Now that the government backed down on its proposed changes to 529 plans for future education expenses, we can expect the same tax benefits present for education to be applied to families and individuals who face expenses caring for disabled people.
Families will be able to deposit funds into special savings accounts, called 529As, and earnings in these accounts will grow and can be withdrawn without any tax consequences. The annual contribution limit will start at $14,000, linked to the amount of the gift tax exclusion, and accounts can grow to $100,000 without being counted against qualification for Social Security benefits. The actual account maximum will be defined within each state’s regulations.
As long as the money withdrawn will be used to pay for qualified expenses, like housing, education, transportation, health care, and rehabilitation for the disabled beneficiary, these tax advantages will apply. This new account is a result of Congress passing the Achieving a Better Life Experience (ABLE) Act of 2014 and President Obama signing this bill into law.
Like 529 plans for college education, 529A plans will be managed by each state. This will provide another stream of revenue for the companies contracted by the states to provide these services, an economical benefit to organizations usually within that state. For an idea of what kind of fees consumers will see with 529A plans, you can see this chart that outlines current 529 plan fees on a state-by-state basis. There’s no reason to assume that 529A plans will be any less expensive than 529 plans.
Will 529A accounts help people with disabilities?
Federal benefits like Medicaid aren’t helpful to households that have more than $2,000 in savings. Medicaid could have been an essential tool for helping families afford medical expenses for disabled people, but the asset limitation does little to encourage financial security. A 529A plan would allow a disabled person to have much more sizable assets while still qualifying for Supplemental Security Income.
Some families have been able to establish a special needs trust to get around the $2,000 savings maximum for Medicaid, but not every family with a special-needs member can afford to establish a trust and these trusts don’t offer the tax benefits that 529A plans will. Some savvy savers have used 529 college savings plans inside a special needs trust to pay for educational expenses for a disabled beneficiary, but with the 529A plan, this can be done without the special needs trust.
One disadvantage of 529A accounts is that a household may take advantage of only the plan available in its home state, unlike 529 plans for college savings. Savers won’t be able to shop around. AARP also points out that any funds remaining in an account after a beneficiary passes away may be turned over to the state to help pay for Medicaid expenses. Also, if a beneficiary withdraws funds from a 529A plan and doesn’t qualify for special tax treatment, the withdrawals will be subject to a 10% penalty as well as the income tax, just like a 529 plan.
Excess contributions, deposits made into 529A plans beyond the gift tax exclusion, will be subject to a 6% penalty — so if you choose to save using this vehicle, be careful.
The added cost of typical expenses for an individual with autism over the course of his or her lifetime is $1.4 million according to the U.S. Department of Agriculture. The added cost increases to $2.3 million for a person with intellectual disabilities. Keeping that in mind, the advantages of a 529A plan represent a small drop in a bucket for people who are embarking on a life journey with an automatic financial disadvantage. When some families can take advantage of 529 plans for savings on education expenses, 529A plans could help create a complementary opportunity for families whose children may never attend college, but are certain to spend just as much, if not more, money on educational expenses for specialized services.
529A plans are protected in bankruptcy proceedings, as long as the contributions were made at least two years prior to filing for bankruptcy. A portion of contributions made more recently may be available to creditors’ claims. Due to the sometimes unmanageable cost of living with a mental or physical disability, the need to declare bankruptcy is more likely than it would be for other individuals, so this protection could be important or even life-saving.
These are the full qualified expenses, and they are quite comprehensive: Education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses. Any withdrawals made for other expenses will be subject to the penalty and tax.
Who qualifies to be a 529A plan beneficiary?
In order to qualify, a person must be or have been blind or disabled before his or her 26th birthday. If the person qualifies as blind or disabled under Title II of the Social Security Act or has a disability certificate on file with the IRS, he or she will qualify. Disabilities that qualify are those that include a mental or physical impairment that can lead to death or will last for at least 12 months, by the determination of a physician.
Some details about 529A plans still need to be worked out by the government, but as the plans exist on paper, they could provide some relief to people managing life with a disability. Once 529A plans are available to savers and consumers, readers will be able to find more information on Consumerism Commentary.
Published or updated January 30, 2015.