The amount that can be deposited in an ABLE account each year without jeopardizing public benefits will rise from the current $14,000 to $15,000 starting in 2018.

The increase makes these accounts that much more attractive as a way for people with disabilities to shield gifts or income or even use as an alternative to a special needs trust in the right circumstances. The amount that can be deposited in an ABLE account is tied to the federal gift tax exclusion, which will rise from $14,000 to $15,000 in 2018 due to inflation.

Created by Congress via the passage of the Achieving a Better Life Experience (ABLE) Act in 2014 and modeled after popular 529 college savings accounts, ABLE accounts allow people with disabilities and their families to save up to $100,00.00 in accounts for disability related expenses without jeopardizing their eligibility for Medicaid, Supplemental Security Income (SSI), and other government benefits.  Funds in the tax-free savings accounts can be used to pay for qualifying expenses such as the costs of treating the disability or for education, housing and health care, among other things. ABLE accounts may be opened by anyone with a disability as long as the disability began before the person turned 26.

Like the 529 savings plans on which they are patterned, ABLE programs are set up by the individual states, although so far most state plans are welcoming the participation of residents of any state.  Twenty-nine states and the District of Columbia now have ABLE programs, according to the ABLE Resource Center.

ABLE accounts are a great new savings tool for individuals with disabilities, but not all people with disabilities are eligible to open these accounts. The rules for determining eligibility are for the most part uncomplicated, although one requirement is proving controversial.

Created by Congress via the passage of the Achieving a Better Life Experience (ABLE) Act in 2014 and modeled after popular 529 college savings accounts, ABLE accounts allow people with disabilities and their families to save up to $100,00.00 for disability related expenses without jeopardizing their eligibility for Medicaid, Supplemental Security Income (SSI), and other government benefits.

Under the ABLE Act, two categories of people are eligible to set up accounts. The first category is straightforward: If you are a recipient of SSI and Social Security Disability Insurance (SSDI), you are automatically eligible because you have already been determined to to be “disabled.”

The second category is for people ineligible for these programs, either because they have too much income or assets, in the case of SSI, or they lack a work history, in the case of SSDI. These individuals must obtain a certification, from a licensed physician, attesting that they meet the Social Security Act’s disability definition, which is as follows:

“The individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, or is blind . . .”

The actual legislation provides almost no further guidance concerning these disability certifications. However, in subsequent proposed regulations released in June 2015, the Internal Revenue Service (IRS) elaborated that certifications must state the person’s diagnosis, detail the limitations on the person’s daily living activities, and certify that the disability began before the person turned 26. So, to be clear, ABLE account holders can be older than age 26, but they must have first experienced their disability before their 26th birthday.

This latter requirement — which also applies for SSI and SSDI beneficiaries who wish to open ABLE accounts — is perhaps the law’s most controversial element. For many disability advocates, reforming this provision has become a top legislative priority. Versions of the ABLE Age Adjustment Act, a bill to raise the age from 26 to 46, have been introduced in both the Senate and House each of the past two legislative sessions.

After the Senate Finance Committee passed two unrelated ABLE reform bills in October 2016, a coalition of 82 disability rights groups wrote a letter to senators opposing the bills’ passage if the ABLE Age Adjustment Act wasn’t included in the package. As a result, none of the three ABLE reform bills has yet passed.

The IRS regulations also provide further guidance on situations where a person’s eligibility changes, such as when the person’s disability no longer exists, or disappears but later resurfaces. These regulations have not been finalized and thus are not legally binding, although the IRS has stated that “[u]ntil the issuance of final regulations, taxpayers and qualified ABLE programs may rely on these proposed regulations.”

In passing the Achieving a Better Life Experience (ABLE) Act in 2014, Congress created a new way for potentially millions of people with special needs to save for disability related expenses without jeopardizing their eligibility for federal public benefit programs.

In fact, these savings plans, popularly known as ABLE accounts, may be used for an even broader array of products and services than many beneficiaries may realize – including housing expenses, bus fare, financial management services or even, potentially, a smart phone.

The ABLE Act itself defines “qualified disability expenses” as “expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary.” It then goes on to list a range of categories of potential uses for funds set aside in ABLE accounts, including:

“Education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other expenses, which are approved by the Secretary under regulations and consistent with the purposes of this section.”

In subsequent proposed regulations released in June 2015, the Treasury Department and Internal Revenue Service (IRS) reiterated that the term “qualifying disability expenses” should be “broadly construed” to include any benefit related to the designated beneficiary “in maintaining or improving his or her health, independence, or quality of life.”

This means that there is no requirement that the benefit be medically necessary, such as is the case when determining health care services covered by Medicaid, or that it benefit no one but the designated individual. As an example, the regulations specify that a smart phone could qualify as a covered expenses, provided that it serves as “effective and safe communication or navigation aid for a child with autism.”

Originally, the proposed regulations would have also required states to establish safeguards for ensuring that ABLE funds are only used for qualifying expenses, presumably by requiring beneficiaries to obtain pre-approval before distributing funds. In response to a backlash from disability advocates, many who feared that such requirements would be unduly burdensome, the Treasury Department and IRS rescinded this requirement in a notice issued November 2015 So as things stand now, you don’t need to get approval to withdraw funds and pay for a qualified disability expense.

The Obama administration, however, never issued final regulations, although the IRS has stated that “[u]ntil the issuance of final regulations, taxpayers and qualified ABLE programs may rely on these proposed regulations.”

To protect against future inquiries from the IRS, the ABLE National Resource Center recommends that beneficiaries maintain detailed records of expenses paid for by ABLE account assets, as well as how these expenses relate to their disabilities in case the expenditures are ever questioned by the IRS. Misuse of ABLE account funds could result in tax penalties and possible loss of public benefits.

For help in setting up an ABLE account or to find out whether something you want to use the account for is a qualified disability expense, contact your special needs planner.