The New ABLE Act – Law Helps the Disabled Gain Greater Control of Their Financial Lives

This new law will allow a disabled individual to establish a tax-free savings account while preserving government benefits. The ABLE savings account is modeled after the so-called 529 College Savings Plan, where funds are contributed on an annual basis, and the income earned is free from tax.

ABLE accounts allow the beneficiary to contribute $14,000 per year, provided the account balance does not exceed $100,000. Based on current tax rates, income-tax savings are minimal. The appeal and protection of the new law is that the individual can have a savings account without jeopardizing Social Security, Medicaid, and other benefits.

Unlike conventional savings accounts, all funds in an ABLE account are subject to payback, meaning that, if the ABLE account’s beneficiary passes away, then the state is entitled to reclaim benefits paid, up to the amount of the account at death. The intention, therefore, is that the funds will be spent on the individual’s needs and expenses, and not saved for a rainy day.

If a disabled person receives a lump sum — for example from an inheritance, divorce settlement, tort injury, retroactive Social Security Benefits, etc. — up to $14,000 may be contributed to an ABLE account without affecting other benefits. In this way, the ABLE account may eliminate the need to set up a special-needs trust or contribute the funds to a pooled trust.

The disabled individuals who will benefit most from the ABLE Act of 2014 are primarily those who do not have significant assets. A number of disabled people may also have ‘third-party’ special-needs trusts, which do not require payback. In this way, trust funds can be preserved for other beneficiaries, while ABLE account funds may be used only for the ongoing needs of the disabled person. ABLE account funds may be used for education, healthcare, transportation, and housing, among other expenses. ABLE accounts will have no impact on Medicaid eligibility.

Many worthy organizations worked for the passage of this bill, including the National Academy of Elder Law Attorneys, the Special Needs Alliance, and the National Down Syndrome Society. The ABLE Act, however, does contain some significant restrictions, including the provision that disability must have been present before age 26. The act, nevertheless, was passed with overwhelming support from both Democrats and Republicans. The House passed it with a vote of 404-17, and the Senate approved the bill by a vote of 76-16. President Obama signed the bill into law before leaving for the 2014 winter holidays.

Disabled persons can start setting up ABLE accounts in 2015, if they can find a bank, broker, or agency to establish the account. While the ABLE Act changes federal law to allow for the savings accounts, each state must now create its own regulations. At this time, it is anticipated that the same banks or brokerage firms who offer 529 College Savings Plans are likely to offer the new ABLE accounts as well.

Living with a disability can be both time-consuming and expensive. There are approximately 58 million individuals with disabilities in the U.S. Given its restrictions, the ABLE Act of 2014 will affect a relatively small portion of those individuals and their families. The act is, however, an important step toward disabled individuals gaining greater control of their financial lives. v