Are tax-free ABLE accounts the right financial solution for the disabled?

Many people with disabilities face financial challenges. To address this issue, Congress is on the verge of approving the Achieving a Better Life Experience (ABLE) Act that would create tax-free savings accounts to assist disabled people. However, it comes with its eligibility restrictions and cannot be a complete solution. 

Reuters/Jonathan Ernst/File
U.S. House Speaker John Boehner wipes away tears during a news conference following a House Republican caucus meeting at the U.S. Capitol in Washington December 2, 2014. Boehner was moved while listening to remarks about the ABLE Act, proposed legislation to make tax-free savings accounts available to people with disabilities to cover certain expenses.

For the first time since 2010, Congress may be about to acknowledge that people with disabilities cannot have a decent quality of life with limited financial resources and modest government support. It is on the verge of approving the Achieving a Better Life Experience (ABLE) Act, which would create tax-free savings accounts to assist some people with disabilities while not jeopardize their eligibility for Medicaid or Supplemental Security Income (SSI).

The House passed the measure yesterday and the Senate is likely to approve it before adjourning for the year later this month. The law is a serious attempt to address a real problem—the financial challenges faced by many people with disabilities. But it is too limited and too poorly targeted to really address those issues. Mostly, it is more evidence that Congress cannot respond to the enormous financial challenges of caring for those who need long-term supports and services with small, patch-work solutions like the ABLE Act.

ABLE accounts would be the latest in a long list of tax-advantaged savings vehicles. They’d look much like the tax-free “529” accounts used to save for college education. They’d be run by the states. Friends or relatives could contribute up to a total of $14,000-a-year, though states could impose maximum limits on total contributions. Each beneficiary could have only one account. Contributions would not be excluded from federal income tax, but are exempt from the gift tax. States could also exempt contributions from their own income taxes.

Account assets could be withdrawn tax free, as long as they are used for eligible services such as housing, transportation, assistive technology, home health aides, and the like. In general, the government would not include account assets when determining eligibility for SSI or Medicaid (usually available only to people with financial assets of $2,000 or less). SSI payments would be suspended when an account balance exceeds $100,000, but Medicaid benefits would continue.

There are serious limitations to the proposal. Crucially, only people who became disabled before reaching age 26 would be eligible. They could continue to participate after 26, but the onset of their disability must have occurred prior to that age. For the most part, ABLE would be limited to people with developmental disabilities, mental illness, and severe childhood conditions such as cerebral palsy.

Few older adults would be eligible since their disability usually results from late-in-life diseases such as dementia, heart failure, and severe arthritis.

In addition, while the program benefits those with friends or relatives who can contribute to the accounts, it does much less to help those from truly low-income families who may not have money to give. Some of those who would benefit already have access to another mechanism, Special Needs Trusts.

Finally, some conservatives object to ABLE because they fear it will eliminate the asset test for Medicaid and TANF for families with a child eligible for SSI, thus greatly increasing the number of people eligible for the programs.

At a time of grinding legislative gridlock, ABLE has strong bipartisan support–381 members of the House and 74 senators sponsored the bill, which was originally introduced by Rep. Ander Crenshaw (R-FL) and Senator Bob Casey (D-PA). But because of its cost, the measure has been sharply scaled back in the last year. The latest proposal would cost about $2 billion–$900 million in lost revenue and $1.1 billion in new spending.

Sadly, the bill is more likely to be remembered for the way Congress is paying for it. Lawmakers chose to tighten a variety of Social Security and Medicare rules, including one provision that would bar Medicare payments for vacuum pumps that treat erectile dysfunction (known by late-night comics as penis pumps). Many jokes will ensue.

Given its limitations, ABLE may turn out to be more tax shelter than serious solution. But Congress has not even acknowledged the enormous financial challenges faced by most people with disabilities (including seniors) since it passed the CLASS Act as part of the 2010 Affordable Care Act. CLASS, an attempt to create a national, voluntary long-term care insurance program, never got off the ground and was eventually repealed.

At least now Congress is once again recognizing the problem. I only hope it doesn’t  think ABLE is a complete solution.

The post Are Tax-Free ABLE Accounts The Right Financial Solution For People With Disabilities? appeared first on TaxVox.

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