January 12, 2018
ABLE accounts are taking hold though not at a blistering pace. ABLE, which stands for Achieving a Better Life Experience, is a tax-favored way to save for the needs of a person with a disability. They are built on the same legal framework as 529 college savings plans.
Deborah Goodkin, managing director of the Enable Savings Plan, likens the slow uptake of ABLE accounts to employees’ initial reluctance to sink their money into 401(k) plans in the early days of defined-contribution plans. According to data from the Investment Company Institute, 401(k)s were also slow out of the gate, and really started to gain critical mass in the mid-1990s, some 20 years after their initial introduction.
But that’s not to say that there hasn’t been growth in ABLE accounts. According to data from Strategic Insight, more than 13,000 accounts had been launched as of the end of September, with about $3,700 per account on average–more than $48 million invested in ABLE accounts nationally.
In January 2017, six states had rolled out plans. As of this writing, and three years since Congress passed the ABLE Act into law, more than 20 states have ABLE account plans that are open for enrollment. Some plans offer enrollment to out-of-state residents, too.
Goodkin is disheartened by the relatively slow growth in ABLE accounts because she believes they can solve a big problem that many people with disabilities and their families face: necessarily limited financial independence.
In order to be eligible for Supplemental Security Income (which pays monthly cash benefits to children and adults with disabilities) and Medicaid, a person with a disability cannot have resources exceeding a very low threshold: assets over a certain threshold, commonly $2,000 (for a single person) to $3,000 (for a couple) would be disqualifying. That excludes the home in which the individual lives, but it includes income he earns from working, money in a checking or savings account, or any investments in his name (including the cash value of a life insurance policy). While living with limited means could be feasible for a dependent child, it presents a larger problem for an adult who lives independently either by choice or by necessity–he is forced to have limited assets in his own name or else he risks being disqualified from receiving federal aid.
An ABLE account, however, allows an individual with a disability to have up to $100,000 in his own name and still qualify for means-tested federal programs (with limited exceptions). This means a person with a disability can get a job, save money, and live more independently. Many ABLE plans even have a debit card option.
Addressing the Reluctance
Goodkin believes more could be done to promote ABLE account awareness at a national level. She believes that families are reluctant to set up ABLE accounts because they fear it will jeopardize their SSI and Medicaid benefits.
“There is a fear among people living with disabilities that the federal government or state government is going to take away your benefits if you have money in an ABLE account,” Goodkin said. “There is also the fear that if they invest money, someone will take it away from them.”
Joanna Swanson, head of direct sales for the Enable Savings Plan of Nebraska, says she tries to encourage people to open the account with only a small amount of money, just to try it out.
“Dip your toe in the water. Start it and try it and see how it works. Test the SSI; see that you still get your benefits. After that, you can start moving forward and saving larger amounts,” she said.
As it is now, people with disabilities and their families have to spend down the assets so as not to exceed the public benefits threshold. That could mean spending money on items that aren’t really necessary purchases, whereas that money could be saved and invested for the future in an ABLE account.
The second common concern–that the money invested could be taken away–is not entirely unfounded. The ABLE account legislation does contain what is referred to as the Medicaid payback provision, wherein the state can file a claim after the ABLE account beneficiary passes on to recoup all or a portion of the funds left in the account equal to the amount the beneficiary received in Medicaid payments.
How ABLE Accounts Work
Contributions to ABLE accounts are made with aftertax dollars to a plan with a preset menu of investment choices. Earnings compound on a tax-free basis, and withdrawals to pay for qualified expenses are tax-free, too. The same federal law that established 529 plans provides the framework for ABLE accounts, and the two account types are alike in many ways.
There are some important differences between ABLE and 529 accounts, however.
For more information, read “ABLE Accounts: 10 Things You Should Know” from the ABLE Account National Resource Center.
Some plans allow enrollment by out-of-state residents; if your state doesn’t offer its own ABLE account, you can still set up an account. (It could pay to check into whether your home state has a program or has one in development, particularly if there is a state tax benefit for contributing.) This tool on the ABLE account NRC’s website allows you to compare the features and costs of different states’ ABLE programs.
How Could the ABLE Act Improve?
The National Association of State Treasurers recently outlined some legislative priorities that would broaden ABLE accounts’ reach and use. And a few of these priorities have recently been addressed. For one, rollovers from 529 college savings accounts into ABLE accounts (up to $15,000 per year) was included in the recently signed tax bill.
Another important recent change affecting ABLE accounts resulting from the new tax bill is a provision previously referred to as the ABLE to Work Act, which allows a person with a disability who has a job to save her own income in the ABLE account. An employed account beneficiary can now make contributions exceeding the $15,000 annual contribution limit, but only up to a certain threshold.
Other priorities still on the NAST’s wish list include increasing the age of onset from 26 to 46, which would expand eligibility to many more people with disabilities.
Another is allowing beneficiaries to open more than one ABLE account (as is allowable with 529s), and allowing married couples with disabilities to hold joint ABLE accounts with up to $30,000 in annual contributions and allowing an ABLE account to be rolled over to a disabled spouse.
TN State Treasurer David Lillard visits local schools to promote the state’s financial literacy programs #FinancialLiteracyMonth https://t.co/Mcv9lHI5Ym