10 FAQs About ABLE Accounts

Parents of children with disabilities face financial challenges, especially when planning for the children's needs when the parents are no longer around. Congress crafted the Achieving a Better Life Experience Act (ABLE) in 2014 to help parents in these situations. The law authorizes so-called "ABLE accounts." These are tax-favored accounts operated by the individual states that address the needs of families with disabled children.

Virtually every state provides ABLE accounts for eligible individuals. Here are the answers to 10 frequently asked questions to help you understand these accounts.

1. How Does an ABLE Account Work?

Generally, ABLE accounts operate much like Section 529 college savings plans do, except that the beneficiary of the ABLE account is a disabled child instead of a student. Under this setup, parents, grandparents and others can contribute funds to a designated account that grows without current tax erosion. Further, there's no tax on distributions used to pay for qualified expenses on behalf of the disabled child.

Important: For federal income tax purposes, contributions to ABLE accounts are not deductible. However, some individual states have carved out limited state income tax benefits, including deductions for contributions, for their ABLE accounts.

Parents can set up only one account per eligible individual under current law. However, if parents have multiple disabled children, they may establish a separate ABLE account for each disabled child.

2. What Are the Main Reasons for ABLE Accounts?

The resources available to families of children with disabilities are limited. Typically, eligibility for public benefits—such as Supplemental Security Income (SSI), Supplemental Nutrition Assistance Program (SNAP) and Medicaid—require income at or near poverty levels.

The ABLE Act recognizes the significant costs associated with living with a disability. These costs include accessible housing and transportation, personal assistance services, assistive technology and health care expenses not covered by insurance, Medicaid or Medicare.

3. Who's Eligible for an ABLE Account?

An ABLE account may be used only to benefit an individual who experienced a severe disability prior to the age of 26 and who is also a recipient of SSI and/or Social Security Disability Insurance (SSDI). In addition, if the child isn't a recipient of SSI and/or SSDI but is disabled before age 26, they may still be eligible for an ABLE account if other criteria are met, including obtaining a letter of disability certification from a licensed physician in certain disciplines.

Important: Proposed legislation introduced in Congress would extend the requirement to age 48. Contact your SSB tax or financial advisor for the latest developments.

4. How Are ABLE Accounts Funded?

Normally, an account is funded through family member contributions over time. Contribution limits are tied to the annual gift tax exclusion, which is indexed for inflation. (The gift tax exclusion for 2022 is $16,000 per recipient.)

Lifetime contributions are limited to the amounts imposed by the individual state for Section 529 accounts. These limits are currently at least $235,000—and can reach as high as $550,000. So, there's usually little concern about this restriction.

5. Are There Any Other Contribution Limits?

Beware: There may be complications pertaining to other programs. For instance, disabled individuals who meet the requirements and receive SSI or Medicaid benefits (or both) are still eligible to participate. (Note that funds inside the ABLE account don't count towards the limits on personal assets for these public benefits.)

If the assets in the account exceed $100,000, the beneficiary's SSI benefits will be suspended until the total drops below this threshold. However, Medicaid eligibility isn't affected by the account's amount.

6. What Are Qualified Expenses?

Distributions from ABLE accounts are exempt from federal income tax only if the funds are used to pay for qualified expenses. Such expenses must go toward maintaining or improving the health, independence or quality of life of the beneficiary. Common examples of qualified expenses include the costs of:

• Education,
• Housing,
• Transportation,
• Employment training and support,
• Assistive technology,
• Personal support services,
• Health care expenses,
• Financial management, and
• Administrative services.

7. What Happens with Distributions Used for Nonqualified Expenses?

If withdrawals are made for nonqualified expenses, the portion of the distributions attributable to earnings in the account is subject to tax at ordinary income rates. Federal income tax rates currently may be as high as 37%, plus a 10% federal penalty tax is imposed on the taxable portion. In states that have adopted special state income tax benefits, withdrawals might also result in state-level penalties.

8. Can You Open an ABLE Account in a Different State Than the One Where You Reside?

Regardless of where you live, you're permitted to enroll in another state program. But the state's program must accept out-of-state residents. Most states offer this option.

9. How Are ABLE Account Funds Invested?

As with Sec. 529 plans, state programs offer various investment options. It's important to assess your personal risk tolerance and balance that against the need for escalating expenses and financial concerns. ABLE account owners can change the way that funds are invested up to two times per year.

10. How Do ABLE Accounts Compare to SNTs?

ABLE accounts are often used to complement special needs trusts (SNTs). These irrevocable trusts are designed to supplement public assistance benefits for disabled beneficiaries. SNT assets and income can be used for such items as travel, education, recreation, rehabilitation and medical expenses that aren't covered by public assistance.

Generally, an ABLE account may provide more flexibility than an SNT. With an ABLE account, a disabled individual can set aside wages or Social Security benefits for a future purchase without violating the general rule that the recipient of SSI and Medicaid can't accumulate more than $2,000.

Putting an ABLE Account to Work for You

Before setting up an ABLE account for a disabled child, parents must consider several complex issues. In some situations, it may be beneficial to use an ABLE account in conjunction with an SNT. Contact your SSB tax or financial advisors to determine what's right for your family's situation.