New Indiana Savings Vehicle for Individuals with Disabilities
Under Indiana’s ABLE savings account program, 529 ABLE (529A) accounts may now be established for individuals with disabilities. In December of 2014, President Obama signed the Achieving a Better Life Experience (ABLE) Act which authorizes each state to independently adopt and operate a program that allows certain minor and adult disabled individuals to establish a 529A account under the state’s 529A program. Indiana adopted its ABLE legislation in March of 2016, and its 529A program is now open for enrollment (in July 2017). The program name is INvestABLE Indiana, and it allows individuals with disabilities and their families the opportunity to create and contribute to a tax-exempt savings account, similar to the 529 college savings accounts, but the 529A funds can be used to pay for the individual’s disability-related expenses and thereby increase the individual’s quality of life without disqualifying the individual from needs-based government benefit programs.
To qualify for an INvestABLE account, an individual must be entitled to Supplemental Security Income (SSI). In addition, the individual's disability must meet certain requirements, and onset of the disability must have occurred before age 26. Although a disabled person can be the owner and beneficiary of only one 529A account, contributions to the account may be made by anyone. The contributions to the 529A account may be made with after-tax dollars, which will then be invested in options available through the INvestABLE program and may be distributed tax-free for qualifying expenses related to the individual's disability. Annual contributions to the account from all sources may not exceed the federal gift tax annual exclusion amount (currently, $14,000).
It is important to recognize that there are some negative attributes of ABLE accounts generally. Non-qualifying distributions from a 529A account are subject to income tax plus a 10% penalty on the earnings portion of the distribution. SSI benefits will be forfeited by the disabled individual if the account value exceeds $102,000. At the individual's death, funds remaining in the account are subject to any Medicaid claim for assistance received by the beneficiary after the account was created. However, any funds remaining in the account after payment of all Medicaid claims may be distributed to one or more beneficiaries designated under the account.
Individuals with disabilities often receive government benefits that help cover medical and long-term care expenses, as well as other costs of living. Some of these government benefits, such as SSI and Medicaid, are needs-based, so that in order to qualify for the benefits, the disabled individual's assets and income must be below certain levels. Under the law, if disabled individuals meet certain requirements, they may retain some of their assets through various vehicles and still qualify for government benefits. A 529A account established under the INvestABLE program in Indiana is one vehicle that allows eligible individuals with disabilities to retain some assets that can grow tax-free and be used to help create a better quality of life for the individual, without sacrificing eligibility for means-based government benefit programs.
However, before establishing a 529A account, it is prudent to consider all of the options available to a disabled individual, including special needs trusts, which allow assets to be preserved for a disabled individual’s use without disqualifying the individual from means-based government benefits. Determining which one or more of the available options should be implemented for a disabled individual will depend on the individual’s specific circumstances.