ABLE Accounts: Another Option for Clients on Medicaid and SSI

The following article was published in the Fall 2016 Utah Trial Journal. Written by Greg Maxwell and Daniel Maxwell.

ABLE Accounts – An Introduction

As settlement planning attorneys, we are consistently asked how to handle small settlements for injured plaintiffs that are receiving needs-based benefits such as Supplemental Security Income (“SSI”) or Medicaid. The following settlement scenario likely sounds familiar: your client is injured in an auto accident and ultimately the case settles for $50,000 gross settlement. After attorney fees, case costs, and medical liens, the client nets $20,000. Because your client relies on needs-based benefits, you need to help your client figure out to how to preserve those benefits.

Until recently, there were only two options for clients receiving needs-based government benefits: (1) clients could spend their settlement down in the month it was received, or (2) a Special Needs Trust could be established. However, the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (“ABLE Act”) provides a third potential solution for many clients who receive settlements and need to protect their needs-based government benefits.[i]

Benefits of ABLE Accounts

The ABLE Act was designed to enable individuals with disabilities and their families to save and pay for disability-related expenses. It does so by allowing for the creation of a financial account (“ABLE Account”) similar to a 529 college savings account. ABLE Accounts provide some important benefits, as outlined below.

Maintain Eligibility for Needs-Based Benefits. The assets in ABLE savings accounts generally will not affect the beneficiary’s eligibility for SSI, Medicaid, and other public benefits. SSI benefits will be suspended—but not terminated—if the ABLE account balance exceeds $100,000.[ii]

Tax-Free Earnings and Distributions. Earnings accumulate tax-deferred in the ABLE account, and earnings and distributions are tax-free if withdrawn for qualified disability expenses.[iii]

Limitations of ABLE Accounts

While ABLE Accounts are a valuable planning tool in many situations, there are a number of limitations to consider.

Eligibility. One major limitation on the use of ABLE accounts is that the designated beneficiary must have been disabled before his or her 26th birthday. Thus, an ABLE account can be set up for a beneficiary who is older than 26 as long as the beneficiary became disabled before his or her 26th birthday.[iv]

To be considered disabled, a beneficiary must be (1) eligible to receive SSI or Social Security Disability Insurance or (2) diagnosed by a qualified physician as having a physical or mental disability resulting in marked and severe functional limitations that is expected to last no less than 12 months.[v]

Qualified Disability Expenses. Funds within an ABLE Account should only be used on items that are considered a qualified disability expense. Examples of qualified disability expenses include education, housing, transportation, job training and support, assistive technology and personal support services, health services, preventive care, wellness programs, financial management and administrative services, legal fees, expenses for oversight and monitoring, and funeral and burial costs.[vi]

If funds from an ABLE Account are used for non-qualified expenses, there is a federal tax penalty of ten percent, and the earnings portion of the funds withdrawn will be treated as income.[vii]

Contribution Limits. Another limitation of ABLE Accounts is the total annual contribution limit. Total annual contributions are limited to the annual gift tax exclusion amount (currently $14,000).[viii]

In addition to the annual contribution limit, there is an aggregate account value limitation. The total aggregate account value limit for an ABLE Account cannot exceed the limit on education-related 529 savings accounts (roughly $400,000).[ix] Unlike 529 college savings accounts, federal regulations permit only one ABLE account per eligible individual.[x]

Residency Requirement (now waived). When the ABLE Act was originally passed, the Act stipulated that an individual had to open an account in his or her state of residency. However, this provision was eliminated by Congress in 2015.[xi] This means that regardless of where your client resides and regardless of whether his or her state of residency has established an ABLE program, your client can enroll in any state’s program as long as the out-of-state program accepts out-of-state residents.

At the time of writing, three states have ABLE account programs open to out-of-state residents: Ohio, Tennessee, and Nebraska. (Update: as of January 1, 2017, the following states have national ABLE account programs: Oregon, Nebraska, Michigan, Ohio, Tennessee, Virginia, and Alaska.) [xii] Thus, even if an injured plaintiff resides in Utah, he or she can enroll in an ABLE account administered by one of these states.

Currently, Utah does not have an operating ABLE Account program. The authors believe that Utah may have its ABLE Account program operational sometime in 2017.

Medicaid Reimbursement. After a beneficiary dies, funds in an ABLE account may be used to pay any outstanding qualified disability expenses (including funeral and burial expenses) of the beneficiary.[xiii]

Once any outstanding qualified disability expenses are paid, any remaining amounts in the ABLE account may be claimed by the state to reimburse Medicaid expenses. The state is entitled to be reimbursed for all Medicaid assistance paid on behalf of the beneficiary after the ABLE account was established.[xiv]

Differences Between ABLE Accounts and Special Needs Trusts

ABLE Accounts and Special Needs Trusts, at their core, have a similar goal: to preserve needs-based benefits for disabled individuals. However, there are some important differences that are worth noting.

Flexibility. An ABLE Account may provide more flexibility and control for the beneficiary than with a Special Needs Trust. Whereas in a Special Needs Trust the trustee must make payments on behalf of the beneficiary, in an ABLE Account the beneficiary can make purchases on his or her own behalf.

Payment of Housing Expenses. With ABLE Accounts, the beneficiary can use funds from the ABLE Account to pay for housing expenses without impacting his or her eligibility for SSI (as long as the beneficiary uses the funds in the same month he or she takes out the funds). If a Special Needs Trusts pays for housing expenses on behalf of a beneficiary receiving SSI, the beneficiary’s SSI payments will be reduced. Thus, the Social Security Administration provided ABLE Accounts with this significant advantage.[xv]

Payment of Funeral and Burial Expenses. Funds for funeral and burial expenses set aside in a Special Needs Trusts are limited to $1,500 or less. At this time, there does not appear to be any limit on funds used for funeral and burial expenses in ABLE Accounts. The ability to pay for funeral and burial expenses without a financial limit is an advantage of an ABLE Account compared to a Special Needs Trust.[xvi]

Cost Efficiency in Small Settlements. For net settlements of around $25,000 or less, it may be cost prohibitive to establish and administer a Special Needs Trust. Often, these individuals have little choice but to essentially impoverish themselves and spend down their assets to below the $2,000 asset limit to maintain eligibility for Medicaid and SSI.

ABLE Accounts provide a viable alternative in small settlements to spending down assets unnecessarily. The proceeds from a settlement (or perhaps from a small inheritance) can be placed in an ABLE Account while preserving needs-based government benefits.

SSI Limits. As indicated previously, if the value in an ABLE Account exceeds $100,000, the value over $100,000 is treated as a countable resource for purposes of determining SSI benefits.[xvii] Special Needs Trusts do not have this same $100,000 countable resource limitation.

Age of Disability Requirements. In order to be eligible for an ABLE Account, the beneficiary must have been disabled before his or her 26th birthday. First-Party Special Needs Trusts can be set up for a beneficiary at any point before the beneficiary’s 65th birthday. Third-Party Special Needs Trusts have no age of disability restrictions.

ABLE Accounts and Special Needs Trusts: Better Together?

Careful settlement planning is needed any time your client receives needs-based benefits. So, for our settlement scenario with your client who will net $20,000 and was disabled before the age of 26, using an ABLE Account and a Special Needs Trust together could provide a powerful and flexible planning option.

One reason using ABLE Accounts along with a Special Needs Trust can be powerful in this or other scenarios is that the combined use resolves a common frustration with Special Needs Trusts: if the beneficiary receives SSI, the funds from the Special Needs Trust cannot be used to pay for housing expenses without reducing monthly SSI payments. The reduction occurs because SSI treats any payments from a Special Needs Trust for a beneficiary’s shelter as in-kind support and maintenance to the beneficiary.

ABLE Accounts do not have this same limitation (as long as the funds are used in the same month they are withdrawn). Thus, one settlement planning technique that can provide significant value to your client is to establish a Special Needs Trust and instruct the trustee to deposit $14,000 (the current gift tax exclusion amount) each year from the Special Needs Trust into the ABLE Account. Your client can then pay for housing expenses out of the ABLE Account and still receive full SSI payments. This arrangement can provide much needed financial relief to pay for housing costs without jeopardizing SSI or Medicaid.

Bottom Line for Plaintiffs and Attorneys

The ABLE Act gives injured individuals one more option when deciding how to allocate and utilize their settlement funds in a way that won’t jeopardize their continued eligibility for needs-based benefits such as Medicaid and SSI.

In many cases, using a Special Needs Trust along with an ABLE Account will provide the greatest amount of flexibility and benefit to settling plaintiffs. Because each client’s situation is unique and ABLE Accounts are a new option with frequent regulatory developments, make sure you obtain advice from a special needs attorney or settlement planner. Careful planning can help maximize settlement value and preserve much-needed government benefits.


[i] Stephen Beck, Jr., ABLE Act of 2014, Pub. L. No. 113–295, 128 Stat. 4056 (2014).

[ii] See Social Security Administration Program Operation Manual System SI 01130.740, http://policy.ssa.gov/poms.nsf/lnx/0501130740 (last visited Sep. 30, 2016).

[iii] I.R.C. § 529A(a).

[iv] I.R.C. § 529A(e)(1).

[v] I.R.C. § 529A(e)(2)(A).

[vi] I.R.C. § 529A(e)(5).

[vii] I.R.C. § 529A(c)(3)(A).

[viii] I.R.C. § 529A(b)(2)(B).

[ix] I.R.C. § 529A(b)(6).

[x] I.R.C. § 529A(b)(1)(B).

[xi] Protecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114–113, § 303, 129 Stat. 3087 (2015).

[xii] For a current listing of ABLE Account programs, visit the ABLE National Resource center at www.ablenrc.org.

[xiii] I.R.C. § 529A(f).

[xiv] Id.

[xv] See POMS, supra note 2.

[xvi] Id.

[xvii] Id.

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