News & Events

529A Accounts Bring Help for Special Needs People

-by Matt Neyland, CFA, CAIA, Director of Investments

Between doctor visits co-pays, medical equipment, education, therapy and other necessary expenses, the cost of raising a special needs child can top the $2 million mark over the course of a lifetime. It’s hard for people with disabilities and their families to save without running afoul of limits on the funds they can accumulate, and still qualify for some government benefits. For instance, to remain eligible for Medicaid health coverage or Supplemental Security Income (SSI), which assists low-income people who are disabled, a disabled person generally can’t have more than $2,000 in savings or other assets. If a disabled person earned more than $700 per month or had assets in excess of $2,000 they risked having to forfeit eligibility for government programs. The only way families could get around these restrictions was to spend thousands of dollars in legal fees setting up special needs trusts.

529A Accounts, Savings Plan

At the end of 2014 the ABLE Act was passed to give families a new way to save for special needs family members. The Act created a new account, 529A, which allows for tax-free growth for a special needs beneficiary. This is a major step in the right direction for Americans living with disabilities, who, prior to the bill’s passage, had little incentive to save any money they earned and were practically forced to live below the poverty level. The ABLE Act has created a way for families to adequately save for the future as a supplement to private insurance and public benefits. Now states across the country are starting to launch 529A accounts. When the designated beneficiary of a 529A account dies, all remaining funds should be distributed to a surviving beneficiary indicated on the 529A account or to the estate of the deceased designated beneficiary.

What is a 529A account?
These accounts are administered by the states, similar to 529 education savings accounts. The funds must be used for qualified disability expenses. The annual contribution limit is $14,000 per individual, and total contribution limits vary by state. However, only the first $100,000 saved in the account is exempted from the SSI $2,000 limit, and beneficiaries with account values greater than $100,000 will not receive any SSI benefits (but will still receive Medicaid).

Who is eligible?
Families can establish a 529A account for an individual who meets the Social Security Administration’s definition of disabled. That definition requires that a person have a condition that will make him or her unable to participate in “substantial gainful employment” (work for pay, essentially). The condition must be expected to last for at least 12 months or result in the person’s death. Finally, the beneficiary of a 529A account must have been diagnosed with a qualifying disability before age 26. There are also special provisions that allow parents who have saved money in a traditional 529 college savings account to roll the money into a 529A account if their child is later diagnosed with a special needs condition such as autism.

What is considered a qualified disability expense?
Just like a 529 college savings account, funds in a 529A account must be used toward qualified expenses to realize the full potential of the tax benefits. Yet unlike a college fund, the money in a 529A plan will be spent over the course of the person’s lifetime on purchases related to living with a disability. Qualified expenses include education, housing, employment training and support, health care and financial management.

529A accounts versus 529 education savings accounts
There are a few key differences between saving for disability-related expenses and saving for college. The first is that with a 529A account you must open your own state’s plan, or the plan your state has a contract with. With a 529 college savings account you can invest in almost any state’s plan. Next, when a parent contributes to a 529A account it is considered an irrevocable transfer, meaning that it cannot be taken back. This differs from a college savings plan, where the parent can use the money for their own purpose but will incur a 10% penalty on the earnings. Anyone can contribute to a 529A plan as long as the combined contributions do not exceed the annual $14,000 limit.
Factors to Consider

Having a 529A does not disqualify an individual from receiving federal and state aid for the disabled, such as SSI or Medicaid, so long as the amount held in the 529A does not exceed $100,000. Should the balance exceed that amount, benefits would be suspended. They could resume once the balance falls below $100,000 again. Another drawback is that after the beneficiary’s death, states can seek repayment from 529A accounts for the cost of care covered by Medicaid. In contrast, there is no limit to the amount of money that can be put in a trust, and funds in a correctly structured trust aren’t subject to Medicaid payback.

Rhode Island’s 529A
There are currently only 10 states that have recently created a 529A Plan for their residents and Rhode Island is one of them. Massachusetts and Connecticut plan to launch their plans in 2017. The RI Plan offers 6 investment options ranging from “Conservative” (10% stocks) to “Aggressive” (90% stocks). The annualized investment costs on assets per investment option range from 0.34% to 0.38%, depending on which investment option(s) you select. The investments can be changed twice-yearly based on changing investment objectives or to rebalance the portfolio. To make it easier for account holders, the plan allows systematic contributions and withdrawals. Also, each account is charged an annual account maintenance fee of $40 and an annual paper delivery fee of $15 for the printing and mailing of statements and confirmations. The annual paper delivery fee will be waived if you sign up for electronic delivery.
The new 529A plan is not a perfect answer. However, it is a great new tool to help families caring for someone with special needs. It allows more families to plan support for their disabled loved ones with an easy-to-use framework that should be relatively low cost and may provide additional funding in the form of tax-free earnings. It can also be a good idea to consider supplementing a 529A with a special needs trust. You should discuss this new savings option with your family and financial planner to decide if it is right for you.

Matthew Neyland, CFA, CAIA is the Director of Investments for SK Wealth Management and an Adjunct Professor at Johnson & Wales University. Matt’s article appeared in PBN on February 10, 2017. You can view it [here].