Early in 2014, Congress passed legislation creating special accounts for persons with disabilities, the Achieving a Better Life Experience Act (who thinks of these names?); Pennsylvania’s Sen. Bob Casey was one of the bill’s prime sponsors.
To summarize, the ABLE Act provides that a person who became disabled prior to age 26 may establish an account, similar to a special needs trust, to accumulate funds to pay for qualified disability expenses. The following provisions apply:
▪ Provided the account is less than $100,000, it will not count as a resource for Supplemental Security Income purposes.
▪ Income accumulated within the ABLE account is not subject to income tax as earned.
▪ Managed by the person with disabilities rather than a trustee, if funds are used for “qualified disability expenses,” there is never any income tax.
▪ Any funds remaining at the death of the beneficiary are to be used to pay back the state for any benefits that the beneficiary has received, although funds may also be rolled into another ABLE account for a family member who is also disabled.
The ABLE Act is tax legislation, similar to the Act creating Section 529 education accounts. Like Section 529 plan accounts, ABLE requires implementation by each individual state. A number of states were expected to do so beginning Jan. 1. Pennsylvania is not one of these states, although there are recently established Supplemental Security Income procedures and proposed IRS regulations governing these accounts.
As originally enacted, the law required a beneficiary to use the ABLE Act provided for in the state of his residence. A little publicized provision of Congress’s recently passed Protecting Americans from Tax Hikes Act eliminates the residency requirements for ABLE Act accounts. Those who were disabled prior to age 26, along with their parents and caregivers, may expect a number of promotional activities by the states that have active programs.
In order to evaluate these programs, it is important to understand how the ABLE Act works.
There can be only one ABLE Act account for each person, although more than one person may make deposits into that account. However, deposits from all sources may not exceed the annual gift tax exclusion, presently $14,000. Contributions must be made in cash or cash equivalents. If the account balance grows to more than $100,000, SSI benefit payments are suspended, but the person does not lose any other benefits that rely on SSI status, such as Pennsylvania Medical Assistance. Once the account level dips to $100,000, SSI benefits are restored.
Qualified disability expenses are those related to the person’s disability including education; housing; transportation; employment training and support; assisted technology and personal support services; health prevention and wellness; financial management; administrative services; legal fees; expenses for oversight and monitoring funeral and burial expenses; and basic living expenses. There are special rules relating to ABLE distributions and SSI In-Kind Support and Maintenance expenditures. The payback provisions (requiring that state’s recovery of the benefits paid to the disabled person up to the amount of the account), applies both to money deposited by the beneficiary as well as contributions from by third parties, unlike third party special needs trusts.
The IRS has promulgated regulations dealing with the registration on an ABLE Act and substantiations of distributions which are not for qualified disability expenses will be subject to a 10 percent surcharge as well as income tax on any income distributed. In addition, the Social Security Administration has published its operations standards for dealing with ABLE Act accounts for SSI beneficiaries.
Links to the ABLE Act, the PATH Act, a chart showing ABLE Implementation Status in each state, SSI operation standards and draft IRS regulations and reporting forms, are on our website, www.centrelaw.com.
Amos Goodall is a certified elder law attorney practicing in State College with Steinbacher, Stahl, Goodall & Yurchak. He is also a fellow of the American College of Trust and Estate Counsel and was recently listed by Best Lawyers as the 2015 Best Elder Lawyer in the Harrisburg area, which includes central Pennsylvania.