Q. I hear that President Obama signed a new law that will make life easier for persons with a disability. Do you know anything about this? We would like to set up something for our grandchild who has a disability and is on SSI and Medi-Cal.
A. Yes. It is called “Achieving a Better Life Experience Act”, or the “ABLE Act” of 2014. It was passed by Congress by an overwhelming majority and signed into law by the president on December 19, 2014. Once fully implemented, the ABLE Act will allow eligible persons with a disability to open tax-free savings accounts, and permit the individuals or their families to contribute up to $14,000 per year into the accounts and still keep government benefits, such as SSI and Medi-Cal.
The Act’s purpose is to encourage the creation of an additional financial resource to help individuals with a disability meet supplemental needs beyond those very basic needs provided by government programs. The accounts will be structured much like 529 Education Savings Plans.
For perhaps the first time, the ABLE Act recognizes the extra costs incurred by persons living with a disability, who otherwise depend upon public benefits for assistance with healthcare, food, housing and the like. Under existing law, to be eligible for public benefits an eligible individual generally must meet certain resource limitations, such as having no more than $2,000 in savings. This resource limitation has long left very little assets available for those essential needs not fully covered by governmental programs, and even less to cover emergencies.
When the law is fully implemented, an ABLE Account may be established by the eligible individual or his family. However, there are some limitations: (1) it can only be established for a beneficiary whose disability began before turning age 26; (2) the annual contributions are limited to the annual gift tax exclusion amount, currently $14,000 per year; (3) the total contributions to the account may not exceed $100,000 in order to maintain eligibility for SSI, nor more than $371,000 (in California) to maintain eligibility for Medi-Cal; and (4) amounts remaining in the account at the death of the beneficiary are reimbursed to Medi-Cal to the extent of Medi-Cal benefits received by the beneficiary after creation of the account.
While the annual contributions are not tax-exempt, the interest income generated by the savings will be tax-exempt so long as distributions from the account are used only for qualifying expenses as defined by the legislation.
Until now, the family of a beneficiary with a disability had limited options to provide for the financial security of their loved one: (1) “spending down” a gift or inheritance in the month of receipt, (2) creating or joining a Special Needs Trust (“SNT”) managed by an independent trustee and/or (3) relying upon the informal generosity of family members. Now, the beneficiary with a disability and his family have a new estate planning tool to enable planning for the future: an ABLE Act Savings Account.
Note: the federal statute will not be fully effective until implementing regulations are adopted, and not until the beneficiary’s home state adopts state legislation in conformity with the ABLE Act. Advocates for persons with a disability expect that these requirements will be in place for California citizens sometime during the year 2015. Until then, eligible persons and their families should watch state developments closely, so that they can act as soon as the legislation is fully operational.
Planning Idea for Housing Expense: In some situations, an ABLE Account can be used very effectively to maximize public benefits, and avoid an ISM reduction in the beneficiary’s SSI. If housing expenses were paid by a third party, such as a family member or even by the SNT, there would normally be a partial reduction in the beneficiary’s SSI for that month. This is called an ISM Reduction, where ISM stands for “In Kind Support and Maintenance”. However, if that payment were, instead, paid from the beneficiary’s ABLE account, there would be no ISM Reduction, as the payment would not be treated as ISM. The ABLE Account could then be replenished each month by the SNT or the family benefactor (so long as the contributions did not exceed $14,000 per year in total, or that year’s Annual Exclusion Amount, (which is adjusted each year by the federal government based upon the inflation index), so that the monthly housing payments continued to be made from the ABLE Account on an ongoing basis. This approach could save a beneficiary on SSI up to $3,180 per year in year 2018 (at $265/month) in SSI benefits thus preserved; an SSI Couple could save up to $4,652 per year (at $387.66/month), in SSI benefits preserved, using this approach.
2017 Update: As of 04/18/2017, 19 states have implemented the Able Act: All but Florida allow residents of other states to join their state’s plan. California has passed enabling legislation, but the Able Account is not yet operational here. We hope it will be operational in California sometime during the Summer, 2017. For Proposed Regulations in California, see this link on the State Treasurer’s Website. For more information on the status of Able Accounts around the country, visit the Able National Resource Center; Treatment of ABLE Account by Social Security for those receiving SSI: POMS SI-01330.410; ACWDL 17-02 (1/13/2017) with ISM values for 2017. On October 4, 2017, Governor Jerry Brown signed into law SB 218, which seeks to prevent automatic recovery from the remainder in an ABLE Account following the death of the beneficiary. This law needs approval from the federal Center for Medicare and Medicaid (“CMS”), but approval is anticipated. However, even with approval, in order to avoid recovery, the beneficiary may still need to be survived by a spouse, minor child or child with a disability. Approval by CMS is anticipated in view of the CMS Medicaid Director Letter, SMD # 17-002, issued by the Director of CMS, seemingly encouraging state legislation to limit recovery. Also, word has it that the ABLE Account Program is slated to begin in California in early 2018. Stay tuned.
2018 Update. ABLE account owners who have employment may be eligible to contribute above the $15,000 annual contribution limit [for 2018] (possibly up to an additional $12,060 depending on the gross income of the account owner). The basic contributions up to $15,000 for the year could be made by the account owner OR anyone else, but the additional contributions up to $12,060 for the year can only be made by the ABLE account owner into his/her own ABLE account. See the ABLE National Resource Center (ANRC) (www.ablenrc.org). Note: Questions remain about aspects of the provision relating to these increased contributions and may require guidance from the U.S. Department of the Treasury. See, also, Disability Benefits 101 at https://ca.db101.org/ca/situations/workandbenefits/assets/program.able.htm
2022 Update: As part of the Secure 2.0 Act, Congress passed and the President signed the ABLE Age Adjustment Act. This will increase the age at which the ABLE account owner’s disability must have started from age 26 to age 46, but not until January, 2026. See this article for more.