The ABLE Act of 2014: A New Way to Save for Beneficiaries With Special Needs

Mar 30, 2015

By Jenna Ichikawa | Related Practice: Estate Planning & Administration

State-sponsored 529 college savings plans are a popular way to save money for college because they offer tax-free growth.  In December of 2014, President Obama expanded Section 529 of the Internal Revenue Code by signing the Tax Increase Prevention Act into law.  While most of the law provides one-year extensions of tax provisions that had expired at the end of 2013, the law also includes the Achieving A Better Life Experience Act of 2014 (the “ABLE Act”), a permanent addition to Section 529 of the Code which provides for a new type of tax-advantaged 529 savings program for special needs beneficiaries.

The basic concept of the ABLE Act is to use the framework for Section 529 college savings plans to allow states to roll out 529 ABLE plans for individuals with disabilities beginning in 2015.  With the ABLE Act, Section 529 of the Code now allows states to establish and maintain 529 ABLE programs under which individuals may contribute to an ABLE account to save for qualified disability expenses of a designated beneficiary whose disability occurred before age 26.  As a general rule, funds in a qualified ABLE account will not be considered a disqualifying resource for federal benefit programs.  Prior to the passing of this legislation, individuals with disabilities risked jeopardizing access to means-tested benefits such as Medicaid or supplemental security income (SSI) by establishing even a minimum level of savings.  If the State of Washington establishes an ABLE program or contracts with another state that establishes such a program, then individuals and families will be able to donate cash to support an individual with a disability without fear of that person losing benefits.  In addition, the funds contributed to a 529 ABLE account will grow tax-free just like 529 college savings plans.

As with college savings plans, each state will be able to set the lifetime aggregate contribution limit to each of its accounts.  On an annual basis, each qualified ABLE program must limit the aggregate contributions from all contributors to an ABLE account for a particular beneficiary to the amount of the annual gift tax exclusion for that year (the federal gift tax exclusion amount is currently $14,000 per person).  The law directs the IRS to issue regulations no later than June 19, 2015 to guide individuals in carrying out the purpose of the programs set up by each state.

With the 529 ABLE program, individuals and families will be able to save private funds to support individuals with disabilities to maintain health, independence, and quality of life. If you are interested in learning more about 529 ABLE plans, please contact a member of our Estate Planning group