ABLE accounts are an option for individuals with special needs to set aside funds for their own use – subject to certain limits — that they can control and access without jeopardizing their public benefits such as SSI and Medicaid. In 2014, Congress passed the Achieving a Better Life Experience (ABLE) Act, to allow individuals who have the onset of a significant disability at any time before age 26 and their families the ability to save money in tax-advantaged accounts for “qualified disability expenses.” ABLE accounts are similar to 529 college savings accounts, allowing tax-free growth of investments and tax-free withdrawals provided the withdrawals are spent on qualified disability expenses. This post will discuss the limits on how much can be contributed to an ABLE account – both annually and in total – without jeopardizing public benefits, and the advantages and disadvantages of ABLE accounts.
What are the limits on how much can be contributed to an ABLE Account?
ABLE accounts allow qualifying individuals to contribute and accumulate a substantial amount of money without jeopardizing government benefits, but there are three important limits. First, qualified individuals and their families may contribute up to $15,000 per year (periodically adjusted for inflation), and an individual account owner who earns income may contribute additional funds to their ABLE account (just over $12,000). Second, for individuals receiving SSI, the first $100,000 in the ABLE account is not counted as an available resource for SSI eligibility purposes. However, once a recipient’s ABLE account balance exceeds $100,000, the recipient will no longer be eligible to receive SSI benefits until the account value is below $100,000, although they will still qualify for Medicaid. Third, in Pennsylvania, the maximum permitted ABLE account value is currently $511,758.
What are key advantages and disadvantages?
A big advantage is that an ABLE account beneficiary can access and spend funds in their account without losing eligibility for public benefits. In contrast, a person with special needs cannot access a first or third-party Special Needs Trust or receive distributions from such a trust without jeopardizing their public benefits. Having an ABLE account also gives the beneficiary a sense of independence and control over their own money, which can help them become more self-sufficient.
A second advantage is that funds in the account can be spent on a broader array of expenses than a first or third-party Special Needs Trust, without jeopardizing the beneficiary’s public benefits. “Qualified disability expenses” has been interpreted to include housing, education, transportation, employment, and basic living expenses.
Another advantage is that the funds contributed to an ABLE account grow tax free and are not taxable upon withdrawal provided the funds are spent on qualified disability expenses. Further, although contributions to an ABLE account cannot be deducted from federal income taxes, contributions to a Pennsylvania ABLE account may be deducted from Pennsylvania income taxes.
ABLE accounts, however, have some disadvantages compared to traditional Special Needs Trusts. First, ABLE accounts cannot be opened for someone who becomes disabled after age 26, unlike a first or third-party Special Needs Trust. Second, while a Special Needs Trust can hold an unlimited amount of funds, ABLE accounts are limited in how much money they can hold and the beneficiary can only have one ABLE account. As noted above, an ABLE account can only hold $100,000 without affecting eligibility for SSI benefits, and the maximum ABLE account balance permitted under Pennsylvania law is currently $511,758. Further, unlike a third-party Special Needs Trust, an ABLE account has a Medicaid payback provision. This means if there are funds remaining in the beneficiary’s ABLE account after their death, those funds will be used to repay Medicaid for Medicaid benefits provided to the beneficiary after the ABLE account was established.
If you live in Jenkintown, Eastern Montgomery County or Bucks County, and are considering an ABLE account, or other special needs planning, please contact me.