Many individuals with special needs must necessarily rely on public assistance and government benefits to help pay for their often-significant expenses. Although family members and friends may be willing and able to help defray the costs of those expenses, doing so can unintentionally make the individual ineligible for public benefits. For instance, an influx of cash or other resources can lead to the loss of the Medicaid coverage that constitutes their major source of medical care coverage, with disastrous results.
Fortunately, qualified individuals with disabilities and their families can save funds in ABLE accounts without fear of jeopardizing public benefits eligibility. The special needs planning attorneys at Rubin Law can help you understand the role of ABLE accounts and how you can use them to benefit your family member with special needs.
ABLE Account Basics
Congress passed the Stephen Beck, Jr., Achieving a Better Life Experience (ABLE) Act in 2014, which allows certain individuals with disabilities to create tax-advantaged savings accounts while still preserving their eligibility for public benefits. Individuals qualify to own and benefit from an ABLE account if they meet any of the following criteria:
- They became eligible for Supplemental Security Income (SSI) based on disability or blindness before the age of 26;
- They were entitled to disability insurance benefits, childhood disability benefits, or disabled widow’s or widower’s benefits based on disability or blindness that began before age 26; or
- They or their parent or guardian have certified that they have met the criteria for a disability certification before the age of 26.
An individual may wish to put earnings and other funds into an ABLE account, depending on the circumstances. For example, a smaller inheritance left to the individual by a relative who mistakenly did not leave it to a special needs trust also could go into an ABLE account. Payments of “adult” child support by a parent may go to an ABLE account to avoid disqualifying the individual from public benefits programs. Family contributions to an individual’s food and shelter costs that go through an ABLE account also can help avoid the 1/3 reduction in SSI benefits that otherwise would occur if the individual received the funds directly. However, due to limitations on annual contributions and total balances, as well as Medicaid “payback” or reimbursement upon death provisions, an ABLE account may not always be the best vehicle for gifts and inheritances, depending on the situation.
Illinois, like many states, has an ABLE account program. However, Illinois residents are not required to use the Illinois program; they can open ABLE accounts using programs in many other states if they wish, which may have more generous terms or be easier to use.
Using ABLE Accounts for Qualified Disability Expenses
Individuals must use proceeds of an ABLE account to pay various qualified disability expenses, such as:
- Everyday living costs for a working adult with disabilities, such as:
- Housing, in the form of rent or mortgage payments,
- Food, and
- Employment training and support;
- Personal assistance and care;
- Specialized technology or health care not covered by Medicaid or Medicare;
- Other expenses as needed to improve the individual’s independence and quality of life.
Individuals must keep good records about how they use the funds in their ABLE accounts. Unless a court has appointed a legal guardian for an individual with disabilities, they have total control over their ABLE account. They can contribute to and withdraw funds from the account as they desire. However, they can face penalties if they use the funds for expenses other than qualified disability expenses, so ensuring that individuals use them only for allowable expenditures can be critical.
Contribution Limits for ABLE Accounts
The total annual contribution amount from all sources to an Illinois ABLE account is $17,000 as of January 1, 2023 ($16,000 for 2022). However, ABLE account owners who work can contribute significantly more than the $17,000 limit to their ABLE accounts in 2023. The total additional contribution limit beyond the $17,000 regular limit is equal to the following:
- The S. Department of Health and Human Services (HHS) Poverty Guidelines for a one-person household for the previous calendar year, or $13,590 for 2022 ($12,880 for 2021), or
- The account owner’s gross wages, whatever is less.
However, individuals may not contribute additional funds to their ABLE accounts if they already are contributing funds to their employer-sponsored 401(k) defined contribution, 403(b) annuity, or 457(b) deferred compensation plans. Contributions over the allowable limits could result in tax liability for individuals, so they should be sure to monitor the amounts of all contributions carefully.
If an individual receives SSI benefits, they can have no more than a $100,000 balance in an ABLE account. Otherwise, they lose their SSI benefits eligibility until the ABLE account balance falls below $100,000. On the other hand, an individual who does not receive SSI can keep a balance in an ABLE account that is no more than the maximum balance for a 529 College Savings Plan in the state where the ABLE account is located. For example, in Illinois, the current maximum balance for a 529 College Savings Plan is $450,000.
Tax Implications of ABLE Accounts
ABLE account contributions are not tax-deductible for federal income tax purposes. However, Illinois taxpayers who contribute to any Illinois ABLE account can take a state income tax deduction of up to $10,000 if filing as individuals or up to $20,000 if filing jointly.
All contributions to ABLE accounts come from after-tax funds, and the income generated by the funds in ABLE accounts is not taxable. Furthermore, when the beneficiary of an ABLE account passes away, there is a Medicaid “payback” provision that requires the remaining balance of the account to pay back the state in most circumstances.
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Rubin Law is the only Illinois law firm exclusively dedicated to providing compassionate legal services for children and adults with special needs. In addition, we offer unique legal and future planning techniques to meet your family’s individual needs. At our law firm, you can discuss all your needs and objectives with an experienced Illinois special needs trust lawyer.
Call us today at 866-TO-RUBIN or contact us online to learn more about the services we can offer you and your family.