ACHIEVING A BETTER LIFE EXPERIENCE (ABLE) ACT OF 2014

Sean Urbany, CPA

Earlier this week, when the Senate passed the Tax Increase Prevention Act of 2014, they not only approved a number of tax extenders, but they also passed the Achieving a Better Life Experience (ABLE) ACT as well. The ABLE Act, which applies to tax years beginning after December 31, 2014, allows each state to establish a new type of tax-advantaged savings program for disabled individuals and families with disabled children. These new accounts will operate in a similar fashion as 529 college savings accounts, where contributions can be made to an account for a qualified beneficiary and the earnings and qualified distributions will not be subject to income tax.

Qualified Beneficiary

An ABLE account can only be established for a qualified disabled beneficiary. A qualified beneficiary can be determined in two ways:

  1. The individual is entitled to disability benefits under the Social Security disability insurance program or the Supplemental Security Income (SSI) program, and the individual became disabled before reaching the age of 26; or
  2. A disability certification for the individual, signed by a licensed physician, has been filed with the IRS for the tax year certifying that the individual has a medically determinable physical or mental impairment and that the disability occurred before the individual reached the age of 26.

It is important to note that in both scenarios, an individual must have become disabled before reaching the age of 26.

Contributions

Each eligible beneficiary is limited to one ABLE account. Contributions are made on an after-tax basis and thus not deductible by a contributor. The maximum amount of annual contributions to each ABLE account is limited to the annual gift tax exclusion amount – $14,000 for 2015. Note that this contribution limit is per account/beneficiary, not per contributor.

Earnings

The funds held in an ABLE account are able to grow and accumulate tax-free. Earnings on the funds held in an ABLE account are not subject to taxation, as long as the distributions are used to pay for qualified expenses.

Distributions

Distributions from an ABLE account are not includible in gross income and therefore not subject to taxation as long as the distributions meet two criteria:

  1. Distributions are used to pay for qualified disability expenses, and
  2. Distributions are not in excess of qualified disability expenses.

Qualified disability expenses are defined as expenses related to the disability of the account beneficiary including expenses for 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 services.
For distributions from an ABLE account used to pay for nonqualified expenses or in excess of qualified expenses, the nonqualified portion of the distribution is includible in gross income and also subject to an additional 10% tax.

Federal Means-Tested Programs

Funds held in ABLE accounts are disregarded in determining eligibility for federal means-tested programs. However, there are two exceptions to this rule:

  1. Distributions for housing expenses under the supplemental security income (SSI) program;
  2. Amounts in an ABLE account exceeding $100,000.

As these new accounts were designed to supplement, not replace, benefits already being received by a beneficiary, if an individual has excess resources based on the exceptions above, SSI payments would be suspended; however, this does not suspend or affect Medicaid eligibility of the individual.

Over the course of 2015, we expect states to begin implementing each of their ABLE account programs and to begin accepting contributions to these plans. The new ABLE plans could be a great tax savings opportunity for disabled individuals or families with disabled children. If you have any further questions on this subject, we recommend that you consult your tax or financial advisor.

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