In December 2014, the federal government enacted a new law called “The Achieving a Better Life Experience Act” (“ABLE”). The general premise of ABLE is to permit certain disabled individuals to set up a special bank account that would be disregarded as an asset for most federal public benefits, such as Medicaid. This would allow families to supplement the lifestyle expenses of a special needs child, for example, without adversely affecting his or her medical coverage. Access to an ABLE account can therefore make a huge difference in the quality of life of the disabled individual, as well as permitting him or her to take on suitable employment, save some of their earnings in this account, and still qualify for their necessary public benefits programs.
Additionally, interest and gains in the ABLE account will not be subjected to income tax, provided a number of rules and restrictions are followed. ABLE shares some characteristics with 529 Plans for college savings which already permits certain tax-free treatment of interest and gains.
To briefly summarize those rules, an ABLE account can only be set up by a person who was severely disabled by the age of 26. Each state is permitted to set up an ABLE program but is not required to do so. Each qualified disabled individual is limited to one ABLE account and it must be set up in their state of residence. The amount that can be contributed to an ABLE account is limited ($14,000 per year for 2015 and 2016, with a total account value limited to the particular state’s limit for 529 accounts), whether those contributions are made by the disabled individual or by family members or other third parties. When the disabled individual dies, the remaining assets in the account must repay the state Medicaid program that provided benefits to the disabled individual.
In order for ABLE assets to receive special tax treatment, those assets can only be used for “qualified disability expenses.” The law lists categories of such qualified disability expenses, including “education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses.” It is likely that not all states will implement ABLE at the same time and when states have set up their program there probably will be some variability in the details of those programs.
Last June, the IRS issued proposed regulations for the program, which were followed last month by interim guidance that would modify the proposed regulations. We have identified three main changes to ABLE made by the proposed modified regulations, all of which work to make the establishment and maintenance of an ABLE account easier for disabled individuals. First, the original regulations would have required state ABLE account managers to review each distribution made from an ABLE account to ensure that the distribution was put to a permissible use. That would have been very unwieldy and thankfully, the interim guidance shifts the recordkeeping burden back to the ABLE account holder, which is much simpler.
Second, in terms of asserting eligibility to open an ABLE account, the original proposed regulations would have required a proposed account holder to submit and the state account managers to review, collect, and maintain, a great deal of medical diagnosis and other health-related information. Now, it will simply be a matter of requiring the disabled individual to swear that they satisfy all the eligibility rules.
Lastly, many recipients of social security income (“SSI”) have difficulties with managing the costs of housing. The modified proposed ABLE regulations seem to suggest that ABLE distributions for housing-related costs would not be disqualifying for SSI purposes. That may facilitate the assistance of family members with helping disabled individuals manage their housing expenses.
Please call us at 860-769-6938 if you have any questions about the issues presented above or if you care to discuss any other planning issues with us.