New 529A Plan for the Disabled Will Offer Tax Advantages, Preserve SSI and Medicaid Eligibility

Like a 529 college savings plan, assets in a 529A grow tax-free, and withdrawals aren't be taxed when used to pay for qualifying expenses, including health and wellness expenses, housing, transportation, education, employment training, and legal fees.

A new tax-free account for individuals with disabilities called the 529A is an important development that has flown largely flown under the radar. The tax-exempt growth the 529A offers will be attractive to anyone planning for someone with special needs.

Like a 529 college savings plan, assets in a 529A will grow tax-free, and withdrawals won’t be taxed when used to pay for qualifying expenses, including health and wellness expenses, housing, transportation, education, employment training, and legal fees. (Nonqualified withdrawals will be taxed at ordinary income rates, plus a 10% penalty.) States have the option to provide tax benefits for contributions, such as tax deductions.

Under the Achieving a Better Life Experience Act (ABLE) Act, passed by Congress last December, each state will set up its own 529A program. None has yet, but several states, including Maryland and California, are in the process of creating 529A programs.

The account owner/beneficiary must meet the Social Security definition of disability and have developed or been diagnosed with the disability prior to age 26. Anyone who qualified for Supplemental Security Income (SSI) before turning 26 will be eligible. Others will need a doctor to submit a letter certifying that the individual is blind or has severe functional limitations.

Assets held in a 529A plan will not disqualify the beneficiary from SSI benefits or Medicaid as long as the total account balance does not exceed $100,000.

It’s a big advantage because individuals with more than $2,000 in available assets outside of a 529A are disqualified from SSI. If the 529A account balance exceeds $100,000, SSI benefits are suspended. If the balance falls below the threshold, SSI benefits will resume.

The beneficiary, or someone able to make legal and investment decisions on his or her behalf, will make investment choices within the plan’s options and can change these elections twice a year.

While relatives or friends can contribute, the account holder must be the beneficiary, and each beneficiary may hold only one account. Gifts to a 529A will be irrevocable. The yearly contribution limit matches the federal gift tax exclusion, currently $14,000 per beneficiary.

The requirement that the account holder be the beneficiary may prove a complicating factor, since many beneficiaries may be adults with diminished capacity or minors. If the beneficiary is not well-equipped to direct his or her own investments, you’ll need someone with custodianship or power of attorney to manage the account.

Special Needs Trust Avoids a 529A Downside

There’s one major 529A downside. States can make reimbursement claims on 529A assets that are unspent at the death of a beneficiary who was on Medicaid.

This provision could wipe out a 529A’s balance if a beneficiary dies unexpectedly or assets are not spent down over time.

In contrast, a special needs trust—an established way of providing for a disabled person—avoids the Medicaid-payback requirement if the trust was not funded with the beneficiary’s own savings.

Families who think there may be money left over beyond a beneficiary’s lifetime or who want to provide for expenses that would not be considered qualified for 529A spending, may prefer a trust.

Trust contributions are unlimited, and if structured properly, trust assets will never affect the beneficiary’s eligibility for government benefits. Additionally, a 529A can only receive cash contributions, but a trust can accept securities, life insurance, or tangible property.

Some families may find a trust is still the better option. Some may wish to have both a trust and a 529A.

A trust, however, does pay income tax on its income. Additionally, a 529A will be simpler and cheaper to set up and administer than a trust. A properly created special needs trust involves initial legal fees at the outset along with ongoing administration expenses.

The setup and administrative costs put a trust out of reach for many, whereas you only need modest assets to fund a 529A.

Since the 529A isn’t available yet, you can’t do anything now other than learn about them and perhaps contact your state legislator to find out the status of legislation in your state.

Paul Jacobs is the chief investment officer of Palisades Hudson Financial Group, based in the firm’s Atlanta office. He holds the Certified Financial Planner (CFP) certification.

Palisades Hudson is a fee-only financial planning firm and investment adviser based in Scarsdale, NY, with $1.3 billion under management. It offers investment management, estate planning, insurance consulting, retirement planning, cross-border planning, business valuation and appraisal, family-office and business management, tax preparation and executive financial planning. Branch offices are in Atlanta, Fort Lauderdale, FL, and Portland, OR.

The firm’s recent book, “Looking Ahead: Life, Family, Wealth and Business After 55,” is a paperback and Kindle e-book available on Amazon at http://tinyurl.com/ocro2dx and at Barnes & Noble at http://tinyurl.com/m9ca3qk. Read Palisades Hudson’s daily column on personal finance, economics and other topics at http://palisadeshudson.com/current-commentary. Twitter: @palisadeshudson.