Just before the Christmas holiday break, Congress passed, and then President Obama signed into law, the Achieving a Better Life Experience Act (“the ABLE” Act). The ABLE Act allows people with disabilities to open special accounts, similar to 529 college savings plans.
The interest earned on these accounts will be tax free and the funds in the account can be used to pay for education, transportation, healthcare, housing and other expenses. This allows disabled individuals to keep their needs based government benefits, such as SSI and Medicaid and use the funds to cover what the benefit programs won’t.
As with any government act or program there are rules and restrictions. Only the first $100,000 in an ABLE account is exempted for SSI eligibility purposes. Additionally, these accounts can receive only up to the annual gift tax exemption amount of $14,000. Finally, only individuals, whose disability occurred before they reached age 26 may establish an ABLE account.
Now that the law is a reality, there is still work to be done. Each state must now establish regulations before financial institutions can make these accounts available, similar to what has been done for 529 plans. No word yet on when New Jersey will have those regulations in place but it is possible that later this year people may be able to start opening ABLE accounts.
The drive to pass the ABLE Act stemmed from a desire to make available to the disabled something similar to a 529 plan that isn’t available to them if they are to preserve their eligibility for needs based government benefits. It was also hoped by some that this option would eliminate the need for special needs trusts. However, the law has some important flaws and isn’t the “end all be all” that some make it out to be. Next week I’ll share with you the drawbacks.