Pennsylvania ABLE Accounts:
A New Tool
Since the passage of the Achieving a Better Life Experience (ABLE) Act by the federal government in December 2014, there has been a great deal of interest by individuals with disabilities in the creation and funding of these accounts. The federal law left the implementation and administration of ABLE Accounts up to the states, and on April 18, 2016, Pennsylvania enacted its own legislation. The Pennsylvania Department of Treasury will begin allowing individuals to sign up for PA ABLE Accounts on April 3, 2017. While much about the implementation and functioning of Pennsylvania ABLE Accounts is still a work-in-progress, it is important to review what is currently known about the new law.
The federal ABLE Act is based on college 529 Plans, and it allows the states to enact legislation allowing an individual with disabilities to open an account which is not countable as a resource to determine the individual’s eligibility for resource- and income-dependent public benefits, such as Supplemental Security Income (SSI) and Medicaid (called Medical Assistance in Pennsylvania). The individual (or anyone else) may then contribute money in the ABLE Account while retaining eligibility for public benefits. Any income generated by the ABLE Account is not subject to income tax. ABLE Accounts may be established by the individual with a disability himself or herself, or by his or her Agent under a Power of Attorney, legal guardian, or parent. Unlike with Special Needs Trusts, the account beneficiary may manage the account, determine what distributions are appropriate, and use a debit card to make expenditures. While the federal law allows each state to set up its own ABLE Account program, the federal law provides that an individual with a disability may only have one ABLE Account.
Under present law, ABLE Accounts are only available to individuals who became disabled prior to attaining age twenty-six (26). An individual with a disability may open an ABLE Account if he or she is older than twenty-six, but they must be able to prove that their disability manifested before age twenty-six. There is pending federal legislation that would raise this age limit to forty-six (46), but it has not yet been signed into law. Presently, contributions to an ABLE Account are limited per year to the federal gift tax exclusion; since the current gift tax exclusion for 2017 is $14,000.00, contributions to the ABLE Account from all sources cannot currently exceed $14,000.00 per year. ABLE Accounts have a total account limit equal to the state’s cap on 529 Plans, which in Pennsylvania is $511,758.00 for 2017. Despite this cap, the beneficiary of an ABLE Account will be considered ineligible for SSI if the balance in the ABLE Account exceeds $100,000.00. Eligibility for Medical Assistance is not affected by the ABLE Account limit.
The federal ABLE Act legislation provides that states may assert a payback from the ABLE Account upon the passing of the beneficiary for Medical Assistance paid by the state for the account beneficiary after the establishment of the ABLE Account. In contrast, federal law provides that states may assert a payback against a Self-Funded Special Needs Trust upon the passing of the beneficiary equal to the total amount of Medical Assistance paid for the trust beneficiary during the beneficiary’s lifetime. Pennsylvania’s ABLE Act does not currently contain a payback requirement. The Pennsylvania Department of Human Services’ position on asserting paybacks against Pennsylvania ABLE Accounts is currently unclear.
Funds in an ABLE Account may be withdrawn by the account holder or distributed at the beneficiary’s request. If the distributions from the ABLE Account are used for the beneficiary’s “qualified disability expenses” (QDEs) for the year, the distributions are not subject to income tax. Qualified disability expenses are defined as:
Any expenses related to the eligible individual’s blindness or disability which are made for the benefit of the disabled beneficiary, including the following expenses: education, housing, transportation, employment training and support, assistive technology and personal support services, health prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and others approved by IRS regulations.
If the distributions exceed the beneficiary’s QDEs for the year, the excess distributions must be included in the beneficiary’s taxable income for the year, and are also subject to an additional 10% penalty.
The Social Security Administration’s Program Operations Manual System (POMS) provides additional guidance about distributions from ABLE Accounts. In general, distributions from an ABLE Account are not considered income for purposes of determining SSI eligibility. Distributions for housing expenses are not considered in-kind support and maintenance (ISM), which is a major difference between ABLE Accounts and Special Needs Trusts. However, if a distribution is held by the beneficiary past the month of distribution, this distribution may be counted as a resource by SSA for purposes of determining SSI eligibility. If the distribution is for a non-housing QDE, the distribution is not counted as a resource if the beneficiary: (1) intends on using the distribution for non-housing QDEs, (2) the distribution is not spent and “identifiable,” and (3) the ABLE Account remains open. If, however, the distribution from the ABLE Account is for a housing QDE or for an item or service that is not considered a QDE, the distribution is countable as a resource. It is important to remember that the income tax consequences of making distributions from an ABLE Account are different from the effect of those distributions on the beneficiary’s resource- and income-limits for public benefits.
ABLE Accounts are not designed to replace Special Needs Trusts, but are instead another useful tool to allow individuals with disabilities to enjoy the benefits of financial assets while retaining eligibility for public benefits. Pennsylvania residents should stay tuned to see the full effect of Pennsylvania’s ABLE Act once the program is fully operational.