant for the people it covers.
A UNIQUE ACT
When the ABLE Act was passed, Congress recognized Stephen Beck, Jr., for his contribution to its passage. The Act’s basic provision is to allow a person to invest up to the maximum annual gift amount ($14,000 for 2015) for the benefit of a disabled person, and Beck had worked tirelessly to secure additional financial security for his daughter who has Down syndrome. Beck passed away when he was 44 years old, shortly before the law was passed. Yet the ABLE Act hasn’t been fully implemented yet. For example, it’s currently unclear how states will identify the qualifications for a person to be considered disabled. But it’s believed that once the details are worked out, this provision may provide some real long-term benefits for the disabled person.
The ABLE Act enables significant funds to be saved, held, and collected for persons who became disabled before they turned 26 years old. There is a significant component of this tax law that’s unique. Distributed funds from the ABLE account aren’t treated as income that could reduce the assistance that the federal and state governments provide to the disabled person. In addition, the means-testing thresholds will be significantly increased for ABLE accounts, which means more savings will be available without jeopardizing the benefits coming from sources such as Supplemental Security Income (SSI), Medicaid, and the Supplement Nutrition Assistance Program (SNAP), to name a few. For example, according to the Social Security Administration’s website (http://1.usa.gov/1MJ7e0x), “SSI benefits are intended to be an income source of last resort and are means-tested; income and resources must be within specified limits” (emphasis added).
To better appreciate the ABLE Act, we can look at the stories of two real-life friends, Ms. A and Ms. B, who grew up with cerebral palsy (CP). Both are now senior citizens but were diagnosed with CP at a very young age. Each set of parents wanted to provide for their daughter in such a way that she would have the means to live a normal life and have some security when older.
Ms. A’s parents were hardworking but didn’t have the funds to set aside for their daughter, so they applied for SSI, Medicaid, and SNAP. She was approved to receive the benefits but had to be cautious about how much money she saved. Having excess assets would result in losing her benefits. SSI income, for example, generally may stop if an otherwise eligible disabled individual has at least $2,000 of assets.
Ms. B’s parents, on the other hand, were better off financially and were able to set aside funds for their daughter. Because they were concerned that she may not have the ability to manage these funds through her life, they established a special needs trust (SNT). An SNT is usually managed by a large bank that, along with a designated trustee, has the authority to use the trust income only as is necessary for the beneficiary’s support, education, or maintenance. Until recently, the SNT was very helpful for Ms. B. The economic issues over the last few years resulted in the trust not having adequate investment income to cover the management and administrative costs of the trust as well as Ms. B’s future monetary needs. Fortunately, Ms. B’s attorney was able to help her get Medicaid assistance after the state government was finally convinced that the SNT shouldn’t be considered an asset for the means-test. Many states appear to have difficulty with SNTs when it comes to means-testing.
Both Ms. A and Ms. B have normal expenses, such as apartment rent, rental insurance, food, telephone, cable, transportation, and hygiene items. They also need visiting aides to help cook meals, wash, do physical therapy, and manage a host of necessary medications. People may be under the impression that the government covers these expenses, but that isn’t true. Household aides aren’t always covered by the government, and special transportation may not be free for going to religious institutions and doctor visits. The purchase of toothpaste, dish soap, laundry detergent, and other hygiene products generally aren’t covered by SNAP even though they are essential for anyone’s health. In other words, government assistance may help cover some essential items, such as food, but not others, such as hygiene products.
Like other disabled individuals, both Ms. A and Ms. B have a need for funds beyond those provided by the government to maintain a reasonable lifestyle given their disability. The ABLE Act has the potential for providing these necessary additional funds.
A WORK IN PROGRESS
There are still many details to be determined and finalized. Comments for the proposed regulations were due September 21, 2015, and a public hearing was held October 14, 2015. About a dozen speakers testified, generally expressing support, and many suggestions were made to improve the program. And the states are going through their legislative process.
Although ABLE accounts are to become available in 2016, there’s still quite a bit of uncertainty in their applicability and usefulness. Therefore, further analysis of the new law is needed as the situation develops. But for the moment, it’s worth thinking of the ABLE Act as a resource that accountants can prescribe for their clients with a disabled child or family member to help put that individual in a better financial position in the future.
© 2015 A.P. Curatola
ABLE ACT FAST FACTS
THE NATIONAL DISABILITY INSTITUTE ESTIMATES that 2.6 million to 4 million children and 4.1 million to 8 million adults will be eligible for ABLE accounts (http://1.usa.gov/1Ku8UJs).
AN ABLE ACCOUNT CAN HAVE TOTAL ASSETS OF up to $100,000 before the beneficiary’s SSI eligibility is affected (http://1.usa.gov/1LwWNj0).
THE ANNUAL CONTRIBUTION LIMIT IS $14,000 for 2015, which will be adjusted annually for inflation.