After having a child, our clients are often eager to begin saving for future college education expenses. For many parents, that means opening a 529 College Savings Plan. However, what should parents do when their child is born - or later diagnosed with - a disability severe enough to reduce the likelihood that he or she will attend college at all? Is there a way for those parents to save and provide for their child with a disability?
Prior to the enactment of the Achieving a Better Life Experience Act (ABLE Act) in 2014, the only way those parents could save for their child without jeopardizing their child’s eligibility for government benefits was by establishing a supplemental needs trust. Although establishing such a trust can be an effective planning tool, it can also be complicated and costly. With the passing of the ABLE Act, parents of children with disabilities can now save for their children’s future in a tax-advantaged account, without putting their child at risk of losing access to government benefits.
What is a 529 ABLE?
A 529 ABLE is a savings vehicle designed to help individuals with physical and mental disabilities put aside money to pay for qualified disability expenses. Like a 529 plan, money is contributed with after-tax dollars and, as long as the money is used to pay for qualified expenses, the money grows tax-free and is withdrawn tax-free.
A crucial benefit of ABLE accounts is that individuals may accumulate up to $100,000 in an ABLE account without impacting their eligibility for means-tested programs like Supplemental Security Income. In addition, Medicaid eligibility is completely unaffected by contributions to, savings in, or qualified distributions from an ABLE account. This is a critical feature of the law for people with disabilities. Under current law, an individual must have less than $2,000 of savings or other assets ($3,000 if married) to qualify for Medicaid or Supplemental Security Income. With an ABLE, disabled individuals can save up to the 529 limit for their state ($350,000 in Tennessee in 2022) while still being eligible for Medicaid and can have up to $102,000 in savings before their SSI benefits start to be reduced or cut off.
What is a “qualified expense”?
Congress has defined a qualified expense broadly. According to the federal definition, qualified disability expenses are “any expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary.” Federal and state (TN) laws explicitly state these categories as qualified disability expenses:
- Training and support
- Assistive technology
- Personal support services
- Health, prevention, and wellness
- Financial management
- Administrative services
- Legal fees
- Expenses for oversight and monitoring
- Funeral and burial expenses
Who is eligible?
An individual, whose blindness or disability occurred on or before the participant’s 26th birthday, may qualify to open an ABLE TN account by meeting one of the following criteria:
- Is eligible to receive Supplemental Security Income.
- Is eligible to receive Social Security Disability Insurance,
- Or has been diagnosed by a qualified physician with a physical or mental disability resulting in marked and severe functional limitations that is expected to last no less than 12 months.
An individual not eligible to receive SSI or SSDI may qualify based upon an impairment found within one of the following lists:
- Social Security Administrations (SSA) list of Compassionate Allowances
- SSAs List of Impairments for Adults (Part A)
- SSAs List of Impairments for Children (Part B)
ABLE Accounts and Your Comprehensive Financial Plan
ABLE accounts are an inexpensive and effective way to save for future expenses of a child with special needs. However, they are not a replacement for special needs trusts. For many children and their parents, an ABLE account will be insufficient on its own and will need to be complemented with a special needs trust, as well as other savings, investment, and insurance vehicles as part of the comprehensive financial plan.
Anyone considering an ABLE should consult with an attorney and a financial advisor to determine the best method for saving and investing funds related to the individual’s specific needs.
Other Frequently Asked Questions
How much can I contribute? Like a 529 plan, the annual contribution limit equals the annual federal gift tax exclusion amount ($17,000 in 2023). However, unlike a 529, this annual limit applies to the aggregate of all contributions per beneficiary, not per donor. Thus, the aggregate total of all contributions from family members, friends, and the disabled individual cannot exceed the annual gift tax exclusion amount.
What is the cost? For the Tennessee ABLE, there are no application fees, sales or distribution charges, maintenance, or advisor fees. The only fees are asset-based fees based on the investment selection. For the Tennessee ABLE, the expense ratios range from 0%-.62%.
What are the investment options? It depends on the state-sponsored plan. The Tennessee ABLE, for example, provides 14 investment options from Vanguard and Dimensional Fund Advisors.
Who can contribute? Relatives, friends, or the individual with the disability.
What is the penalty if I use the funds for a non-qualified expense? If funds are withdrawn for a non-qualified expense, the beneficiary will pay income taxes on the earnings, as well as a 10% penalty.
Can I rollover money from a 529 College Savings Plan to an ABLE account? Yes, recently enacted tax changes allow savings in a 529 account to be rolled into an ABLE account (up to $17,000 annually in 2023).
Do I have to use my state’s ABLE program? No. Although some states restrict eligibility to state residents, many state ABLE programs are available for nationwide participation. The TN ABLE, for instance, is only open to state residents. However, ABLE programs in Alabama, Colorado, North Carolina, Virginia, and others are not restricted to their state residents.
Are ABLE contributions eligible for 529 state income tax deductions? At this time, they are not eligible for this state income tax benefit.
https://www.ssa.gov/disability/professionals/bluebook/ChildhoodListings.htm. Note that Autism Spectrum Disorder is specifically named on the SSAs list of impairments for children. Thus, any child diagnosed with autism is eligible to open a 529 ABLE.
One major difference is that after the beneficiary’s death, states can seek repayment from ABLEs for the cost of care covered by Medicaid.
To compare state ABLE accounts, see http://www.ablenrc.org/state_compare.