The Achieving A Better Life Experience (ABLE) Act of 2014 is a significant permanent change to the financial planning landscape for special needs beneficiaries.  The National Disability Institute estimates that 5.8 million Americans would be eligible for an ABLE account.

The basic concept of the ABLE Act is to use the existing framework for Section 529 “college savings plans” to allow states to roll out Section 529-ABLE plans beginning in 2015.  These plans would allow contributions to be invested on behalf of disabled individuals.  Distributions used for qualified expenses of the disabled beneficiary would be tax-free and would not disqualify the disabled individual from most means-tested state or Federal aid programs (e.g., Medicaid, SSI). Qualified expenses include education, housing, transportation, employment support, health and wellness, assistive technology, employment training and support, and more.

“Disability” for these purposes is defined as:

– A medically determinable physical impairment (such as blindness) or mental impairment (such as autism or down syndrome) resulting in marked and severe functional limitations expected to result in death, or lasting(or expected to last)not less than 12 months, if that disability occurred before the date on which the individual attained age 26 and if such disability is certified in writing by a licensed physician.
If funds are not used for qualifying expenses for a disabled beneficiary, the investment income would be taxed as ordinary income, plus a 10% penalty. Funds from a 529-ABLE account can be rolled over to another ABLE account via a 60-day rollover and the designated beneficiary of the 529-ABLE account can also be changed to another (disabled) beneficiary in the same family without tax consequences.  However, funds remaining in the account when the beneficiary dies may be used to repay the state for any medical assistance received under a state Medicaid plan, with only the remainder, if any, going to the deceased’s estate or designated beneficiary.

The 529-ABLE
– Rules stipulate that a beneficiary can have only one such account, and it appears that the disabled beneficiary will be required to use the 529-ABLE account in their resident home state (or the contracted plan of another state if the home state does not offer its own 529-ABLE account).
– Plans will be subject to the investment limitations and restrictions for Section 529 plans as well as state limitations on maximum contributions and gift tax limitations including the $14,000 annual exclusion.
– This account is similar to a third-party special needs trust for a disabled beneficiary. The funds in the new 529-ABLE accounts and distributions for qualified expenses are designed to not be counted towards most state and Federal aid programs.

These plans should play a significant role in special needs planning in the future to enable disabled individuals to achieve greater financial security.