Congress Approves Tax-Free Savings Accounts for Some People with Disabilities

A new law just passed by Congress and signed by President Obama will allow people with disabilities who became disabled before they turned 26 to set aside up to $14,000 a year in tax-free savings accounts without affecting their eligibility for government benefits.  

Under the Achieving a Better Life Experience (ABLE) Act, the tax-free savings accounts can be used to pay for qualifying expenses such as the costs of treating the disability or for education, housing and health care, among other “disability-related expenses.”  The existence of the accounts will not compromise the individual’s ability to qualify for benefits like SSI or Medicaid as long as the account balance does not exceed $100,000.  

States must set up programs for families to invest in the new so-called “529A accounts” and will provide investment options. The act takes effect at the beginning of 2015, meaning that states will have to act soon to regulate these new accounts. Once in place, ABLE accounts will become one more tool for families of people with special needs to use in order to protect their loved ones’ valuable benefits while trying to provide a decent quality of life. 

But as Howard Gleckman, a fellow at the Urban Institute, points out in a Tax Policy Center blog post, the law prevents saving for disabilities that come later in life, such as dementia or severe arthritis.  “In addition,” Gleckman writes, “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.”

The law’s age-26 cutoff was part of a compromise to decrease the bill’s original projected pricetag from $20 billion to $2 billion over 10 years.  The cost was reportedly paid for by tightening a variety of Social Security and Medicare rules, including barring Medicare payments for vacuum pumps that treat erectile dysfunction.