In the week leading to the Christmas holiday, the US congress passed the ABLE Act of 2014 as part of the Tax Increase Prevention Act of 2014. ABLE stands for Achieving a Better Life Experience. The Act creates the new 529A plan. It is a significant change to the financial planning landscape for special needs beneficiaries.
The 529A plan is modeled after the Section 529 College Savings Plans, which are widely used for college planning. The 529A is meant to help people with disabilities as defined under Social Security rules and will allow tax advantaged distributions for certain expenses for the disabled beneficiary including housing, transportation, health and wellness, education and more without disqualifying the disabled individual from Federal and State aid.
As with the current 529 plans, for funds not used for qualifying expenses, any investment growth would be taxed as ordinary income plus a 10% penalty. Additionally, the funds can be rolled over tax-free from one ABLE account to another and the designated beneficiary can be changed from one disabled person in a family to another in the same family.
In theory the 529A will be limited to the same maximums that apply to 529 plans in their respective state. However, in practice the maximum amount that can be held in a 529A will be limited to $100,000. Above that amount, the beneficiary may lose his or her qualification for Medicaid coverage. In addition, a maximum of $14,000 can be contributed annually to a 529A.
There are other differences between the 529A and the current 529 plans. For example, it appears that the 529A will only be able to be used in the beneficiary’s resident home state. Hence, if the beneficiary moved, it may require rolling over the 529A from one state plan to another. That is different from the college 529, for which families can use the best state plan that they can find, including out of state plans.
The 529A is a great new tool to add to the panoply available to help disabled people. It will allow more middle-income families to plan support for their disabled family members with an easy to use framework that should be relatively low cost. The 529A comes with built-in advantages such as lower costs and tax advantages. On the other hand, there are restrictions for annual and maximum contributions to the 529A. On balance, the new plan should be very attractive to many middle class families.
It will take some time for 529A rules to be finalized and for states to roll out the plans. Hopefully, Massachusetts will be at the vanguard!
(an earlier version of this article also appeared in the Boston Globe)