The Importance of ABLE Accounts

By: Connor W. Kavanaugh CTFA, ChSNC

Date: July 27th, 2020

Before we discuss ABLE accounts, its important to start with needs-based benefits because this lays the groundwork for the importance of ABLE and how impactful they can be for individuals with disabilities when used properly. 

When you begin to think about the life care plan for an individual with a disability, needs based government benefits are apart of nearly every plan. The support that Supplemental Security Income (SSI) and Medicaid play is vitally important. To qualify for these important supports, an individual is required by law to have less than $2,000 in countable assets in their name. This includes bank accounts, savings bonds, CD’s, custodial accounts, cash value life insurance and other similar assets. In its simplest form, for an individual to qualify for important supports, they need to live in poverty—ridiculous concept, huh? Advocates for decades lobbied for changes and finally, after decades of work, passed the ABLE Act. 

What is the ABLE Act?

The ABLE Act is a provision of the 529 section of the IRS code that previously established the framework for education savings plans to help families save for college. The ABLE Act allows money, up to $100,000, to be set aside for a person with special needs in a similar way and not have it impact their eligibility for needs-based benefits like Medicaid and SSI. The money deposited can grow tax-free over time and is used to pay for qualifying expenses toward the care and support of the individual with a disability. These accounts are administered by the individual states and accept contributions in the form of cash only (not stocks, bonds, real estate, or other investable assets). As of July of 2020, 42 states and the District of Columbia have active ABLE programs!  

What can an ABLE account pay for?

Money in an ABLE account is intended for the care and support of the individual with a disability. Qualified disability expenses include housing, transportation, assistive technology, health care, and employment support among many others. The general rule is that the money being distributed from the ABLE account must be used for the sole benefit of the individual with a disability. Use this as a rule of thumb for future distribution decisions.

What are the benefits of ABLE accounts?

ABLE accounts provide advantages in three main areas: taxation, access to government benefits and independence. With an ABLE account, a person with special needs can accumulate savings in a tax-advantaged way similar to 529 college savings plans. Like 529 plans, the funds in an ABLE account grow tax-free, and some states even offer account contributors a tax break from state income taxes. For you Oregonians, a tax credit of up to $300 on your Oregon income tax return.

As mentioned, individuals with disabilities who have more than $2,000 in assets would normally not qualify for federal government benefits such as Supplemental Security Income (SSI), but under the ABLE Act, families may establish ABLE accounts that will not affect the child’s eligibility for SSI (up to $100,000), Medicaid, and other public benefits.

Lastly, advocates wanted the ABLE account to be an empowerment tool—a way that makes an individual feel as though they are saving and spending just like everyone else.  The individual with a disability is the sole account owner and beneficiary giving them a sense of ownership and excitement that they may never had before. The prepaid debit card allows the individual to use it to better learn and understand important money management and budgeting skills. 

Are there any drawbacks or limits to ABLE accounts?

Due to certain restrictions, ABLE accounts may not be for everyone. Eligibility is limited to people whose disability or diagnosis occurred before age 26. Also total contributions to ABLE accounts are limited to $15,000 per year, although beneficiaries who work can make ABLE contributions above the $15,000 annual cap from their own income up to the Federal Poverty Level, which is $12,760 for a single individual in the lower 48 states (in 2020), provided they do not participate in their employer’s retirement plan.

If the value of the account exceeds $100,000, any SSI income is suspended until the account falls below that $100,000 limit. Another drawback is that after the death of the ABLE account owner, states can claim reimbursements from funds remaining in the account for any Medicaid benefits paid during the time the individual had an ABLE account. Oregon is one of four states nationwide that has repealed the state Medicaid payback.

ABLE accounts have and will continue to be main components in the long-term special needs plan for a family. I encourage you to continue to better understand and educate yourself on how an ABLE accounts can work alongside a special needs trust and improve the plan for individuals with disabilities.