Achieving a Better Life Experience (ABLE) Accounts
Achieving a Better Life Experience (ABLE) Accounts helps people with disabilities remain eligible for Medicaid and Supplemental Security Income (SSI) while having significant financial resources.
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Program Description
In December 2014, congress passed legislation (the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014) that created a tax-advantaged financial account which helps individuals with disabilities to pay for disability-related expenses. Similar to other bank accounts, an Achieving a Better Life Experience (ABLE) account can be opened online. Each state has its own version of the account and you’re not limited to using your state’s account program. Indiana’s program is called INvestABLE. INvestABLE accounts have six different investment options ranging from aggressive to more conservative options.
The Achieving a Better Life Experience (ABLE) Account is available to individuals who meet certain criteria, detailed in the Designated Beneficiary section below.
Designated Beneficiary
A designated beneficiary is the person who owns the money in the Achieving a Better Life Experience (ABLE) Account. To be considered a designated beneficiary, an individual must be considered an “eligible individual” by meeting the following requirements (as found in the Social Security Administration Policy Manual):
a. Be eligible for Supplemental Security Income (SSI) based on disability or blindness that began before age 26; or
b. Be entitled to disability insurance benefits (DIB), childhood disability benefits (CDB), or disabled widow’s or widower’s benefits (DWB) based on disability or blindness that began before age 26; or
c. Certify (or an agent under a power of attorney or, if none, a parent or guardian must certify) that the individual:
• has a medically determinable impairment meeting statutorily specified criteria or is blind; and,
• the disability or blindness occurred before age 26.
The designated beneficiary is considered the “First Party” while others who contribute to the account (who aren’t the designated beneficiary) are “Third Party” contributors. The section that follows provides further information about these two types of contributors.
Third-Party vs. First-Party Contributions
When someone other than the designated beneficiary contributes to the account (like a parent or grandparent), that contribution is a third-party contribution. The amount that a third party can contribute to an Achieving a Better Life Experience (ABLE) Account is based on the Internal Revenue Service (IRS) annual gift limits. In 2020, the third-party contribution limit is $15,000.
A designated beneficiary who’s employed can contribute to the Achieving a Better Life Experience (ABLE) Account directly, this is called a first-party contribution. First-party contributions are subject to the same limits as third-party contributions, the total of all contributions must be less than the limit ($15,000 in 2020).
In certain situations, the designated beneficiary may be able to make additional contributions above the annual limit. If the designated beneficiary does not contribute to an employer-sponsored retirement plan at work, then the designated beneficiary can make additional contributions. The limit on these additional contributions is the designated beneficiary’s income for the year or the federal poverty level for the state where the individual resides, whichever is smaller. In 2020, for Indiana, the poverty line is $12,490 for a single person.
Account Balance Limit
There are rules unique to each state about how much money the account can hold. In Indiana’s version of the Achieving a Better Life Experience (ABLE) Account (known as an INvestABLE account), the maximum balance an account can have is $450,000.
How does an Achieving a Better Life Experience (ABLE) Account help someone remain eligible for other programs?
One reason to establish an Achieving a Better Life Experience (ABLE) Account is to organize financial resources in a way that helps the beneficiary remain eligible for other assistance programs, like Supplemental Security Income (SSI). The individual (financial) resource limit for Social Security Programs is $2,000, meaning that individuals who have more than $2,000 in cash and other assets won’t be able to receive Supplemental Security Income (SSI), for example. In Indiana, this $2,000 individual resource limit also applies to certain categories of Medicaid.
Due to additional expenses that come from living with a disability, this resource limit makes it difficult for a person with a disability to become self-sufficient. Like the rules of other programs, there are certain resources that are not counted or ignored. These may be referred to as exempt resources when reading program policy manuals.
Achieving a Better Life Experience (ABLE) Accounts and Supplemental Security Income (SSI)
The Achieving a Better Life Experience (ABLE) Account can have up to $100,000 before eligibility for Supplemental Security Income (SSI) is affected. This means the designated beneficiary can have a sizeable amount of funds available to pay for Qualified Disability Expenses (QDE) and still be eligible to receive Supplemental Security Income (SSI) payments.
As the account grows to more than the $100,000 limit (and assuming the designated beneficiary doesn’t have countable resources above the $2,000 individual resource limit outside of the Achieving a Better Life Experience (ABLE) Account) the Supplemental Security Income (SSI) payments become suspended. A person who stops receiving Supplemental Security Income (SSI) will likely have to use funds from the Achieving a Better Life Experience (ABLE) Account to pay for his or her living expenses. Eventually this may cause the account balance to drop below $100,000. Once the account balance is below the limit, the person can begin receiving Supplemental Security Income (SSI) payments without having to reapply for benefits.
Achieving a Better Life Experience (ABLE) Accounts and Medicaid
For the purposes of Medicaid (as described in section 2615.10.30 of the Indiana Medicaid Policy Manual), Achieving a Better Life Experience (ABLE) Accounts are exempt regardless of the balance of the account. Given the maximum amounts allowed in these accounts, a person with a disability could retain Medicaid benefits while having sizeable investments which could be used to cover many living expenses.
In these circumstances, the government has the right to be “reimbursed” for the expenses Medicaid covered during the life of the designated beneficiary. These are known as “Estate Recovery” rules and they apply when the designated beneficiary dies. The State will make a claim on the assets held in the Achieving a Better Life Experience (ABLE) Account and the estate will be required to pay back some or all of what was spent on behalf of the designated beneficiary.
Account Tax Advantages
A tax-advantaged account means that taxes paid are lower when using an Achieving a Better Life Experience (ABLE) Account rather than another type of bank account, in certain circumstances. When developing a long-term financial plan, the Achieving a Better Life Experience (ABLE) Account can help a person with a disability transition to self-sufficiency. There are other accounts and legal instruments available, however, that may or may not be beneficial based on individual circumstances such as first and third party versions of Special Needs Trusts (SNT) and Pooled Trusts.
Tax-Deferred Growth and Tax-Free Withdrawals for Certain Expenses
A major tax advantage for Achieving a Better Life Experience (ABLE) Accounts is the fact savings can grow tax-free, this is referred to as “tax-deferred.” The funds in the account can be invested in easy-to-understand options. These investments can grow over time and provide a regular source of funds for the beneficiary to use for various expenses.
Another tax advantage available with these accounts is the ability for a beneficiary to avoid paying taxes on money taken out of the account if it’s used for Qualified Disability Expenses (QDE). This allows beneficiaries to get help paying for many life expenses without becoming ineligible for programs like Medicaid and Supplemental Security Income (SSI).
The Retirement Savings Contributions Credit (Saver’s Credit)
Starting in 2018, Achieving a Better Life Experience (ABLE) Account owners, who are working, may be eligible for an additional tax credit commonly known as the Saver’s Credit. This credit is available for low to moderate income earners who contribute to certain types of financial accounts.
In 2020, single tax filers whose Adjusted Gross Income (AGI) is at or below $32,500 can earn a tax credit on a portion of their savings. For married filing jointly tax filers, the 2020 Adjusted Gross Income (AGI) limit for eligibility for the Saver’s Credit is $65,000 or twice the limit of the single filer.
Depending on the tax filer’s actual income amount, the filer may be eligible for a tax credit equal to 50%, 20%, or 10% of the amount saved in a specified type of financial account.
Tax credits are different from tax deductions and understanding the difference can help you make better financial decisions related to tax planning. Both tax credits and tax deductions change the amount a person is required to pay in taxes, known as the tax liability. Taxes are a complicated subject and the following example is simplified for illustration purposes. You may benefit from professional assistance, perhaps through a Certified Public Accountant (CPA), if you need additional help as it relates to tax planning.
As an example, a person who has a $1,000 in taxable income (after taking into account all other deductions and adjustments), would be required to pay 10% of that amount in federal income taxes. This means he or she would have $100 as a tax liability. A $500 tax deduction would reduce his or her taxable income by $500, which would reduce the amount they need to pay in taxes from $100 to $50 (10% of $1,000 minus the $500 tax deduction).
If the $500 was a tax credit, rather than a tax deduction, then the person’s $100 tax liability would be reduced to $0 and an additional $400 would be paid to the person as a tax refund. As shown, tax credits can create a payment to the person who is eligible to receive them. Tax deductions cannot cause you to earn a larger refund in the same way.
You can learn more about the Saver’s Credit by reviewing the IRS Form 8880, Credit for Qualified Retirement Savings Contributions.
Qualified Disability Expenses (QDE)
A Qualified Disability Expense (QDE) is an expense related to a person’s disability. There are certain categories of expenses which are considered Qualified Disability Expenses (QDE). According to the Social Security Administration (SSA) Policy Manual, the following are Qualified Disability Expenses (QDE):
• Education;
• Housing;
• Transportation;
• Employment training and support;
• Assistive technology and related services;
• Personal support services;
• Health;
• Prevention and wellness;
• Financial management and administrative services;
• Legal fees;
• Expenses for ABLE account oversight and monitoring;
• Funeral and burial; and,
• Basic living expenses.
The definition of “Housing” expenses includes the following (also mentioned in the Social Security Administration (SSA) Policy Manual):
• Mortgage (including property insurance required by the mortgage holder);
• Real property taxes;
• Rent;
• Heating fuel;
• Gas;
• Electricity;
• Water;
• Sewer; and
• Garbage Removal;