The Achieving a Better Life Experience (“ABLE”) Act was signed into law by President Obama in December of 2014. Governor Andrew Cuomo signed New York’s ABLE Act into law in December of 2015, but it took until September 10, 2017 for New Yorkers to be able to open ABLE accounts administered in their home state.
The federal legislation passed with quite a bit of fanfare, some of it warranted and some of it overblown in our opinion, and regulatory and administrative modifications to the program keep coming. The Social Security Administration continues to refine its rules about how ABLE account contributions and distributions will be treated, most recently in April of 2020. We think that many of the program’s biggest promoters – financial services companies and even some disability advocacy organizations – often fail to provide credible comparisons between ABLE accounts and other available tools.
With all that that said, ABLE accounts are here to stay, and they do present some interesting planning possibilities for the right person. Given all the inquiries we have been receiving from our clients and readers of this newsletter, we thought it was time to weigh in.
What are ABLE Accounts?
At the federal level, the ABLE Act amends section 529 of the Internal Revenue Code, creating Section 529A. In order to develop an intuitive grasp of ABLE accounts, a basic understanding of federal college savings plans under section 529 of the Internal Revenue Code is most helpful.
Many readers have established “529 accounts” for their college-bound family members. These college savings accounts grow on an income tax free basis, and withdrawals from these accounts for “qualified education expenses” come out of the plan tax-free, meaning that no one pays income tax on the interest and investment income earned within the account. And in in New York State, the contributing taxpayer receives a State income tax deduction of up to $10,000 per year. As of the date of this newsletter, the federal government does not provide a federal income tax deduction for contributions to a 529 account.
ABLE accounts are similar to 529 accounts in a number of ways, but different in others. ABLE accounts enjoy tax free growth on the income within the account. Future distributions will also be allowed on a tax free basis so long as they are for “qualified disability expenses.” In addition, these distributions generally will not count as “income” to the beneficiary for the purposes of means tested government benefits like Supplemental Security Income (SSI) and Medicaid.
The IRS regulations define “qualified disability expenses” quite broadly. “Qualified disability expenses” include “education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses.”
Subsequent guidance on this definition states that “qualified disability expenses” are expenses which relate to the blindness or disability of the beneficiary of an ABLE account, and which help the designated beneficiary maintain and improve his or her health, independence, or quality of life. The IRS and Treasury Department have directed that these terms be “construed broadly” in order to allow for payment of basic living expenses, and should not be limited to expenses for items for which there is a medical necessity.
We think this broad definition of permissible distributions present some very interesting possibilities for using ABLE accounts to promote independent living for many of our clients.
Who Can Have an ABLE Account
A person can only have an ABLE account if their disability was present and can be documented prior to attaining the age of 26. The simplest way to prove this disability is to show that the individual was receiving SSI or Social Security Disability Insurance (SSDI or SSD) benefits prior to reaching age 26. Continuing receipt of these benefits is de facto confirmation that the individual meets the ABLE Act’s definition of disability.
For those who are not receiving federal disability benefits, the IRS and Department of the Treasury allow an individual with a disability (or the individual’s agent under a power of attorney, parent or legal guardian) to certify the onset date of the disability under penalty of perjury based on a written diagnosis from a physician. The certification is made under penalty of perjury and upon the condition that the person be able to provide the signed physician’s diagnosis to the ABLE program or to the IRS upon request.
Unlike 529 accounts, a per
son with a disability can only have one ABLE account. Generally, contributions to an ABLE account cannot exceed $15,000 in a given year in the aggregate. This means that if the individual with the disability contributes $6,000 of his or her own money, other family members will only be able to contribute a total of $9,000 in that same year. And unlike contributions to a 529 account, New York State does not offer an income tax deduction for contributions to an ABLE account. For some wage earners who have ABLE accounts, the annual contribution limit is higher.
The maximum allowable amount to which an ABLE account can grow without impacting benefits differs from State to State. In New York, our limit is $520,000; meaning that a New York resident can have $520,000 in their ABLE account before there would an adverse impact on his or eligibility for the Medicaid program. The SSI program has a much lower limit, $100,000. In other words, the SSI program will disregard the balance in an ABLE account so long as the amount is at or below $100,000. Any amount above the $100,000 limit is considered a “countable” resource for SSI purposes.
Medicaid Repayment Applies to ABLE accounts
This feature of the ABLE account is often minimized or omitted altogether when proponents present information to the general public. When an ABLE account beneficiary dies, there is a payback to the State Medicaid program for funds paid out on behalf of that beneficiary subsequent to the establishment of the account. This payback exists regardless of who made the contributions to the account.
This is an important point. Family members who choose to fund an ABLE account with their own money can use other planning vehicles – like a third party supplemental needs trust – to set aside funds for a family member with a disability. These trusts have no contribution limit, no limit on accumulated balances, and whatever happens to be left over at the end of the beneficiary’s life can go wherever the parent or grandparent wants it to go, other children or grandchildren for instance.
For a family member who is not expecting to contribute a significant amount of money to an ABLE account, this Medicaid repayment may not be a big deal. But for those who have the financial wherewithal to set aside significant funds for a family member with a disability and who would like to avoid Medicaid repayment in the event of an unexpected passing of the beneficiary with the disability, good planning warrants consideration of alternatives.
Mechanics of New York ABLE Accounts
A New York ABLE account can only be opened by:
1. the eligible individual (the beneficiary with the disability);
2. a parent or legal guardian of the eligible individual; or
3. a person granted power of attorney on behalf of the eligible individual.
ABLE accounts are self-managed accounts, meaning that the “eligible individual” is both the owner (with withdrawal rights) and the beneficiary. In other words, when an ABLE account is established for an individual with a disability, he or she has the right to remove funds from the account, unilaterally and without limitation. For many higher functioning individuals, this is a great benefit. For others, this presents some significant risks.
New York’s ABLE plan has a website which is very user friendly and can be found at www.MYNYABLE.org. And a good summary and comparison of all State plans is available through the ABLE National Resource Center: www.ablenrc.org
When Should Eligible Individuals Consider ABLE Accounts?
We still hear some professionals talk about ABLE accounts as if they have done away with the need for supplemental needs trusts. They have not. Be it the annual contribution limit, the mandatory Medicaid repayment, or the unfettered ability of the eligible individual to access the account without restriction, there are still many situations where a trust is the only viable planning option.
On the other hand, there are some situations where ABLE accounts make a lot of sense.
For an individual with a disability who is cognitively competent and capable of making independent financial decisions, these accounts present a convenient and cost-effective way to save money without worrying about the modest resource limits of the SSI and Medicaid programs. Many individuals with disabilities work full time and could contribute to an ABLE account in lieu of saving money in a traditional bank account, and then use funds in the account for one of the broad categories of expenses permitted under the proposed regulations.
Another interesting possibility is when an individual with a disability receives financial assistance in paying food and shelter related expenses, often through regular contributions from other family members. If the beneficiary is receiving SSI, the financial assistance provided by the family member will have the effect of reducing the monthly SSI check. If the family member funded an ABLE account instead of paying for food and shelter directly, distributions from the ABLE account in most circumstances would not be penalized by the SSI program, allowing the individual with the disability to receive the maximum SSI monthly payment and the financial assistance from the family member.
Finally, an individual with a disability who receives a small inheritance, a modest personal injury settlement, or other unexpected windfall could use the ABLE account as an alternative to a first party supplemental needs trust.
Can (or Should) You Transfer a 529 College Savings Plan to an ABLE Account?
This is a question we have been asked time and again in the last several months. The federal tax cut legislation in 2017 included a provision permitting transfers from 529 college savings accounts into ABLE accounts. Transfers are limited to the annual contribution limit for ABLE accounts, which as noted above is $15,000 in 2020.
But should you transfer from a 529 account to an ABLE account? It depends. 529 accounts allow for greater annual contributions, and they are not limited to individuals having a particular disability onset date (as is the case with ABLE Accounts). The debate among many professionals who practice in this area is whether the use of a traditional 529 account is a better alternative than an ABLE account. In some situations, it may be.
If a parent saves money in a traditional 529 account for a child with a disability and later uses those funds for expenses which are not “qualified education expenses,” the adverse impact is insignificant for many individuals with disabilities. With both types of accounts, only the earnings portion of an improper distribution would be subject to income tax, and both types of accounts impose a 10% penalty if the distribution is not a “qualified” distribution as defined by that program’s rules. However, distributions from a traditional 529 account will not be subject to the 10% penalty if the beneficiary has a disability which prevents him or her from working, whereas a non-qualified distribution from an ABLE account may impact benefit program eligibility. Thus, the cost of obtaining substantial tax savings within the 529 account is the income tax liability on the earnings. For individuals with more significant disabilities who have little or no income, that may be a small and acceptable price to pay.
We can only scratch the surface in a newsletter like this, and in future issues we may scratch this surface again as ABLE accounts become a more permanent part of the disability planning landscape. For now, and as with most planning in this area, the devil is in the details.
Update on the Re-Opening of Wilcenski Pleat Law Offices
Effective June 3, 2020 our office is going to begin seeing clients in person again. In light of current New York State guidance on re-opening, staff and visitors will be monitored for COVID-19 symptoms, access to common areas will be limited, and staff will continue working on rotating schedules in order to limit the number of staff working in the office at the same time.
We will continue to offer and encourage phone and zoom consultations and conferences between clients and attorneys/staff, but we are no longer scheduling remote document signings. With the ability to reopen to the public, in-person signings will ensure that all documents are signed in a manner consistent with existing New York State law.
In our Clifton Park office, we are limiting on-site consultations or signings to two per day, one in the morning and one in the afternoon. This will allow us adequate time for cleaning/disinfecting and limit the number of visitors on site at any one time.
In our Queensbury office, we will only schedule one on-site consultation or signing, as we share space with another law practice that will also only be scheduling one client appointment per day.
Other office procedures and precautions (masking, gloves, etc.) will be explained to the client when the office visit is scheduled.
We expect to revisit our procedures at the end of June as additional guidance becomes available.
We look forward to seeing you soon.