ABLE stands for Achieving a Better Life Experience. The federal ABLE Act, signed into law in 2014, allows states to set up ABLE programs. The program was established to assist individuals with disabilities and their families in saving funds to maintain health, independence, and quality of life — without jeopardizing their access to federal and state funds.
Michigan adopted its own ABLE law (MiABLE) in 2015. At the end of 2016, the Michigan program became operational and began accepting applications. Accounts that are set up under the program are referred to as ABLE accounts or MiABLE accounts.
What Is an ABLE Account?
The program allows an eligible individual with disabilities to set up an ABLE account. The accounts are referred to as 529A savings accounts, because they are set up under Section 529A of the Internal Revenue Code. They are similar to Section 529 college savings plans.
The MiABLE program offers investment opportunities and tax incentives for family members — and others, such as friends — wishing to save funds for individuals with disabilities. In Michigan, the program is administered by the Department of Treasury’s Student Financial Services Bureau.
ABLE accounts are a new tool that may be available — depending on eligibility — when a family is planning for the financial needs of a family member with disabilities. Special needs trusts continue to be an option as well, and do not have some of the limitations of ABLE accounts. Additional information about special needs trusts is included in an article by our special needs trust attorneys at Barron, Rosenberg, Mayoras & Mayoras.
Who Can Set Up an ABLE Account?
An eligible individual with a disability sets up the ABLE account, and is the owner and beneficiary of the account. Each individual can have only one ABLE account.
To be eligible, an individual must have a significant disability that began before the age of 26. If a person meets the onset age requirement, there are two different ways to be eligible to set up an ABLE account:
- An individual who already receives benefits under the Supplemental Security Income (SSI) and/or Social Security Disability Income (SSDI) programs is automatically eligible to set up an ABLE account.
- An individual who does not receive SSI or SSDI can still be eligible to set up an ABLE account if he or she meets Social Security’s definition and criteria regarding “significant functional limitations,” and receives a letter of certification from a licensed physician.
A person does not need to be under the age of 26 to be eligible. The person can be older than 26, as long as the onset of the disability occurred before his or her 26th birthday.
What Expenses Can an ABLE Account Be Used to Pay?
An ABLE account must be used for “qualified disability expenses” (QDEs). The expenses must relate to the beneficiary’s disability and be made for the benefit of the person with the disability. They also must help the individual maintain or improve his or her health, independence, or quality of life. The Internal Revenue Code, Section 529(e)(5), lists the following as qualified disability expenses (QDEs):
- employment training and support
- assistive technology and personal support services
- health and wellness
- financial management and administrative services
- legal fees
- expenses for ABLE account oversight and monitoring
- funeral and burial expenses
- basic living expenses, which includes food
It is important to note that ABLE account distributions that meet the requirements of the QDEs are not considered in kind support and maintenance, which would reduce a SSI recipient’s benefits by one third (1/3). Additionally, distributions made for housing expenses and other QDEs could be considered under certain circumstances as a resource in determining SSI eligibility and could also affect the beneficiary’s Medicaid benefits.
The Internal Revenue Service may identify other approved expenses in future IRS Bulletins.
Where Can an ABLE Account Be Set Up?
Individuals have a choice of where they set up their account. A number of states now have ABLE plans. Each state establishes some of the plan criteria, so plans vary from state to state.
Some states require that a person must be a resident of the state to set up an ABLE account. Other states, including Michigan, have nationwide programs that allow both residents and non-residents to set up accounts in the state.
Are There Contribution Limits?
Contributions to an ABLE account can be made by family members, friends, and the individual owning the account. For 2017, the total annual contribution by all participating individuals cannot exceed $14,000. That amount is the same as the federal gift tax exclusion and may increase over time as the cost of living increases.
The total aggregate account limit over time is set individually by states, based on the state’s limit for education-related 529 savings plans. In Michigan, the limit is $500,000, which includes any other 529 prepaid tuition or college savings accounts of the beneficiary. In other states, the limit is $300,000.
For individuals who are recipients of SSI, the ABLE Act sets some additional limitations. The first $100,000 in an ABLE account is exempted from the SSI $2,000 resource limit. If the ABLE account exceeds $100,000, the individual’s SSI cash benefit would be suspended until the ABLE account balance goes below $100,000. There is no additional effect on the beneficiary’s eligibility for other federally-funded programs with a means test, such as Medicaid.
One important characteristic of ABLE accounts is a Medicaid pay-back provision. When the beneficiary passes away, the state where the beneficiary lived can claim all or a portion of the funds in the ABLE account. The pay-back amount is equal to the amount paid by the state in Medicaid expenses to the individual after the ABLE account was opened.
What Are the Tax Advantages of an ABLE Account?
Payments made from an ABLE account are referred to as “distributions.” As long as distributions are used for qualified disability expenses, the distributions from the account, including earnings, are not taxed. If a distribution is not used for a qualified disability expense, the distribution could be subject to income tax and assessed a 10 percent penalty. Distributions used for something other than a qualified disability expense could also affect other benefits.
In Michigan, contributions to a MiABLE account are deductible on the donor’s Michigan Income Tax return, up to $5,000 for a single return and up to $10,000 on a joint return. Each state establishes its own rules for state income tax deductions. The rules are not the same in every state that has an ABLE program.
Investment of ABLE Account Funds
Each state determines whether and how funds of an ABLE account can be invested. Michigan has set up its program to provide investment opportunities for MiABLE accounts.
ABLE Accounts and Special Needs Trusts
ABLE accounts and special needs trusts are two very different tools that may be available to families planning for the needs of a family member with a disability. ABLE accounts do have eligibility requirements and limitations. Determining which tool is right for your family depends entirely on your circumstances and those of your family member.
Our special needs trust attorneys at Barron, Rosenberg, Mayoras & Mayoras, P.C., will help you evaluate your family’s needs, discuss the options available — including ABLE accounts and special needs trusts — and work with you to develop the best financial plan for your family.
BRMM is located in Troy, Michigan, and serves clients throughout the Tri County and Detroit area, as well as in other parts of Michigan. What our clients say about us is proof of our commitment to achieving the highest levels of legal and client service.
Call us at 248.641.7070 or complete our online form to set up your free consultation.