A New Way to Save for Disabled Beneficiaries

By: Edward J. Leach, CFP®, MBA

According to the US Department of Agriculture's most recent annual estimate, it will cost a middle-income family $233,610 to raise a child to age 18, ignoring college and inflation. This is a staggeringly high number, but the cost to raise a child with special needs can exceed that number by 5 or 10 times, depending on the child's condition. According to the advocacy group Autism Speaks, the cost of caring for a person with autism that is not complicated by intellectual disability is $1.4 million. The average lifetime cost of care increases to $2.3 million if the person with autism also has an intellectual disability. The costs to raise a child with special needs includes doctor visits, medical equipment, education, therapy, and other miscellaneous expenses.

In December of 2014, President Obama signed into law the Achieving a Better Life Experience (ABLE) Act. This act was meant to provide Americans with disabilities a way to save for their future without compromising eligibility for government programs. Under the ABLE Act, families can open 529 ABLE Accounts (529A) that allow for tax-deferred savings for those with disabilities without having to worry about losing public benefits. Money can be withdrawn tax free when the funds are used to pay for qualified disability expenses.

The following passage from Savingforcollege.com highlights the importance of 529A accounts:

"Prior to the ABLE Act, if a person with a disability earned more than $700 per month or had savings or other assets in excess of $2,000 they risked having to forfeit eligibility for government programs like Medicaid. The only way families could get around this was to set up a special needs trust, which is often very costly to do. As a result, there has been little incentive to save, and many people with disabilities end up living below the poverty level."

In order to be eligible for a 529A account a person must have become blind or disabled before age 26, with the condition expected to last at least 12 consecutive months. In addition, a person must be able to obtain a disability certification from a doctor or be receiving Supplemental Security Income (SSI) and/or Social Security Disability Income (SSDI).

Similar to a 529 College Savings plan, the 529A accounts are administered by each state. There was a residency requirement to participate in a state's 529A account prior to 2015. In 2015, the PATH Act, which removed residency requirements, was signed into law. However, each state plan may still require you to be a resident. For example, New York state has a residency restriction while Pennsylvania and Maryland do not. This allows residents of New Jersey and Connecticut, two states that do not currently offer a 529A account, the ability to utilize one. Though, with some Googling it appears the states of New Jersey and Connecticut are developing their own plans.

Some state plans also offer unique tax benefits. For example, the Missouri plan allows Missouri residents the ability to deduct contributions of up to $8,000 per year for single filers and $16,000 for married individuals filing jointly. Unfortunately, the New York ABLE account does not offer any tax benefits, and the residents of states like New Jersey and Connecticut won't be able to participate in any out-of-state benefits.

Like a 529 College Savings plan the annual contribution limit in 2018 is $15,000, which is tied to the annual gift tax exclusion. Total contributions to a 529A plan can be north of $300,000 but vary by state. However, if over $100,000 is accumulated in a 529A account the individual will lose the ability to qualify for Supplemental Security Income (SSI) benefits - so it is prudent to coordinate a 529A plan with all other benefits.

Before opening a 529A it is important to consult with a tax professional and potentially an attorney who specialize in the areas of special needs. If you would like to learn more about 529A accounts, please contact the team at HIGHLAND.