Savings Plans for Special Needs Individuals

The Achieving a Better Life Experience (ABLE) Act allows people who are diagnosed with a disability before the age of 26 to save for quality of life purchases without affecting their qualification for social security benefits (SSI) or Medicaid.

Prior to the passage of this act, people with special needs would be disqualified for government benefits if they had any more than $2,000 in assets.

The passage of this act is expected to promote the health, independence and quality of life for people with special needs and end a cycle of poverty, dependence and limitation.

The ABLE Act allows people with special needs to set up an account similar to a 529 Account, a popular college savings plan. They can save up to $100,000 in the account without affecting their SSI benefits. If the account accrues more than $100,000, SSI payments will be suspended but not terminated. The amount in the account does not affect Medicaid payments. The cap on the account is governed by the state limit on 529 plans.

Anyone may contribute to the account as long as cumulative contributions do not exceed the gift tax exclusion amount in any given year, which is $18,000 this year and is adjusted for inflation. Contributions are not tax deductible. But the accounts can grow tax free, similar to a Roth IRA.

ABLE Account holders can withdraw money from the account, without paying taxes, to use for any qualified expenses including health, education, housing, transportation, training, assistive technology, personal support, and related services and expenses. Housing distributions count as income for SSI purposes.

If an account holder wanted to use money in the account for a non-qualified expense, say a trip to Disneyland, the amount withdrawn would be subject to taxes and a 10 percent penalty. Money left in the account after the death of the account holder is subject to Medicaid reimbursement, which means that Medicaid is entitled to recoup any funds spent on the account holder during his lifetime. Remaining funds would be distributed to the deceased’s estate or designated beneficiary.

Another long standing option for parents of children with special needs is a Special Needs Trust. ABLE accounts are not a replacement for a Special Needs Trust but could be another option if a Special Needs Trust does not fit the needs of a family.

A Special Needs Trust is exempt from the SSI and Medicaid resource tests, but not from Medicaid reimbursement. A Special Needs Trust would not have an investment cap, like an ABLE Account, but is subject to income tax. A qualified estate planning attorney can help you determine which plan is best for your family.