Families of Those with Disabilities Can Save on Qualified Expenses
Section 529 of the Internal Revenue Code has been around nearly 20 years now, so most taxpayers with children are aware of the advantages of investing in a “529 Plan” for tax-advantaged savings for future college costs. Though enacted as part of the federal tax code, these plans are administered by states, and many states, such as New York, even offer a tax deduction for investing in them.
A new version of 529 plans is now becoming available. On December 19, 2014, the Achieving a Better Life Experience (ABLE) Act was enacted as section 529A of the Internal Revenue Code. The ABLE Act authorized states to establish programs allowing taxpayers to save and invest funds for disability-related expenses of eligible individuals (defined below).
Even though federally enacted in 2014, it takes states time to adopt the Act and get their programs up and running. The New York ABLE Act became effective on April 1, 2016, but is not yet available for taxpayers to invest in. New York expects the program to launch by year end 2016.
529-ABLE accounts are designed to support individuals with disabilities. To be eligible, an individual must have a disabling condition or blindness that occurred before reaching the age of 26. An account is established in the name of the beneficiary (the disabled person) or his/her parent, legal guardian, or representative, and while there is no deduction for contributions to the plan, earnings on funds invested grow tax-free as long as used on qualified disability expenses of the beneficiary. Qualified expenses include the following:
- Employment training and support
- Assistive technology and personal support services
- Health, prevention, and wellness
- Financial management
- Legal fees
- Funeral and burial expenses
- Other expenses approved by the Treasury
It is not necessary that the beneficiary currently be under the age of 26. Any age may be a beneficiary, as long as the condition was diagnosed prior to reaching age 26. When opening an account, a certification process must be completed to ensure the beneficiary qualifies as an eligible individual.
Even though the account is held in the name of the beneficiary, the intention is to supplement any Federal/State aid the beneficiary may be receiving, such as Medicaid, SSI, and even private insurance. This is important, because the funds in a 529-ABLE plan are generally not included in total assets for federal means-tested benefits. However, if the plan balance exceeds $100,000, distributions to pay for housing will be considered for SSI.
A beneficiary is allowed to have only one ABLE account, and there is a cap on the amount contributed each year, equal to the annual gift tax exclusion (currently $14,000). Excess contributions will be subject to a 6% excise tax, and any distribution made for non-qualifying expenses will be subject to a 10% penalty. Each state will set its own limits on how much can accumulate in the plan. In New York, the plan balance is limited to $375,000. Once the account balance reaches $375,000, earnings will still grow tax-free, but no additional contributions may be made until the account balance falls below that level.
Upon death of the beneficiary, the remaining funds will be used to first pay any outstanding qualified expenses. Any excess remaining will be repaid to the state, as creditor, for reimbursement of any expenses paid by Medicaid for the beneficiary from the date the account was established. Finally, any remaining funds will be distributed to the deceased’s estate or a designated beneficiary. Any portion of that balance that represents earnings on the account will be taxed as investment earnings.
The passage of the ABLE Act provides a long overdue tax-advantaged way for families of those with disabilities to save for the costs of caring for those individuals. For help navigating what the Act can mean for your family, contact us.