ABLE Accounts — a tool for special needs planning

The Achieving a Better Life Experience (ABLE) Act was passed in December 2014. On April 18, 2016, Pennsylvania enacted its own legislation on ABLE accounts and in 2017 the Pennsylvania Department of Treasury began allowing individuals to enroll and open ABLE accounts. Pennsylvania ABLE accounts allow eligible individuals with qualified disabilities to save tax-free for disability-related expenses without jeopardizing any means-based government benefits the individual may be receiving. Although the law has been around for over five years, many families are unaware of the benefits of ABLE accounts for individuals with a disability.

To be eligible to establish an ABLE account the account owner must be blind or disabled according to Social Security guidelines, and the disability must have occurred before the individual reached the age of twenty-six (26) years. An individual is only permitted one ABLE account.

The annual contributions to the ABLE account are limited to the annual federal gift tax exclusion, for 2021 this amount is $15,000. This money can come from the individual with the disability or anyone else who may wish to give the individual money. However, the cumulative contributions for any one beneficiary cannot exceed $15,000 per year.

Contributions to ABLE accounts are not tax deductible on your federal income tax return. However, the funds in the ABLE account grow tax free. When distributions are made, as long as the withdraws satisfy the qualified disability expense definition, then the funds withdrawn are tax free. If the distribution does not meet the standard for a qualified disability expense, the funds distributed are subject to both income taxation and a penalty of 10%. Contributions to a PA ABLE account may be deducted from state taxable income. A qualified disability expense is any expenses related to the individual’s disability, which may include health, housing, transportation, employment training, assistive technology, education, legal fees, and other costs.

For individuals that are on Medicaid and or SSI the beneficiary can save money in an ABLE account without the funds counting as a resource, and SSI eligibility is not affected by account balances of $100,000 or less. In addition, distributions from ABLE accounts do not count as income for SSI or Medicaid. The account maximum for Medicaid purposes is $511,758.

It is important to understand that although ABLE accounts are a great tool for individuals with disabilities, this does not replace the need to establish a Third-Party Special Needs Trust where a family member or friend plans to leave an inheritance to an individual that is on SSI and or Medicaid.

When enacted, the federal ABLE Act provided that a state could assert a payback from ABLE Accounts upon the death of the beneficiary for any Medical Assistance that the state paid to the beneficiary after the establishment of the ABLE Account. However, Pennsylvania decided in its enabling legislation that it will not assert a payback directly against the ABLE account. However, if the beneficiary received Medicaid benefits in another state, that state may seek reimbursement. Additionally, when the beneficiary dies, the balance of an ABLE account must either be rolled over into the account of a family member or paid to the beneficiary’s estate. Once distributed to the estate of the beneficiary, Pennsylvania will seek repayment of Medicaid benefits through its estate recovery program.

The legal advice in this column is general in nature, consult your attorney for advice to fit your particular situation.