TCJA Expands Contribution Options for ABLE Accounts

Congress passed the “Stephen Beck Jr., Achieving a Better Life Experience” Act in 2014 to expand the types of assistance available to help disabled individuals maintain health, independence and quality of life without interfering with access to means-tested government benefits.  The most beneficial change to result from these legislative efforts was the establishment of 529 ABLE accounts.  In the last several years, many state legislatures, including Oregon, have implemented their own version of ABLE accounts and several others are in the process of starting their own programs. The new tax law also made several important changes to 529 ABLE accounts that expand the contribution options for account holders. The purpose of this post is to inform generally about 529 ABLE accounts, provide recommendations on how to use the accounts to their fullest potential, explain how they differ from 529 College Savings plans, and also give a brief status update on Oregon’s ABLE program and the progress neighboring states have made towards establishing their own programs.

What is an ABLE Account?

ABLE accounts are tax-advantaged savings accounts for individuals with disabilities.  Whereas parents and grandparents are usually the owner of a 529 College Savings plans established for their beneficiary children, the 529 ABLE account beneficiary has ownership of the account.  The beneficiary or account holder controls how to spend their funds.  The account holder, family, friends or others can all make contributions to the account, but only with post-tax dollars that will only qualify for a state income tax deduction, if permitted.  Despite this limitation, account holder will not owe any tax on income the account earns during the year.  Typically, individuals that make annual contributions to the account for a single tax year are limited to $15,000, the maximum amount an individual can gift to someone without reporting it to the IRS. Any income the account earns will not be taxed to the account holder.

How are ABLE Account Funds Spent?

Generally, ABLE accounts only allow for an account holder or authorized individual to allocate funds for a “qualified disability expense”.  The Treasury Department and Internal Revenue Service (IRS) have issued proposed regulations that recommend a broad definition of “quality disability expense” to allow dispersal of funds for all expenses that assist the beneficiary in increasing or maintaining their health, independence and/or quality of life.  Qualified disability expenses include but are not limited to basic living expenses, education and tuition costs, medical costs, transportation, assistive technology, personal support services, legal fees, communication devices such as smartphones, housing, oversight and monitoring, mental health services, job training support and financial management services.  ABLE account holders do not need to submit documentation of their expenses to any governmental agency, but ABLE advocacy groups strongly recommend retaining documentation to justify expenses in case of an IRS or Social Security audit.

Who Qualifies?

In order to qualify for an ABLE account, an individual must have significant disabilities that substantially developed before the age of 26.  If the individual already receives SSI/SSDI and meets the age criteria, they will automatically qualify for ABLE.  If the individual does not receive SSI/SSDI but meets the age criteria, they can still establish an account as long as they meet the Social Security criteria for a significant disability and they receive a certification letter from a doctor.

What are the Limits?

Customarily, disabled individuals that wish to qualify for public benefits such as SSI, SNAP, and Medicaid must meet a resource test that limits eligibility to earning more than $700 a month or having $2,000 of owned accessible financial sources.  This threshold forces disabled individuals to remain poor in order to continue qualifying for public benefits.  Congress established ABLE accounts for the purpose of supplementing but not supplanting, financial aid provided by public benefits, private insurance and other resources.  Many states have set the total account limit to around $300,000, with some notable exceptions, and the first $100,000 in ABLE accounts are considered exempt from the SSI $2,000 resource limit.  If an ABLE account exceeds this $100,000 limit, the beneficiary’s SSI cash benefit will be suspended until the account falls back below $100,000.  In contrast, SNAP benefits and Medicaid do not consider ABLE accounts a countable resource for eligibility, and therefore the amount of money in the ABLE account does not affect eligibility for those programs.  With 529 college savings plans, SSI does not consider them as countable resources generally since the parent or grandparent owns the account. Distributions to the disabled beneficiary that exceed the $2,000 resource limit can still trigger ineligibility issues.

Recent Changes

The new tax law signed late last year made several important changes to ABLE accounts.  First, under the ABLE to Work Act, an ABLE account holder who works can contribute an additional amount beyond the $15,000 maximum.  The new limit is either the lesser of the Federal poverty limit for a one person household ($12,060) or the individual’s overall compensation for the whole year.  The legislation also allows an account holder to claim a credit for contributions made to their ABLE account.  The credit is a nonrefundable tax credit for eligible taxpayers making qualified retirement savings contributions.  Second, the ABLE Financial Planning Act, also included in the new tax law, allows ABLE account holders to roll over funds from a regular 529 College Savings plans to ABLE accounts tax free up to the maximum contribution level.  This change helps families who originally established 529 College Savings plans for their children before receiving a child’s diagnosis or for older children who suffered a life-changing event and now need to use their 529 College Savings funds for alternate purposes.  Disability Advocates have proposed legislation to raise the age of onset of disability from 26 to 46 in order to help individuals that incur disabilities later in life to qualify for ABLE accounts but the current 26 age limit is still in effect as of this year.

Differences Between the States

While ABLE is a federal program, the accounts are managed at the state level.  Qualified individuals will need to sign up for either their state’s program or if their state does not offer ABLE, a state’s program that accepts out of state residents.  Currently 30 states offer ABLE and each state often has different program managers, different account limits, state tax deductions for in-state residents, different monthly account/debit card fees and more.  Below is a summary the Oregon, Washington, and Idaho programs.

Oregon

Oregon has launched their own state ABLE program for in-state residents, and even allows out-of-state residents to establish ABLE accounts through the ABLE for ALL Savings Plan.  BNY Mellon manages Oregon plans with four investment options and an additional fee of 0.30% on the investment.  State residents who sign up with the Oregon ABLE Savings Plan will have to pay a $45 annual fee and out-of-state residents who sign up for the ABLE for ALL Savings Plan will have to pay a $35 annual fee.  Oregon allows out-of-state ABLE accounts to roll over into the Oregon ABLE Program without a fee but will charge a $50 fee if rolling over an Oregon plan into a different state.  Oregon does have an income tax and offers a state income tax deduction for Oregon residents who make contributions up to $2,330 for single filers ($4,660 for joint) to ABLE accounts with beneficiaries under the age of 21.  Account holders can also set up a gifting page online where friends and family can contribute funds to the ABLE account directly.  Oregon has set the account limit to $310,000.  A recent Oregonian article highlighted the way that the Oregon program may improve the quality of life for Oregonians.

Washington

Washington State planned to have their own state ABLE account program launch in Fall 2017, but due to unforeseen circumstances referenced in a message from the Washington State Department of Commerce, the program will not launch until sometime in 2018.  Until then, the State recommends that Washington residents establish an Oregon ABLE account and then transfer the account to Washington once the program finally rolls out.  BNY Mellon will manage Washington State plans with four investment options, and there is an annual fee of $35 plus an investment fee ranging from 0.30%-0.38%.  Washington will allow out-of-state residents to create ABLE accounts and will also allow Washington residents to transfer out of state ABLE accounts into a Washington State account with no fee. Since Washington does not have an income tax, there is no state tax deduction offered for in-state residents.  The most important difference to note regarding ABLE accounts established in Washington State is that the total account limit caps at $86,000 to start, far lower than other states with established programs.

Idaho

Idaho does not currently offer its own state ABLE program but allows its residents to open an ABLE account in another state that allows out-of-state residents to register.  The Idaho legislature is currently considering adopting ABLE laws to start its own program but unlike Washington State’s program, there is no current timeframe of when their program will launch.

Come See Us

Both the ABLE to Work Act and ABLE Financial Planning Act included in the new tax law greatly expand the contribution options available to established ABLE account holders and families still deciding.  Every family situation is different and the new options that allow the rollover of 529 College Savings plans could be greatly beneficial to the long-term quality of life for your disabled child or close family member.  While Oregon is currently the only state in the Northwest that has established a state program, we recommend that residents of Washington, Idaho, and other states who are interested in ABLE accounts potentially look into establishing an Oregon account and then rolling the account over once their respective state finally launches their program.

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