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Early in 2014 Congress passed legislation creating special accounts for persons with disabilities known as the ABLE Act (“Achieving a Better Life Experience”– who thinks of these names?); Pennsylvania’s Senator Casey was one of the Bill’s prime sponsors.

To summarize, the 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. 

  • 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 law 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 are expected to do so beginning January 1, 2016. Pennsylvania is not one of these States. At this point, 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As originally enacted, the law required a beneficiary to use the ABLE Act provided for in the State of his residence.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 “PATH Act (“Protecting Americans from Tax Hikes Act of 2015") signed at the same time as the Omnibus Budget Bill, and Section 303 of PATH eliminates the residency requirements for ABLE Act accounts. Persons who were disabled prior age 26 along with their parents and care givers may expect a number of promotional activities by the States which 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 which rely on SSI status, like 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 (“ISM”) 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% 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.

 

*Certified as an Elder Law Attorney by the National Elder Law Foundation

 

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