529 ABLE Plans: Pros & Cons

529 ABLE plans are accounts that can be used to provide for a disabled beneficiary and can be a low-cost alternative to a special needs trust. A 529 ABLE plan is similar to an education 529 plan in that earnings on the contributions are tax-deferred and tax-free when withdrawn to pay for qualified expenses for an eligible individual. Prior to 529 ABLE plans, individuals could lose their eligibility for Medicaid and other government programs for having a few thousand dollars in assets.  

529 ABLE Plan Advantages 

Some advantages to these accounts are that qualifying expenses include a range of possibilities such as 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, as well as many other approved expenses. As you can see, this covers almost any expense related to the beneficiary.

A 529 ABLE plan will have no impact on Medicaid eligibility and is afforded asset protection against bankruptcy claims. They are also easier and less expensive to set up and maintain than a special needs trust. An individual with a disability can work and maintain a 529 ABLE plan as long as the individual meets the definition of disability and is engaged in substantial gainful activity.

529 ABLE Plan Disadvantages

There are some important disadvantages to these accounts, such as that a designated beneficiary is limited to having only one 529 ABLE plan. While eligible 529 ABLE account holders are free to select a plan sponsored by any state, many states restrict non-resident participation in their plans. The annual contribution limit is $15,000, the same as the annual gift exclusion, which is significantly less than what can be put in a trust. A 529 ABLE plan beneficiary who works may also contribute his or her compensation up to the poverty line amount. A beneficiary can’t contribute this additional amount if their employer contributes for them to a retirement plan.

There are also tax penalties imposed on both non-qualifying account distributions and excess account contributions. If an excess contribution to a 529 ABLE account is not withdrawn, the account owner will be assessed a 6 percent excise tax, and SSI benefits are suspended whenever the 529 ABLE plan assets exceed $100,000. However, benefits will resume once plan assets fall back to $100,000 or less. Upon the death of the designated beneficiary, the state will have a creditor claim for the repayment of any net medical assistance received from Medicaid after the establishment of the account.

For those who can afford to fund a special needs trust, deciding whether to use a trust or a 529 ABLE plan or a combination of the two can be complicated. Special needs trusts have associated set-up and ongoing costs. They often don’t make sense unless there is a larger amount of funds to invest. With trusts, investment gains are taxable, but you can make unlimited contributions without affecting a beneficiary’s eligibility for government benefits.

It is advisable to discuss with your attorney and CPA which option may be a better choice for your unique situation.