ABLE accounts are the newest tool in the special needs planning toolkit, providing a vehicle that has the potential to benefit millions of families. If you haven’t heard of them yet, ABLE accounts provide families an account to deposit and invest funds for the benefit of their special needs family members, without those funds being counted against them for Supplemental Security Income and Medicaid purposes. Simply put, it’s an easy and inexpensive way to put money away for their future, without having to worry about them losing their government benefits.
Even with all the benefits, it’s important to carefully evaluate how an ABLE account should fit in to your special needs planning. There are several rules built in that in certain circumstances can turn an ABLE account from a benefit to a potential detriment. So, let’s jump in and review how an ABLE account can both help and hurt.
Help: Alleviate spend downs for individuals who work
One of the most enjoyable and empowering things for many individuals with special needs is the ability to work. It can provide purpose, confidence, community and be a great way to earn an income. However, as many with experience will tell you, when it comes to their income, the system is broken. Why? Because the rules are set up so that to continue to qualify for vital benefits, like Medicaid, individuals with special needs can never have $2,000 or more in their names. For many, this leads to a lot of unnecessary “spend down” periods where they have to spend the money, even if they don’t really need to buy anything, to avoid losing benefits.
ABLE accounts have the potential to reduce, if not eliminate, these unnecessary spend down periods because the individuals’ earnings can be contributed to the account, allowing him or her to save money, without the chance of losing benefits.
Hurt: Limited annual contributions to the account
Currently, ABLE account contributions are limited to the IRS annual gift exclusion amount, which is currently $14,000. Now that may sound like a lot of money, but think about an individual with special needs who is contributing a large portion of earning to an ABLE account, and has family members who want to contribute as well. Depending on how much he or she earns, that can eat away a large portion of the limit, leaving less available for others to contribute and potentially missing out on funds that would be beneficial to have for the future.
For families in this situation, or who have the means and desire to contribute more than $14,000 annually, an ABLE account will not be the panacea they might believe it is. It will be important for them to coordinate the funding of other vehicles in their special needs plan or else they could end up leaving a substantial amount that could benefit their loved one with special needs on the table.
Help: Tax-advantaged growth and tax-free distributions
ABLE accounts were created from Section 529 of the tax code, which is the same place 529 college savings plans come from. If you’re familiar with their benefits, you know that you don’t get a Federal tax deduction for your contributions, but they are able to be invested and grow without being taxed. And also, as long as they’re used for qualified education expenses, your distributions aren’t taxed either. Well the same structure holds true with ABLE accounts! This feature is big because it gives you the opportunity to shelter a substantial amount of money from taxes to benefit your loved one with special needs. And, it allows those funds to grow faster than they would in a taxable account.
You might be asking, “what counts as a qualified disability expense?” And the good news is that the answer is quite broad. Expenses that qualify include education, health and wellness, housing, transportation, legal fees, financial management, employment training and support, assistive technology, personal support services, oversight and monitoring, funeral and burial expenses, and more. This gives ABLE accounts a good amount of flexibility. Distributions for expenses that don’t qualify are subject to income tax and a 10% penalty.
Hurt: Balances over $100,000 affect government benefits
An account that provided unlimited tax-advantaged growth and preservation of government benefits would be too good to be true. Even with contribution limits, it’s certainly not impossible for an ABLE account balance to grow into the several hundred-thousand-dollar range after years of funding and growth. In fact, there is an account balance cap in many states, but most of those are similar to the caps on 529 college savings plans at $300,000-$450,000. Given this realization, lawmakers included a rule that says when a beneficiary’s ABLE account exceeds $100,000, their Supplemental Security Income (SSI) payments will be suspended until such a time as the account falls back below $100,000.
This means that contributing too much or having too much growth can cause a well-intentioned ABLE account to be an issue. So, it’s important to remember that even given its many benefits, the ABLE account’s place in planning is not for holding substantial sums of money to benefit an individual with special needs.
Help: Accounts are established through state programs
The world of investments can truly be the Wild West for those who aren’t knowledgeable of where to begin, putting them at a distinct disadvantage. There are so many firms with so many different choices, many of which can be summed up as mediocre, if not downright bad when it comes to performance and fees. Thankfully, like 529 college savings accounts, ABLE accounts are established and maintained by the states. They have chosen the vendor and usually work with them to set up a small number of easy to understand investment portfolios for account holders.
This structure helps keep you out of the Wild West world of investments and does a pretty good job of protecting you from high fees, poor performance, and bad service. However, it’s not a perfect system, because states can still end up contracting with vendors that are only so, so. That’s why it’s important to evaluate your state’s ABLE program with that of other states to find the program that’s best for you. Some states also offer tax benefits associated with using their plan, which is another important factor to keep in mind.
Hurt: “Pay back” provisions are included
If you’re familiar with other special needs planning techniques you may have heard of a “Self-Settled” or “First-Party” Special Needs Trust. These trusts are one in the same and meant to serve as a vehicle for individuals with special needs to hold funds that are in their name, so they can qualify for government benefits. They are generally used for lump-sum settlements or as a repository for structured settlement payments. One of the features of these trusts is called a “pay back” provision. This puts the beneficiary’s state Medicaid agency in a first lien position, and at the termination of the trust or death of the beneficiary, they have the right to reimbursement for Medicaid services provided during the beneficiary’s lifetime from the remaining trust funds.
ABLE accounts share this feature and have a “pay back” provision incorporated into their design. This reinforces the fact that ABLE accounts are not the vehicle for substantial sums of money for an individual with special needs. Since many individuals with special needs have significant medical expenses covered by Medicaid during their lifetime, there is a good chance that after the state comes in for reimbursement, there will be no funds left to go to a successor beneficiary. Keep in mind, this provision’s inclusion is up to each of the states and may be revisited in the future. For example, the State of Pennsylvania has said that as of now, they do not plan to utilize the pay back provision for their state’s ABLE accounts.
Don't hesitate to reach out with any questions or to discuss how an ABLE account can fit into your finances! We'd love to talk to you about how proper Special Needs Financial Planning can greatly benefit you and your loved ones, and open the door to many strategies to provide for a successful future.
Mychal Eagleson, CFP®, AAMS® is the President of An Exceptional Life Financial, a firm that specializes in financial planning for teachers and families with special needs. He frequently writes and speaks on personal finance topics relating to these clients. Mychal also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media. To read more of his articles or learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.