An Update on ABLE Accounts

August 1, 2023 | Author: Deppe Fredbeck & Yount LLP

ABLE accounts were authorized by the Achieving a Better Life Experience Act of 2014 and can be an excellent resource for individuals with disabilities. Let's take a deeper dive into what these accounts are, how they can benefit certain individuals, and some relatively new regulations in order to clarify some rules regarding ABLE accounts.

Who is eligible to open an ABLE account?

To be eligible to open an ABLE account, one must be a U.S. citizen or legal resident and an individual with a significant disability that began before age twenty-six. Big news: legislation has been passed that will adjust this age to forty-six starting in 2026, but for now, the disability must have begun before age twenty-six. Such an individual is termed the designated beneficiary of the ABLE account. The designated beneficiary can be of any age when the account is opened, but until 2026 when the new legislation comes into effect, the disability had to have onset before age twenty-six. If the individual receives Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), that individual is already eligible to open an ABLE account. If the individual isn't receiving SSI or SSDI, they must obtain a disability certification from a doctor and meet the Social Security Administration's definition of significant functional limitation. Finally, each eligible designated beneficiary can only have one ABLE account.

Who can contribute to an ABLE account?

Anyone can contribute to an ABLE account. The account owner, or designated beneficiary, can contribute to the account, as can their family or friends.

How much can one contribute to an ABLE account?

There are limits on how much can be contributed to an ABLE account. In 2023, the annual limit for each contributor is $17,000. Consistent with the Tax Cuts and Jobs Act, people with disabilities who are employed and are eligible designated beneficiaries can also make additional contributions to their ABLE account. (However, if the eligible designated beneficiary's employer contributes to a workplace retirement plan, the individual cannot make these additional contributions.) There are also lifetime caps set by individual states. These limits range from $235,000 to $550,000 depending on the state. The Indiana account limit is $450,000.

What can ABLE account funds be spent on?

Distributions from the account are tax-free if used for any expense related to living with a disability, including healthcare costs, living expenses, housing, transportation, assistive technology, legal fees, and education. To be tax-free, the distribution must be made for a qualified disability expense, which is defined as follows:

"Qualified disability expenses mean any expenses incurred at a time when the designated beneficiary is an eligible individual that relates to the blindness or disability of the designated beneficiary of an ABLE account, including expenses that are for the benefit of the designated beneficiary in maintaining or improving his or her health, independence, or quality of life. See §1.529A-2(h). However, any expenses incurred at a time when a designated beneficiary is neither disabled nor blind within the meaning of §1.529A-1(b)(8)(i) or §1.529A-2(e)(1)(i), even if the designated beneficiary is an eligible individual for that entire taxable year, do not relate to blindness or disability and therefore are not qualified disability expenses."

Are there any other advantages to ABLE accounts?

ABLE accounts allow those with disabilities and their families to save money with certain tax advantages. Contributions to an ABLE account are not tax-deductible and are made with post-tax earnings, but withdrawals and investment income earned will not be taxed.

Another major advantage is that the balance of the account will not be a countable resource when applying for certain needs-based public benefits. These needs-based programs have strict asset limits, sometimes as low as $2,000. So, if the individual has more than that amount of non-exempt assets, they would not qualify for benefits. Through an ABLE account, the individual can have extra funds set aside for their needs without jeopardizing their eligibility for needs-based government benefits. (Depending on the benefit, there are limits regarding how much ABLE account funds will be a non-countable asset. For example, currently all of the funds in an ABLE account (which has a maximum the amount of $450,000) would be exempt for Medicaid eligibility, but only $100,000 would be exempt for SSI.

ABLE accounts can be an excellent resource for folks who are disabled, and a great way for their families to be able to contribute in a meaningful way. Family members and other advocates can arm themselves with the knowledge about what ABLE accounts are, how they are beneficial to their loved ones or clientele, and how the law around them may evolve.