What is an ABLE Account

An ABLE Account is also known as a 529 A plan. It is a tax qualified version of a 529 college savings plan, but with special features, or one might say “disadvantages” that are not found in tax qualified 529 college plans for non-disabled persons.

This is a special account that has been authorized under Federal law to allow disabled individuals (who will be called “designated beneficiaries”), to preserve funds without disturbing public benefits such as SSI and Medi-Cal.

There are a number of limitations concerning this account:

A KEY limitation in most states is that any funds remaining in an ABLE Account upon the death of the designated beneficiary, must first be used to pay back any Medi-Cal costs that the designated beneficiary used since the creation of the ABLE Account.

Twelve facts to know about the ABLE Act in order to inform your clients about the ABLE Accounts.

1. ABLE Accounts are available only for individuals who are disabled prior to age 26. [This age will increase to 46 on January 1, 2026] 

2. The fact of disability must either be determined by Social Security, Medi-Cal, or by a doctor’s certification. 

3. The earnings generated by the funds in an ABLE Account are not taxable. 

4. Withdrawals of the earned income of the ABLE Account are not taxable. 

5. Contributions from anyone, are not deductible. (Although some states are considering making the contributions tax favored for state tax purposes.) 

6. Distributions from the ABLE Account for permissible items, such as education or a technology, are not taxable. An interesting point is raised in this by one commentator, that such distributions from an ABLE Account might not be considered in-kind support under SSI POMS rules. 

7. The beneficiary may only have one ABLE Account. 

8. Any number of people INCLUDING the designated beneficiary, [and as a preliminary conclusion by Advocates, probably including the trustee of Special Needs Trust] can contribute to the ABLE Account, however the total amount contributed to any calendar year from all sources, cannot exceed $17,000.[in 2023; this amount increases periodically] 

9. It appears that the ABLE Account must be established by the designated beneficiary or a parent or legal guardian or an Attorney-in-Fact named in a Power of Attorney executed by the disabled beneficiary. That seems to limit the family members who can create such an account if the designated beneficiary lacks capacity. 

10. There are two limits on the amount that is permitted to be deposited into an ABLE Account.

a. The account may not contain more than the limit allowed by the state where the account is when established. For example, in California, the limit in 2021 is $529,000. 

b. In CA, for Medi-Cal purposes there is no limit other than the state 529 account limit noted above. So, if all the client needs are Medi-Cal, and not SSI, then the account can hold up to $529,000 in California in 2021, and Medi-Cal will not count that asset up to that amount toward the asset limit. 

c. The second limit is $100,000. If the client needs SSI, and not just Medi-Cal, any assets held in the ABLE Account which exceed $100,000. are countable to the SSI recipient. Unmarried SSI beneficiaries are allowed to keep up to $2000 in countable assets. That means if an SSI beneficiary has no other assets whatsoever, he or she may keep up to $101,999.00 in the ABLE Account. 

d. Note that most developmentally disabled persons will receive Disabled Adult Child benefits on the work record of their retired or deceased parent. That benefit generally exceeds the SSI limit and thus disqualifies the individual from SSI, but under CA rules, the adult disabled indigent child, can usually still qualify for Medi-Cal. That means that in CA, most holders of ABLE Accounts will usually be subject to the higher limit on ABLE Accounts, not the $100,000. limit. 

e. Considering practical issues. i. Considering that the maximum annual contribution from all sources is $17,000, it would take six calendar years for an account to reach $100,000, and decades to reach $529,000. —and that would suggest that either the returns were extraordinary, or that no distributions were made, which defeats the point of the account. 

ii. One might ask why can’t the family of any disabled person, make gifts of $17,000 annually or why can’t an older couple self-fund an ABLE Account for themselves, assuming either one or both are disabled, and preserve the assets in such an ABLE Account in California? 

iii. The reason is that the disabled designated beneficiary of this ABLE Account MUST be disabled prior to age 26. [ or in 2026– age 46] 

iv. One might also ask why a disabled veteran, someone who is mentally ill, someone who is injured or takes sick as an adult, is excluded from taking advantage of this option. Unfortunately, that is simply the law. Although one commentator, indicated the limit was imposed to allow the legislation to be budget neutral. Other commentators would point to the fact that the key lobbyists were advocates for developmentally disabled children, not advocates for veterans, mental health service users, brain injured clients or elders. 

11. Other rules may apply if the designated beneficiary is no longer disabled or even in remission. The details of those rules will not be addressed here. 

12. The funds may be used only for qualified expenses, which do not include clothing or travel, but do include the following: 

• Education 
• Housing 
• Employment training and support 
• Assistive technology 
• Personal support services 
• Transportation
• Health prevention and wellness 
• Financial management, administrative services and legal fees 
• Expenses for oversight and monitoring 
• Funeral and burial expenses 

Additional practical considerations when advising clients: 

When they become available, the ABLE Account is a useful tool primarily for a developmentally disabled person, or others disabled at a young age, who: 

• Receive a small personal injury settlement. 
• Receive a small inheritance. 
• For the family of a person disabled prior to age 26 to fund a nest egg. 
• For a designated beneficiary who is working and wants to save his or her wages, in an easily accessible fund, without exceeding the $2,000 limit. 

It is also notable, that the federal law provides for steps in case the accounts cannot be financially viable. 

In thinking about the practical management of these accounts, unlike 529 college savings plans, these accounts can be very high maintenance and don’t necessarily offer the promise of future profit and additional high profit accounts to any financial manager who handles these accounts. 

The accounts: have practical caps of $100,000., and there are tax rules to be considered. There are rules about permissible and non-qualified disbursements that have to be handled by someone. The account owner, is, by definition, disabled, and therefore tools like online banking and automated phone services, may not be that helpful, and more personal services may be needed. There may be numerous small deposits, but surely there will be numerous small withdrawals, and the fund has to be evaluated and repaid to Medi-Cal upon the death of the beneficiary.