Financial Planning Department
Using Tax-Advantaged Savings Plans for Individuals with Disabilities
On December 16, 2014, President Obama signed H.R. 5771 into law, which included the ABLE Act, authorizing states to create tax-favored savings accounts for individuals with disabilities, similar to 529 college savings plans. These plans allow disabled individuals to accrue assets, tax-deferred, while still maintaining their eligibility for government benefits. Currently, disabled individuals with more than $2,000 in assets may be subject to a loss of benefits. States are now able to establish and operate these accounts, governed by IRS Code Section 529.
Beneficiaries of these accounts can be any age, but the disability must have started before age 26 and meet certain criteria as determined by a doctor. Individuals are considered automatically eligible if they are entitled to Supplemental Security Income(SSI) benefits or Social Security Disability Insurance (SSDI) benefits based on blindness or disability.
Only one ABLE account can be opened for each beneficiary. If the eligible individual is age 18 or older and has the legal capacity to contract, he or she must open the account. A child or an adult who lacks legal capacity may have an account opened for themby an authorized individual (parent, guardian, or power of attorney). The authorized individual manages the account, but the disabled individual remains the beneficiary and account owner at all times.
These accounts are not state-specific, which allows individuals to choose a plan based on their investment preferences. However, states may offer certain benefits if their own plan is used. Funds in one ABLE account are able to be rolled over within 60 days to another ABLE account with no tax consequences, with a limit of one 60-day rollover per 12-month period. In addition, investment changes are limited to twice per calendar year.
Total annual contributions to these accounts from all sources cannot exceed the annual gift tax exclusion ($14,000 in 2017) and lifetime contributions cannot exceed a states contribution limit (in most cases, $300,000 or more). While there are no federal tax incentives for contributions, states may offer their own tax breaks. For example, PA ABLE accounts are exempt from Pennsylvania inheritance taxes.
It is important to note that if a beneficiary is receiving SSI benefits, any balance in excess of $100,000 will cause their benefits to be suspended until the account falls back below the threshold. Please note, however, that the beneficiary will still maintain theirMedicaid eligibility during the penalty period.
Similar to 529 plans, ABLE accounts are subject to a state-designated ceiling on the maximum amount that can be invested and any excess contributions will be subject to a 6% penalty. Unlike 529 plans, donors cannot front-load an ABLE plan with 5 years-worth of the annual gift tax exclusion.
Distributions for medical and educational expenses, housing and transportation costs, employment and training support, health prevention and wellness, assistive technology, financial services, and more will be considered qualified and will not be subject to federal or state taxation. Distributions for non-qualified expenses will cause the earnings to be taxed at the recipients income tax rate, plus a 10% penalty. Non-qualified withdrawals may also affect eligibility for government benefits if they are not used in the same month as the withdrawal.
Contributions to ABLE accounts may receive bankruptcy protection if the funds were invested more than one year prior to declaring bankruptcy. Contributions may be partially or fully sheltered depending upon certain requirements.
Should the original beneficiary no longer need the funds within their ABLE account, the beneficiary can be changed but there may be tax consequences. If the new beneficiary is a family member and also classified as disabled, there will be no tax penalty for the change. On the other hand, if the new beneficiary is not a family member and/or not classified as disabled, the transfer will be treated as a non-qualified expense and will be subject to the 10% penalty as well as income tax on any earnings.
Additionally, funds in the account after the death of the beneficiary may be paid to the state for medical expenses incurred on behalf of the beneficiary, depending on that states specific law. For example, Pennsylvania has limited circumstances that wouldput the funds at risk. Any remaining funds will not be subject to the 10% penalty but earnings will be taxable.
While ABLE accounts can be a great tool for disabled individuals, other options should be considered to supplement these tax- advantaged plans. For example, it may make sense to establish a third-party special needs trust to accept gifts and transfers from friends and family members. This way, benefactors can be assured that their monies will be used to benefit the specific disabled individual or their heirs, as opposed to being paid out to the state.
If you are caring for, or providing support to, an individual with special needs please be sure to speak with your Hefren-Tillotson financial advisor about all available options.
This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this reportor make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.