The IRC Section 529A Plan entered U.S. Federal law with the signing of Public Law 113-295, The Stephen Beck, Jr., Achieving a Better Life Experience Act on Dec. 19, 2014, also known as the ABLE Act. The creation of a 529A or ABLE Account allows a person with a disability (that had an onset before their 26th birthday) to invest in their future or save for larger purchases in a tax-advantaged account.
ABLE accounts are designed with some unique rules, including that contributions are generally limited to the annual gift exclusion ($15,000 in 2021, aggregated across all contributions for the beneficiary), and that distributions of growth are tax-free to the extent that they follow the rules of the broadly defined “qualified disability expense” (QDE), which includes expenditures for education, housing, transportation, employment training and support, assistive technology, financial management and administrative services, legal fees, and even basic living expenses (and more).
Notably, though, the 529A account is truly designed for someone who meets the Social Security Administration’s definition of disability: “the inability to do any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment 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.” Which is important, because the application process for an ABLE account is relatively simple, and someone with a specific lifetime diagnosis that existed prior to their 26th birthday would be permitted to open an ABLE account to see how it works. However, if they are not, at the time, meeting SSA’s definition of disabled, there are no QDEs, and distributions on earnings will be taxed (and will be subject to a 10% early withdrawal penalty as well). Though only the earnings are subject to taxes and penalties, as the original contributions/cost-basis can still be withdrawn (albeit on a pro-rata basis) tax- and penalty-free.
Beyond the tax-preferred treatment of earnings in ABLE accounts for eligible disabled beneficiaries, though, one of the biggest impacts of using such accounts is that they help shield assets from any asset-limited government benefits program, including SSI, Medicaid, and some other programs such as Section 8, EBT (Electronic Benefit Transfer for the Supplemental Nutrition Assistance Program or SNAP), and other miscellaneous state and local benefits.
SSI eligibility and 529A plans
SSI (Supplemental Security Income) is the program most people think of when they talk about “disability benefits.” But to qualify, SSI has very restrictive asset and income limitations to ensure that those who are receiving benefits are really in need of government support.
As a result, prior to the ABLE account’s existence, people trying to claim SSI had to spend down their assets below the $2,000 limit — and continue to spend down any money that rose above the $2,000 limit — to qualify. The only alternative was to move the assets into an even more restrictive (and potentially expensive) supplemental needs trust to avoid having them counted as assets while continuing to receive the benefits of SSI (and Medicaid).
As part of the ABLE legislation, though, 529A plans shield any assets the beneficiary may have (e.g., cash or financial investments) from being counted towards SSI $2,000 asset limit. Thus allowing the beneficiary to ‘have’ assets – held within the 529A plan – and still be eligible for SSI, without going through the cost and hassle of establishing a supplemental needs trust (albeit while making themselves subject to the 529A plan rules for qualifying distributions).
Going forward, disabled beneficiaries can now receive gifts from family members into their 529A plans and avoid having those family gifts disqualify their benefit. And younger children who may have accumulated some assets before their 18th birthday can move savings and cash accounts into an ABLE account, so they don’t have to spend down their savings while becoming eligible for SSI once they turn 18.
Medicaid and 529A plans
Medicaid is tied to SSI, and has similar restrictions to SSI, as there is an asset and income limitation for who is eligible to have access to its medical insurance program.
While the medical insurance piece is important, though, the most important part of the Medicaid program is waiver supports. Waiver programs can provide services such as adult day health support (e.g., medical administration support), community integration support, adult day support (alternative to employment), assistive technology, career planning, home care attendants, homemakers, home-delivered meals, respite for caregivers, social work services, and nursing. The total cost of these waiver services might otherwise add up to tens of thousands of dollars and would otherwise be unaffordable and leave many individuals critically under-supported in their lives, but their costs are ‘waived’ (i.e., they are covered) for those on Medicaid, as long as they do not exceed the asset and income limitations.
However, the ABLE account allows for both Medicaid and these waiver services to continue even if someone has assets, is receiving cash supports, or even if they are earning money up to Substantial Gainful Activity (SGA) limits, as long as those dollars are held in (and subject to the rules of) the 529A Account.
Section 8, EBT and other benefits coordinated with 529A plans
The reality for people on SSI, Medicaid, and other critical resources is that they sometimes have to force themselves to spend any excess money that they have in a month (or put it in a trust that they don’t have control over) so that they don’t lose their income, healthcare and housing. This is commonly called “the poverty trap,” where benefit recipients, once on benefits that support their daily lives, cannot see a way out of poverty because they aren’t allowed to begin to save without losing their benefits (which can be lost long before the beneficiary has enough saved up to actually support themselves without those benefits).
In the case of Section 8 housing, electronic benefit transfer recipients (such as SNAP or TANF direct payment programs for food support), the ABLE continues to be a lifeline, allowing qualified individuals to build more of an emergency fund while receiving the benefits designated for people whose income is below the poverty line. The ABLE allows these qualified individuals, whose income continues to meet program limits, to put their cash in this investible account to save without fear.
Coordinating SSDI and disabled adult child benefits and Medicare with 529A plans
While SSI is only available for those whose assets are below specified (low) limits, Social Security Disability Income (SSDI) or the Disabled Adult Child (DAC) benefit is determined based solely on the individual’s disability status itself and their inability to earn a competitive wage.
As a result, there is less need for an ABLE account for those who are ‘only’ receiving SSDI (and either no longer receive or were never eligible for SSI), as there is no asset limitation. However, if they are still receiving Medicaid services, using the ABLE account still might be critically important.
On the other hand, once someone is eligible for SSDI for two years, they qualify to receive Medicare. And once Medicare is activated for the client and becomes accessible for medical insurance benefits, remaining on Medicaid may no longer be as important.
The caveat, though, is again that Medicaid is about more than ‘just’ medical insurance alone. If the recipient is utilizing any waiver services, the asset limitations of Medicaid remain relevant, and using the ABLE may be crucial to keep their critical support networks paid for and available to them.
529A plans as a(n excluded savings vehicle)
In addition to the fact that assets in an ABLE account are not considered toward the asset thresholds for major government benefits programs, one of the biggest benefits of 529A plans is that they allow the earnings to grow without having the asset limit tested again later, either.
In other words, once the asset is sheltered in a 529A account, all of its subsequent compounding growth inside the account is sheltered as well. Thus, while normally investment growth would be taxed (through some combination of interest, dividends and/or capital gains when sold), which would be deemed “income” and could potentially trigger the loss of benefits, with the ABLE account generating tax-free growth, the end result is not “just” tax-free growth itself, but also the benefit that the money can grow and continue to be excluded from public benefits consideration as well.
On the other hand, it’s also important to recognize that very low-income earners will not need tax deferral, as they are not paying taxes on their earnings (their income is below the standard deduction in the first place), and also may not even have the capacity to save much of anything. In such cases, the 529A plan is more about capturing any incremental amount of extra cash that is able to be saved at the end of the month (if/when that happens), or serving as a shelter for gifts from family and friends, allowing them to be saved instead of spent right away (without disqualifying for benefits given the asset limitation).
The emotional benefits of a 529A plan: Empowerment, independence, and living with anxiety and shame
Guardianship and conservatorship are legal processes that exist to make decisions on behalf of someone who is deemed unable to control their own money. Which in turn renders them largely unable to make any of their own decisions, from opening a business to even being able to sign their own documents and contracts.
As a result, guardianship should be viewed as a relatively ‘extreme’ measure. As it is not just that the individual can't make decisions without the support of somebody trusted, or an expression that they may make some less-than-ideal decisions for themselves (as nearly all young adults do at some point!); it is effectively saying the individual can't make any decisions on their own.
In turn, this means that just because an individual may need some help making decisions, it doesn't mean that they should irrevocably have their rights taken away from them. Because in reality, the loss of confidence that comes from being ‘prohibited’ from making decisions for oneself can be extreme and can permanently impair the future prospects of a disabled person ever wanting and being prepared to live independently.
In addition to the outright control issues, guardianship and the use of supplemental needs trusts can also create challenging power dynamics for disabled individuals. What 55-year-old wants to approach his little sister to get money out of his bank account to replenish his checking account on a monthly basis after rent is paid? Especially if it’s a younger sister who has a family of her own, answers the phone in a frustrated tone every time you call, complains about the tasks of administrating your trust and how it is more complicated than she thought, and lectures you on your forgetfulness when you are asking for a replacement phone for the 3rd time in a year? Even in situations where the trustee actually is supportive — but especially when they’re not — such situations can lead disabled individuals to not feel free to ask for financial support. Which in turn can result in periods of being underfed, ill-housed and/or mentally in a bad place.
Another significant emotional challenge for disabled individuals is that the benefits system that exists has check-ins, which can be as often as every six months. Nominally, the purpose of check-ins is to ensure that those receiving benefits are not ‘gaming’ the system and drawing more than they are entitled to. In practice, though, most of the time the recipient doesn’t even know there is a “game to play,” and is simply trying to maintain their benefits and figure out how to get what they are entitled to while not falling into crisis while trying to figure out a new process they may not understand. Some laws are so obscure you need to have the know-how of all the systems just to understand the rules. Consequently, often individuals are just so confused by the system that they are discouraged from seeking or using government benefits altogether, even in times of need.
Leveraging a 529A plan to gain (emotional) independence
One of the major challenges that disabled individuals face is “ableism”: when others assume that something must be done for a disabled person or assume that someone with a disability is not able to do something for themselves because of their disability.
For instance, the assumption that somebody with Down syndrome cannot speak for themselves, or that somebody with a physical disability will always need to be helped in moving around (and jumping in to do so, even with the intent of helping them, before they have an opportunity to do it themselves), is ableism. Which for the disabled individual can lead to feelings of shame, anxiety and self-doubt (around money, and more), such that even if the disabled individual is just as capable in a certain domain, if they’ve been taught to have feelings of shame and are constantly reminded that they can’t do or have access to certain things, they may eventually deny themselves, too.
The opposite of ableism is to always assume that the individual is competent until they prove otherwise and to always include the individual in the decision-making process. Which ultimately can help empower them and build their confidence to be more competent in being able to take care of themselves.
In this context, one of the best things about an ABLE account is that it is always owned by the individual with the disability, enabling them to have greater control of and autonomy over their own financial decisions, and empowering their confidence to navigate their own financial lives (without running afoul of eligibility for government benefits).
In fact, not only can a disabled individual open the ABLE account, and fund the ABLE account, but there is no rule against a trust contributing to an ABLE account, giving even more power (back) to the beneficiary. Thus, a trust can use its own distribution powers to fund the ABLE account, annually or as needed, so that the beneficiary gains more opportunity to make their own decisions throughout the year on what to do with that money without needing to go to the gatekeeper of their money and reducing what otherwise can be bad feelings between the trustee and the beneficiary of the trust. (Notably, this strategy also legally works around the restriction that supplemental needs trusts cannot pay for housing and food. ABLEs can.)
And while ABLE accounts do still have their own restrictions about how funds can be used — not entirely unlike the limitations on assets and income and how government benefits can be used — the ABLE account’s reporting structure, to ensure the distributions are qualified, is a process more akin to bookkeeping than a process to qualify (or disqualify) future support. Thus, an ABLE account does not have such a gatekeeper. Some individuals will still require the support of a representative payee to access and keep track of the transactions within the account, but that is a fully different process than going to a family member such as a sibling or aunt, friend of the family, parent, or another custodial support person for little things such as a new cell phone, groceries or painting supplies. Vacations and sports tickets are now attainable without asking permission.
The result, again, is that the use of the ABLE account makes it feasible for the individual to express what they would like to do, and what they would like for themselves.
In other words, the goal is to achieve “supported decision making,” or the ability for someone to not be controlled by guardianship and conservatorship and to have some more say in what they want for their lives while maintaining a structure that provides the necessary support.
After all, the reality is that very few of us live truly independent lives. Nobody lives entirely in a bubble; nobody is 100% a hermit. Support is required from friends and family members, and sometimes outside professionals. In the case of disabled individuals, there may be a need for greater support, but support systems do exist. When we look at people living in “connected households,” homes where professional caregivers, homemakers and other support team members are employed into a network of care, there are many individuals surrounding the person to make their lives more independent, structured in a way that gives the individual power to lead their care and fire and hire who they want.
Where needed, a team of support can help in financial decision making, and a power of attorney can still step in to support a person who has higher support needs in making complex decisions. While a 529A plan allows the disabled individual to have more autonomy and empowerment over the core of their financial needs and maintenance.
Maximizing the emotional and financial benefits of 529A plans
For a disabled individual who has relied on government benefits and waivers but wants to start working and become more financially independent, it’s a high-stakes, risky scenario.
The reason is that some waiver programs have waitlists, which can be months, years, decades or even a century (given the sheer number of people in need and limited government resources). Imagine you're an individual who thinks they can work but know that if you go off your waivers to keep your income, you may end up back on a waitlist so long there's no way you are ever going to get those services and support back. This phenomenon is known as benefit purgatory.
Fortunately, most states have what's called “working disabled” programs, where the beneficiary might lose a few hundred dollars a month of SSI as they begin to work and earn their own income, but not all of it (making the transition easier). In addition, most states have programs that encourage people to work and receive Medicaid (and remain eligible for the associated waivers). And in some cases, disabled individuals aren’t even currently utilizing or relying on all the programs that are available (which means it’s not necessarily a program to be concerned about losing eligibility for).
Nonetheless, it's very important to help disabled individuals get out of the benefit purgatory and grow their employment income and financial stability quickly to the point that if/when/as they render themselves ineligible for government benefits, they really do have enough to support themselves.
Enter the 529A plan. Notably, the ABLE account’s design does not allow for unlimited saving. Once the account reaches $100,000, benefit programs are allowed to freeze (but not terminate) the recipient’s benefits until the account is spent down below $100,000 (another form of asset-based test, albeit with a higher threshold than the usual limits for SSI and Medicaid).
This freeze puts a unique opportunity in front of the beneficiary, in that they can test out what it feels like to not have access to the benefits they are receiving for a period of time and test out the benefits purgatory transition. Someone can plan to do this exercise, or it can be required of them, but they should not need to reapply to programs to switch their benefits back on once the account has been reported to have been spent down below the asset limit.
This can be a powerful opportunity to plan and go through the emotional work of looking at life from a frame of more financial independence. Simply put, the financial support from the accumulated value of a 529A plan can allow someone to take greater risks with employment, to further build their own personal income and their personal confidence.
In addition, 529A plans can build toward even more financial empowerment and even more substantive personal goals. For instance, owning a home is traditionally both a significant pathway to wealth and an excluded asset in qualifying for government programs. However, it’s virtually impossible for a disabled individual to purchase a home because they’re unable to accumulate a downpayment (due to asset tests), nor qualify for a mortgage. An ABLE account can be an amazing opportunity for an individual to save for purchases that are going to be an excluded asset, given that the savings themselves may not be an excluded asset yet. When an individual is able to save money for homeownership, it can really help be the catalyst to a life out of the benefit purgatory.
Coordinating 529A accounts with employer retirement plans
When a disabled individual begins to work and generate their own income, it’s important to coordinate the 529A plan with the potential to contribute to employer retirement plans. As disabled individuals are permitted to contribute the income they earn from employment to their own ABLE accounts, but only if they're not also contributing to a retirement plan. Which means in practice, the working disabled must choose between 529A plan contributions or employer retirement plan contributions.
Fortunately, given that the working disabled often have limited income, both retirement account contributions and 529A plan contributions are eligible for the Saver’s Credit (up to 50% of the contribution amount for those with AGI of less than $39,500 in 2021, up to a maximum credit of $1,000).
The upside to choosing to contribute to the 529A plan is that while tax-free distributions of growth are limited to Qualified Disability Expenses, in practice, disabled individuals tend to have a wide range of expenses that qualify. Whereas a pretax retirement account may have limited value (as the tax deduction isn’t very valuable when income is low), and a Roth-style account may be tax-free after five years (since by virtue of their disability, the individual will otherwise be eligible for penalty-free withdrawals and tax-free earnings distributions), but that’s still give years longer than the tax-free growth of a 529A plan.
Still, though, a working disabled individual would want to be certain they are not missing out on an employer match — an ‘instant’ return that’s hard to replicate anywhere — and the state they're living in may have an exemption for the working disabled on assets that are in a retirement plan (so the accumulation of assets in the retirement account won’t cause a disqualification of government benefits along the way). Notably, though, this is a very state-specific scenario. In addition, some states offer an additional state tax credit for contributions to a 529A plan (similar to the credit that some states provide for contributions to a 529 college savings plan).
It is important to note that one of the main misconceptions of the 529As is that the money saved each month is removed from the person’s countable income for the Social Security Administration. This is not the case. While the ABLE account’s assets may not be treated as countable assets, the income-based tests of SSI, SSDI, and Medicaid are all still fully in effect when income is contributed to an ABLE account (i.e., the ABLE does not shield or protect earnings income that is contributed from being counted for income tests).
Selecting an ABLE account for the disabled beneficiary’s spending use
Most tax-preferenced accounts, from retirement plans to 529 college savings plans, don’t experience withdrawals very often. In part, this is simply because the accounts are most commonly used for accumulation — not decumulation — and also because even when it is time to take dollars out, typically distributions happen in larger ‘chunks’ (e.g., an entire semester’s tuition, an entire month, quarter or year’s worth of retirement spending, etc.).
By contrast, though, 529A plans often fuel day-to-day and weekly spending. As often the whole point of an ABLE account is that the disabled beneficiary cannot have more than $2,000 in assets in their own name to stay under the asset thresholds — even and especially including a liquid bank account. Which means most/all spending must occur directly from the account, and 529A plans are increasingly issuing debit cards that can be used by the disabled beneficiary to access the available dollars in the account.
Unfortunately though, in practice, the debit cards of ABLE accounts don't always work in all places. A lot of times, the debit card feature is administered with a local or state bank that itself has limited reach, such that even though it might say Visa or MasterCard, the debit card may not be eligible to be used at lots of places that otherwise accept those cards, including small and local gas stations, grocery stores, department stores and drugstores. Which means it’s very important to ensure that the debit card with the ABLE account will actually be usable at the stores that the beneficiary frequents.
In addition to debit card usability (at accepted stores), another important feature of ABLE account debit cards is how exactly they draw dollars from the account. For instance, some ABLE debit cards can draw in full from the account — which means a disabled beneficiary without ‘impulse control’ is at risk to overspend and fully spend down from their potentially limited assets. On the other hand, plans like Fidelity’s Attainable Savings ABLE, run by the state of Massachusetts, route dollars through a related but separate account with its own balance and limit, which means even if there is $5,000 in an ABLE account, the beneficiary might only be able to spend $1,000 of it immediately via the debit card, providing an additional layer of protection while still otherwise allowing the beneficiary at least some of their spending autonomy.
A similar approach to support beneficiary spending, from Ohio’s STABLE program (the first 529A offering in the country and one of the most innovative), loads what's called the True Link card, which also provides a separate balance against which the debit card can draw without opening up the entire account to the beneficiary at once, and done in a compliant way to ensure the balance is not counted unfavorably for income or asset purposes (as an outside bank account might be).
More generally, though, the point is simply that it's not just about whether a 529A plan’s debit card can be used everywhere, but also how easy it is to use and manage the withdrawals via the debit card.
From the financial advisor’s perspective, it’s also important to note that the Virginia 529A plan — ABLEAmerica — is administered by American Funds (which also manages the Virginia CollegeAmerica 529 plan), which makes it the only broker-sold 529A plan for financial advisors. Though notably, the Fidelity 529A plan in Massachusetts does offer their Registered Investment Advisers the opportunity to be on the ABLE account for their clients.
A common goal of people with disabilities is to live as much as possible like a person without a disability. This is also true when it comes to managing finances. That is what makes 529A ABLE accounts so empowering. The emotional benefit of a 529A account is that the person with a disability gets to save, invest and spend money, much like a person without a disability — living normally, saving like many adults, investing like smart adults, spending like every other adult. This is the emotional magic of a 529A account.
