Q. I hear that President Obama just 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 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.
Update: As of 09/08/2016, the following states have implemented the Able Act: Ohio, Florida, Nebraska, and Tennessee. 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. For more information on the status of Able Accounts around the country, visit the Able National Resource Center.