Congress Considering Bill to Allow Disabled to Open Tax Exempt Savings Accounts
Individuals with disabilities face a dilemma when they try to save money. If a single individual has more than $2,000, they could lose their valuable Supplemental Security Income (SSI) and Medicaid services, which for some folks means losing housing and medical care. Imagine being able to create a 529-type account, where the interest is not taxed, the money can be used for the individual’s needs, and eligibility for public benefits is not affected. It could become a reality.
The U.S. House and Senate are considering legislation called the Achieving a Better Life Experience Act, or ABLE Act. The bill amends the IRS code to allow individuals to create a tax exempt savings accounts, so the individual can use the funds in the account to pay for “qualified disability expenses.” Allowable expenses include education, primary residence, transportation, employment support, health and wellness, legal fees, assistive technology and personal support, and other personal expenses.
ABLE accounts have the same tax-favored status as a 529 education accounts, and interest earned is not taxed. Most importantly, the funds in the ABLE account and distributions from the account are disregarded in determining eligibility for Medicaid and other means-tested federal programs.
If the individual is receiving SSI, a distribution for housing is not disregarded and only the first $100,000 is disregarded. An individual’s SSI check will be suspended if the account exceeds $100,000, but they will not lose Medicaid eligibility.
These accounts would be useful for individuals with disabilities who work and would like to save their own money. They would want to limit the account to $100,000 in order to prevent suspension of their SSI benefits.
The down side is that when the beneficiary dies, the funds remaining in the account must first be used to pay back Medicaid for amounts it expended on behalf of the individual. Only if any money is left will it go to the individual’s family or chosen charity.
ABLE accounts may not be the best way for a parent or other relative to save for their loved one with special needs because of the Medicaid payback provision. If the parents/relatives instead put their funds in a special needs trust for the individual, the money is used for the individual’s expenses but there is no Medicaid payback provision. When the beneficiary dies, the remaining funds go to family or a designated charity, instead of to the federal government.
Call for action: Contact your U.S. representatives and urge them to co-sponsor this legislation, support it and fast-track the bill so that President Obama can sign it this fall.