On December 4, the IRS issued a Newswire about new ABLE accounts that benefit adults with disabilities and changes from recent federal tax reform. In September, we posted a blog about ABLE accounts, explaining that they were created as a vehicle for saving money to benefit disabled adults that would not put them in jeopardy of having too many assets to qualify for the major public-benefits programs that operate as their lifelines — namely Medicaid (Health First Colorado) and Supplemental Security Income or SSI through the federal Social Security Administration or SSA.
To put the significance of ABLE accounts into perspective, usually a disabled adult would receive Medicaid for health care and often also for residential care as well as sometimes SSI as a small monthly cash benefit that can be used for support and basic needs. Both programs have asset limits, so usually such a recipient cannot go over having $2,000. This incredibly low monetary limit means that the individual cannot save up for larger purchases without risking the loss of basic government supports. Basically, forced impoverishment is the price tag for receiving basic living supports.
Now, money in an ABLE account will not jeopardize Medicaid or Health First Colorado benefits and only money over $100,000 will count as an available asset for SSI purposes. The upper limit to the account size in Colorado is currently $400,000.
In every calendar year, up to $15,000 (or the current annual gift tax exclusion level) may be deposited into an ABLE account. Anyone can contribute, usually relatives, friends or the individual. According to the IRS, as of 2018, if a disabled account owner/beneficiary earns wages, he or she can deposit an additional amount equal to the federal poverty line. In 2018 in the continental U.S., this is an additional $12,140. (This deposit from earnings is not allowable if the individual’s employer makes retirement plan contributions for them.)
The IRS also notes:
- Still subject to the $15,000 cap, money can be rolled over to an ABLE from a 529 educational account, whether the disabled person or another qualifying family member is the 529 beneficiary.
- A disabled beneficiary with a low- or moderate-level income level who contributes to an ABLE account may also qualify for the Saver’s Credit on their tax return. The credit maximum is $2,000 for an individual, depending on income level.
Putting ABLE in perspective
The purpose of ABLE accounts is to help with more major disability-related expenses, not with day-to-day miscellaneous spending. Only distributions or withdrawals for “qualified disability expenses” are free from taxation such as those for:
- Personal support services
- Assistive technology
- Employment supports
- Employment training
- Health care
For example, a disabled person may desire to purchase a technological communication device at $5,000 to help him or her integrate better into the community. Without an ABLE account, he or she could not save the amount needed without being vulnerable to termination from Medicaid and SSI. Using ABLE, the funds could safely grow to the level needed without fear of losing government benefits and then withdrawn without taxation for purchasing the device.
For miscellaneous daily living expenditures like buying coffee or lunch, the individual would normally use instead a regular checking or savings account or even cash, usually from earnings, SSI payments or Social Security Disability Insurance benefits, depending on the individual circumstances.
ABLE accounts do not replace estate planning for families with disabled loved ones to plan for. It still may be advisable to use special needs trusts or other vehicles, but an ABLE account may be an important new tool in the toolbox.