Advisers who help clients plan financially for children with special needs may soon have a new tax-advantaged tool.
Proposed federal legislation would allow the use of Section 529 accounts — traditionally set up to allow for tax-free savings for college funding — to benefit those with special needs.
The accounts could grow tax-free and be used to pay for the costs of educating, housing and transporting disabled people beyond what private insurance, the Medicaid program and the Supplemental Security Income program cover. The accounts created under the proposed Able Act 529 also could be used to pay for technology or employment-related costs for a person with special needs.
Importantly, savings in the accounts of up to $100,000 would not adversely affect the means-tested benefits received through Medicaid and Social Security.
"By providing a tax-advantaged means to provide for extra costs, the Able Act is a pathway to a better and more certain economic future for individuals with disabilities and their families," said Michael Morris, executive director of the National Disability Institute.
The bipartisan measure, introduced last month, has 89 co-sponsors in the House and 26 in the Senate. Legislation with a similar goal of providing a tax-advantaged savings vehicle to benefit people with disabilities was first introduced in 2006, but never gained much traction because of its financial impact on the federal budget. Significant changes have been made to the proposal to make its chances of approval much greater, supporters said.
The current proposal includes a “payback” provision that would allow the balance of these accounts left after a beneficiary dies to go toward reimbursing Medicaid for some of the benefits the government provided to the individual.
“There's a lot of talk now about the rising costs of Medicaid and other government benefits, as well as states not being able to pay for housing programs,” said Mary Anne Ehlert, a financial adviser whose practice is focused on helping families plan for members who have special needs. Able accounts could give families a way of taking on more of the costs as federal and state entities have fewer resources.
As drafted, a beneficiary could have an Able account or a college savings account, not both. Like today's 529s, though, a beneficiary could have multiple Able accounts. The accounts also could be rolled over into a college savings account if the person were deemed no longer to be disabled or could be rolled over to another family member, according to the proposed bill.
Ms. Ehlert, who created a company called Protected Tomorrows, aimed at helping educate other advisers about the best planning tactics for disabled individuals, said it will take time to get states to modify their plans.
“There are limitations on the Able Act 529 that will be very important for advisers to understand, or they could put families planning at risk,” she said.
