by John Darer® CLU ChFC MSSC CeFT® RSP CLTC
Just About Ready, Willing and ABLE
HR 5771, the Tax Increase Prevention Act of 2014 (also known by acronym TIPA 2014), signed into law on December 19, 2014 by President Barack Obama, added new code section 529A to the Internal Revenue Code (IRC). IRC 529A provides for the creation of a special tax-favored savings account for the disabled, termed an “ABLE” (Achieving a Better Life Experience) account.
Why ABLE Accounts?
Individuals with disabilities, including personal injury victims, face significant barriers to finding and holding employment and living independently because their access to Supplemental Security Income (SSI) and Medicaid can be lost once they establish a minimum level of savings and income. SSI has an individual resource limitation of only $2,000. In most states, qualifying for SSI also confers Medicaid eligibility. Generally, when SSI recipients have income and resources over the limit, their SSI benefits are suspended, but they remain eligible for Medicaid. ABLE accounts, similar in nature to IRC Sec. 529 plan accounts for college funding, are designed to encourage and facilitate the ability of those with significant disabilities to live and work independently, without losing the benefits of SSI or Medicaid.
Under current federal legislation, a state (or an agency or instrumentality of a state) may establish and maintain a qualified ABLE Program. In general, a qualified ABLE program must meet the following requirements:
- Contributions may be made to an account established solely for the purpose of meeting the qualified disability expenses of the designated beneficiary of the account.
- The program must limit a designated beneficiary to one account, wherever located.
- Certain other requirements of the law. For example:
- There must be a separate accounting for each designated beneficiary;
- A beneficiary’s ability to direct the investment of contributions to the account must be limited to no more than two times a year.
- No interest in any portion of an account may be pledged as security for a loan. There must be adequate safeguards to prevent aggregate contributions in excess of the limit established by the state.
A qualified ABLE program is generally exempt from federal income tax, other than the tax on unrelated business income of tax-exempt organizations.
How Do ABLE Accounts Affect Means Tested Programs Like SSI and Medicaid?
An amount in an ABLE account, or any distribution from an ABLE account for qualified disability expenses, is generally disregarded for the purposes of determining eligibility for federal means-tested programs such as SSI or Medicaid, with two exceptions:
- There are two exceptions to this: A distribution made for housing expenses is not disregarded for purposes of the SSI program.
- Any amount in excess of $100,000 is considered a “resource” for purposes of federal means-tested programs.
Generally, if a disabled individual is found to have excess resources, his or her eligibility for SSI is suspended (not terminated), but eligibility for Medicaid is unaffected.
Who Can Set Up ABLE Accounts?
- Must have become blind or disabled before reaching the age of 26 Must be entitled to Social Security disability benefits or SSI; OR
- Must have a physician-signed certificate of disability on file with the IRS. The certificate of disability must attest that the disabled individual is either blind or has a medically determinable physical or mental impairment which results in marked and severe functional limitations which can be expected to result in death or which has lasted or can be expected to last continually for at least 12 months
- A designated beneficiary of an ABLE account must be an eligible individual who is the owner of the account and who is designated at the beginning of participation in a qualified ABLE program as the beneficiary of amounts paid into the program.
Contributions to ABLE Accounts Contributions to an ABLE account are considered a completed gift of a present interest, must generally be in cash, and are nondeductible for federal income tax purposes.
- On an annual basis, contributions to an ABLE account may not exceed the federal annual gift tax exclusion, which is $14,000 for 2016. This limit may be exceeded in case of a rollover from a prior ABLE account. Excess contributions are subject to a 6% excise tax.
- Total overall contributions may not exceed the limit imposed on accounts under the qualified tuition program of the state maintaining the qualified ABLE program.
- Contributions may be made by any person. The term “person” includes an individual, trust, estate, partnership, association, company, or corporation.
- If a contributor makes other gifts to a designated beneficiary, in addition to the gift to the designated beneficiary’s ABLE account, the contributor’s total gifts to the designated beneficiary could exceed the annual gift tax exclusion and result in a gift tax liability
How Do ABLE Account Distributions Work?
Distributions from an ABLE account to the designated beneficiary are excluded from income to the extent that they do not exceed the beneficiary’s qualified disability expenses. If the amount distributed exceeds the beneficiary’s qualified disability expenses, a portion of the distribution is included in the beneficiary’s income. In calculating the taxable portion of the distribution, the difference between the qualified disability expenses and the amount distributed is reduced by an amount which bears the same ratio to the distributed amount as the qualified disability expenses bear to that amount. This follows the tax treatment of annuities, as outlined in IRC Sec. 72. An amount includable in a beneficiary’s income is also subject to an additional 10% tax
- Qualified disability expenses are any expenses related to the beneficiary’s disability or blindness and which are made for the benefit of the designated beneficiary, 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
- Oversight and monitoring
- Funeral and burial expenses
- Other expenses identified in future published guidance from the IRS.
New York ABLE Accounts
On December 22, 2015 New York passed Senate Bill No. 4472 which allows annual contributions up to $14,000 made by a NY Able account owner into an eligible NY Able account. The law went into effect on April 1, 2016. Any qualifying contribution will be allowed as a deduction against the taxpayer’s federal taxable income which is subject to New York State income tax any distributions from a NY ABLE account that are used toward qualified expenses may also be subtracted from the taxpayer’s federal taxable income to the extent that they were in included in gross income for federal income tax purposes. It is important to note that distributions from a New York ABLE account that are used toward non-qualified expenses are to be added to the taxpayer’s federal taxable income. the New York ABLE Program will be Administered by the Office of the New York State Comptroller.
When Will NY ABLE accounts be available?
- Under the NY ABLE Act, this program became effective on April 1, 2016; however, the Program is not yet available for eligible individuals.
- According to its website, the Office of the New York State Comptroller is working diligently to launch the New York ABLE program and anticipates the earliest it will be available is the end of 2016.
Connecticut ABLE Accounts
HB 6738 Signed 6/17/2015 as CT Public Act 15-80, with an effective date of October 1, 2015.
For the purposes of the CT ABLE program, there is established within the Office of the State Treasurer the Connecticut Achieving A Better Life Experience Trust. The trust is an instrumentality of the state of CT. The trust shall receive and hold all payments and deposits intended for CT ABLE accounts as well as gifts, bequests, endowments or federal, state or local grants and any other funds from public or private sources and all earnings, until disbursed in accordance with the CT ABLE Act. Under the CT ABLE Act.
- The CT State Treasurer is responsible for the receipt, maintenance, administration, investment and disbursements of amounts from the trust.
- The trust cannot receive deposits in any form other than cash.
- No depositor or designated beneficiary may direct the investment of any contributions or amounts held in the trust other than in the specific fund options provided for by the trust
- No depositor or designated beneficiary cant direct investments in such specific fund options more than two times in any calendar year.
- No interest, or portion of any interest, in the program shall be used as security for a loan.
When will CT ABLE accounts be available?
Currently the Office of the Treasurer is working with an advisory committee on implementation for Connecticut families. CT State Treasurer Denise Nappier has a web page dedicated to the CT ABLE program detailing meeting schedules and minutes of those meetings so CT citizens can follow.
How will ABLE Accounts affect Settlement Planning for Personal Injury Victims?
The optics on $14,000 annually with the cap are somewhat better than a spend down to $2,000 for small and moderate size cases. Personal injury victims who are beneficiaries and their families will have more choice and control over their funds with an ABLE account. There may be some cost savings as well. The cost of establishing an ABLE account will likely be less than that of a Supplemental Needs Trust, Special Needs Trust or Pooled Income Trust. The appropriate choice however, will depend on each individual’s circumstances.
References: IRC 529A
Comments and Trackback Policy