The Achieving a Better Life Experience (ABLE) Act allows a person with a disability to establish a savings plan to help pay for expenses related to his or her disability without penalty of losing public benefits. While the ABLE Act is a federal law, ABLE accounts are established and managed under state law. Understanding what an ABLE account is and how to safeguard your benefits can make a considerable difference in your quality of life.
The Need for ABLE Accounts
Many disabled individuals receive a variety of public benefits that assist them with housing costs, health care, income and food, such as HUD assistance, Medicaid, SSI, and SNAP. These are needs-based benefits and the recipient must have limited resources and income to retain eligibility for these benefits. For example, a single SSI recipient must have less than $2,000 in savings and other countable resources. If the recipient of these benefits exceeds this limit, he or she may lose benefits. Even worse, he or she may be required to pay back benefits received when over the asset limit.
The ABLE Act takes into consideration that disabilities often cause additional financial burdens on people. They may have extra costs for:
- Accessible housing
- Accessible transportation
- Health care needs not covered by Medicaid
- Personal assistance devices
- Assistive technology
Recipients can open ABLE accounts without jeopardizing their benefits. These savings are intended to supplement public benefits and other resources, not to take the place of them.
While special needs trusts can help pay disability expenses, these are often administered by someone other than the disabled individual, such as a Trustee, and the funds may have to be distributed to sources other than the recipient.
State ABLE Accounts
Individual states provide ABLE accounts. However, not all states currently have ABLE accounts. Individuals who live in states where ABLE accounts are not in place may be able to open an ABLE account in another state and still derive the same benefits. Each state has its own rules, administrators and costs to manage the account. Some states have different terms for out-of-state residents than in-state residents. Some states do not allow out-of-state residents to establish ABLE accounts in their state.
The Texas Legislature enacted the Texas Achieving a Better Life Experience Act that established the Texas ABLE® Program (“Texas ABLE” or the “Program”), launching its own ABLE account program in 2018. Administered by the Texas Prepaid Higher Education Tuition Board through the Texas Comptroller’s office, the Texas ABLE Program provides Texans with disabilities with the opportunity to save in a tax-advantaged investment account while preserving eligibility for certain means-tested state and federal programs such as Medicaid and Supplemental Security Income.
The Texas ABLE Program is only open to Texas residents who meet federal eligibility requirements: (1) onset of a disability that occurred before the age of 26 and (2) the individual is either entitled to Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) benefits, or has a condition on the Social Security Administration’s list of Compassionate Allowances, or has a physician’s diagnosis of a qualifying condition.
ABLE Account Basics
ABLE accounts are tax-advantaged savings accounts. The disabled person is usually the account holder. Each eligible individual can have only one ABLE account.
Maximum Contributions to ABLE Accounts
To continue receiving SSI benefits, a person must have a balance under $100,000 in an ABLE account. Total annual contributions to the account from all sources cannot exceed the annual gift tax exclusion (currently $16,000). This amount is adjusted occasionally to account for inflation. Anyone, including the disabled individual, family, friends, a trust, or estate, can contribute to an ABLE account.
Some states have work-incentive programs that allow the disabled individual to contribute all of his or her income from work to the account, in addition to the $15,000 limit. However, this option is not typically available if the beneficiary participates in an employer-sponsored retirement account.
If a person has over $100,000 in the account, the first $100,000 is not counted for purposes of determining eligibility for benefits. While the account is over the limit, the recipient’s SSI cash benefits are suspended until the balance falls below $100,000. However, Medicaid benefits are not affected while the account is over the limit.
States have their own established limits for the balance of these accounts that range from $235,000 to $529,000. The limit parallels the limit established for 529 college savings plans in the state.
ABLE Accounts must be set up so that they contain a Medicaid payback provision that uses any remaining funds in the account at the time of the account holder’s death to reimburse Medicaid for services it rendered for the person. The state where the beneficiary lived can make a claim against the account that is equal to the money it spent on the account holder through Medicaid services. However, some states waive this right.
Qualified Disability Expenses
The funds saved in ABLE accounts can be used on qualified disability expenses only without incurring penalties. These expenses are related to the beneficiary’s disability or blindness. These are expenses that assist the beneficiary to maintain or improve health, independence, or quality of life. The expenses may include, but are not limited, to expenses for:
- Employment training and support
- Personal support services
- Health care, including insurance premiums and copays
- Prevention and wellness
- Assistive technology and related services
- Financial management
- Basic living expenses
- Administrative services
- Legal fees
- Funeral and burial
- ABLE account oversight and monitoring
There are special rules that apply if ABLE account funds are used for housing expenses since some public benefits are intended to help pay for these expenses. If the beneficiary takes money out of an ABLE account to pay for housing-related expenses, he or she must spend that money in the same month that it was withdrawn to prevent the funds from being included as a resource that affects their eligibility. Housing expenses include:
- Mortgage payments
- Property insurance
- Real property taxes
- Heating fuel
- Garbage removal
States offer various investment strategies for ABLE accounts. They often offer the same investment options that are available to families with a college 529 savings plan. These may include options with varying degrees of risk. This gives the beneficiary greater flexibility to assess his or her future needs and risk tolerance and to choose an investment strategy that best suits him or her. The Texas ABLE Program offers five different Investment Options. Four are Managed Allocation Options and one is a Bank Savings Account Option.
Setting Up an Account
Setting up an ABLE account is different than setting up other types of financial accounts. Typically, a person completes an online application through a state-designated program or institution. The Texas ABLE Program is an online program, which means you can enroll and manage your ABLE account online. The minimum initial contribution to open an ABLE account is $50, and there is a minimum of $25 for subsequent contributions. To open an ABLE account, you must certify that you possess the appropriate documentation related to your eligibility. Also, if you establish an ABLE account as an “Authorized Legal Representative” on behalf of a Designated Beneficiary, you must certify that you possess the appropriate documents during online enrollment.
Accessing Funds and Deposits
The state determines how ABLE account funds are accessed. Some states provide a debit card. Texas ABLE program offers a reloadable prepaid debit card as an optional service to Texas ABLE account owners. The card can be requested at the time of enrollment or existing Texas ABLE account owners can log into their Texas ABLE account any time and request a card on the Profile tab. Account owners can transfer money from their Texas ABLE account to the Card and use it whenever they need to pay for qualified disability expenses anywhere Visa® debit cards are accepted. Funds on the card are FDIC insured.
In Texas, Account owners can also log in to the online portal to request a withdrawal to pay bills directly from the Account by electronic transfer or check, or to move funds from the Account to a personal checking or savings account and pay Qualified Disability Expenses from the personal account.
The state also determines what form deposits must be in. In Texas, Contributions can be made using one of the following methods:
- By check (excluding starter checks)
- Through an automatic contribution plan (“ACH”)
- By electronic funds transfer (“EFT”)
- By payroll deduction (if your employer provides for payroll deduction and agrees to submit contributions on your behalf); or
- Through a Rollover or Program-to-Program Transfer from another qualified ABLE program or a 529 account.
Fees, Taxes, and Penalties
Fees to open and maintain the account vary by state. In Texas, there is no enrollment fee, but there is a monthly maintenance fee of $4. Also, asset-based fees charged as a percentage of the balance are usually imposed and may vary based on the investment strategy used. There may be additional fees to print statements, for each withdrawal, check processing, and the use of a debit card.
Income earned from ABLE accounts is not taxed. However, if account funds are not used for qualified disability expenses, federal income tax on these amounts may be owed, in addition to a 10% penalty. The use of funds for purposes other than qualified disability expenses can also affect a person’s eligibility for benefits. Distributions made for qualified disability expenses are tax-free. Contributions are made with post-tax dollars. Some states offer an income tax deduction for contributions made to ABLE accounts. ABLE accounts can be audited by the Internal Revenue Service, so you must keep proper records of how you use the funds in your account. Keep receipts in an organized folder or scan them and save them on your device.
Beneficiaries should carefully consider the pros and cons before opening an ABLE account. ABLE accounts are one planning tool that can help people with special needs. Other options such as special needs trusts may also be available, depending on your situation.
A disability planning attorney at Law Office of Adriane S. Grace, PLLC can help you assess your needs and explain which options are best for you. Contact us to schedule your public benefits counseling meeting to discuss further. For more information on the Texas ABLE Program, click here.