Take-Away: The 2017 Tax Cut Act made positive changes to Achieving a Better Life Experience (ABLE) plans, which are designed to help disabled individuals and their families pay for qualified disability expenses on a tax-favored basis.

Background: ABLE accounts were originally effective beginning in 2015. If correctly established, the earnings in an ABLE account are not subject to income tax while held in the account. When the funds held in the ABLE account are withdrawn to pay for an eligible individual’s qualified disability expenses, the earnings on the account are not subject to federal income tax. An ABLE account functions much like it’s cousin, the IRC 529 Account for qualified higher education expenses. [I say  cousin since the ABLE Tax Code section is IRC 529A.]

  • Benefits: The other benefit of an ABLE account, beside tax-free growth and withdrawals used to pay qualified disability expenses, is that ABLE account permits a person with disabilities to open an account to save for their disability-related expenses without jeopardizing Medicaid coverage and other federal benefits, so long as the ABLE account balance does not exceed $100,000. Hence, the disabled individual’s eligibility for Supplemental Security Income (SSI) benefits are not jeopardized if that individual maintains an ABLE account.
  • Limitations: Like a regular IRC 529 account, an ABLE account must be established and maintained by a state or state agency and it can only accept cash or cash equivalents. Moreover, a disabled individual can have only one ABLE account. Perhaps the biggest drawback to an ABLE account is that contributions to the ABLE account cannot exceed the annual exclusion amount for the year- in 2018 that amount is $15,000. As a generalization, no more than $100,000 can be held in an ABLE account before it loses its tax-free benefits.
  • Qualified Disability Expenses: The Regulations define qualified disability expenses as any expenses that are related to the eligible individual’s blindness or disability that are incurred for the benefit of that designated beneficiary for: education, housing, transportation, employment training and support, assistive technology, personal support services, health, prevention and wellness, financial management, legal fees, oversight expenses, and funeral and burial expenses. The Regulations  also include within this definition ‘including expenses that are for the benefit of the designated beneficiary in maintaining or improving his or her health, independence or quality of life.’ Thus, arguably an expenditure for the disabled individual’s quality of life from his/her ABLE account would be eligible for non-tax treatment. The Regulations go on to state that qualified disability expenses include basic living expenses which are not limited to items for which there is a medical necessity or which solely benefit the disabled individual.  In short, the concept of qualified disability expenses paid from an ABLE account is pretty broad.

2017 Tax Cut Act Changes to ABLE Accounts: Several changes were made to ABLE account rules as a result of the 2017 Tax Cut Act (the Act), including:

  • Contributions: As noted earlier, the annual contribution limit to an ABLE account normally is the annual exclusion amount: $15,000. But the contribution limit to an ABLE account can now be increased in certain circumstances. A designated beneficiary may contribute additional amounts to their ABLE account equal to the lesser of: (i) compensation includible in the designated beneficiary’s gross income for the tax year; or (ii) the poverty line for a one-person household for the prior calendar year. Thus, some eligible individuals will be able to fund their ABLE account with a greater amount than just the annual exclusion amount ($15,000 in 2018). The burden is on the designated disabled beneficiary to show that he/she has not exceeded this new contribution limit.
  • Saver’s Credit: The saver’s credit is a nonrefundable tax credit for eligible taxpayers for qualified retirement savings contributions. The maximum annual contribution eligible for the saver’s credit equals $2,000 per individual, dependent on the individual’s reported adjusted gross income for the year. The Act now permits a designated disabled beneficiary to claim a saver’s credit for his/her contributions made to their ABLE account.
  • 529 Rollover: Both IRC 529 and IRC 529A permit rollovers of account balances to another similar account for the same designated beneficiary, or for a member of the family of the account’s designated beneficiary. These rollovers are generally income and gift tax free. However, rollovers out of a 529 education account to an ABLE disability account were not permitted. The Act amends IRC 529 to permit rollovers out of a 529 education account into an ABLE disability account on a tax-free basis. However, the amount of any rollover from a 529 education account to an ABLE disability account cannot, when added to all other contributions made to the ABLE account for the calendar year, exceed the ABLE annual contribution limit identified above.
  • Sunset: Like many of the other taxpayer-friendly provisions of the Act, these liberalization rules of IRC 529A disability accounts will sunset on December 31, 2025.

Conclusion:  The Act’s changes are intended to help disabled individuals save more to help themselves with their disability related expenses, with an increased annual contribution limit, use of the saver’s credit, and the ability to move unused 529 education funds directly into an ABLE disability account. For families with disabled individuals who have not opted to create a special needs trust for that individual, funding an ABLE disability account is now more attractive. Who knows, maybe someday Congress will amend the rules to permit inherited IRAs to be rolled into an ABLE account.