By: Randall A. Denha, J.D., LL.M.
Families caring for disabled individuals got a big boost from Congress in December 2014 with passage of the Achieving a Better Life Experience (ABLE) Act, or so-called ABLE Act. That law created tax-advantaged “529A” accounts that can be used to meet the needs of those living with disabilities — similar to the accounts families use to save for college. It’s a significant change to the financial planning landscape for families of people with special needs. The 529A plan is modeled after the Section 529 College Savings Plans, which are widely used for college planning. The 529A is meant to help people with disabilities as defined under Social Security rules and will allow tax advantaged distributions for certain expenses for the disabled beneficiary including housing, transportation, health and wellness, education and more without disqualifying the disabled individual from Federal and State aid.
The 529A accounts authorized by the ABLE Act are modeled after 529 college savings plans. Here are some specifics about 529A plans, including how they differ from college 529s:
• Families can establish a 529A account for an individual who meets the Social Security Administration’s definition of disabled. That definition requires that a person have a condition that will make him or her unable to participate in “substantial gainful employment” (work for pay, essentially). The condition must be expected to last for at least 12 months or result in the person’s death. Finally, the beneficiary of a 529A account must have been diagnosed with a qualifying disability before age 26.
• Like the college savings version, 529A plans will be established by states. Presumably, the same state agencies that oversee 529 college plans will be responsible for 529A plans.
• There can be only one 529A account in the name of each beneficiary, and the account will normally be located in the state where the beneficiary lives. That’s different from 529 college plans: There can be multiple 529s for a single beneficiary, and an account can be located in any state (though accounts in the state of residence may have better tax benefits). If the beneficiary moved, it may require rolling over the 529A from one state plan to another. That is different from the college 529, for which families can use the best state plan that they can find, including out of state plans.
• Spending for a beneficiary can occur only in his or her state of residence. This will allow simplified compliance verification for federal and state agencies.
• Contributions to a 529A are made with after-tax dollars and are limited to $14,000 a year (in 2016) for each beneficiary from all sources. Individual states may choose to provide additional tax benefits.
• Investment growth in a 529A is tax-free.
• Distributions (withdrawals) from a 529A account are tax-free as long as the money is used to pay for “qualified expenses.” Otherwise, withdrawn earnings are taxed at ordinary income rates, with an additional 10% penalty imposed. “Qualified expenses” include education, housing, transportation, health care expense, employment training and support, and financial management..
• Having a 529A does not disqualify an individual from receiving federal and state aid for the disabled, such as Supplemental Security Income or Medicaid, so long as the amount held in the 529A does not exceed $100,000. Should the balance exceed that amount, benefits would be suspended. They could resume once the balance falls below $100,000 again.
Advantages of a 529A
The 529A comes with built-in benefits such as low maintenance costs (hopefully), tax advantages and the ability for a beneficiary to have up to $100,000 in assets earmarked for his or her care without jeopardizing access to public assistance.
These accounts should be attractive to many middle-class families. Similar to the intent of 529 plans for college bound students, the 529A allows families to set aside money for their disabled loved one and use it as needed, while limiting the harmful impact of unforeseen expenses. These savings accounts can be used for maintaining health, independence and quality of life for those with disabilities without taking away certain essential benefits such as Medicaid.