In 2014, Congress adopted the Achieving a Better Life Experience Act (better known as ABLE). That new law formally introduced the concept of a “qualified disability expense”. But what kind of expenditure is a qualified disability expense? And does the term mean anything outside of ABLE?
Definition of qualified disability expense
The ABLE Act itself created a new income tax code Section 529A. That statute allows ABLE Act accounts to make distributions for qualified disability expenses. It then both defines the term, and gives some specific examples.
A qualified disability expense is, according to the ABLE Act, any expenditure that is “related to” the ABLE beneficiary’s blindness or disability, and made for the benefit of the beneficiary. Might that include adaptive equipment, educational expenses, even entertainment and travel? Yes, but to make it easier to figure out, the statute clarifies by including a list of items that are expressly included:
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, and other expenses, which are approved by the Secretary under regulations and consistent with the purposes of this section. [See Internal Revenue Code section 529A(e)(5)]
To be clear, an expenditure not on that list might still be a “qualified disability expense.” It just has to be related to the beneficiary’s disability and for their benefit. That opens pretty broad possibilities.
What if an expenditure is not a qualified disability expense?
There’s another significant point about the list of qualified disability expenses. If an ABLE Act account distribution is made for a purpose that doesn’t qualify, not very much happens. It doesn’t mean that the beneficiary loses Social Security payments or Medicaid eligibility. There is no tax penalty. It just means that the portion of the expenditure that is untaxed income in the account might be subject to income taxes. Most ABLE account beneficiaries don’t have enough income to have to file, much less pay, taxes. The “non-qualified” expenditure is probably not very consequential.
Let’s use an example. Sharon is on Supplemental Security Income (SSI). Her mother set up an ABLE Act account for Sharon, and deposited $5,000 into the account last year. That deposit was not income to Sharon (either for taxes or for Sharon’s SSI eligibility). The account is not an available resource for SSI or Medicaid purposes.
This month, Sharon used her ABLE Act account to buy groceries. She withdrew $100 and paid the bill at the supermarket checkout. Food is not on the list of qualified disability expenses. Is Sharon in trouble?
No. The expenditure might not have been a qualified disability expense. But the worst thing that happens is that a portion of Sharon’s $100 withdrawal might be subject to income taxation. Assuming that her account earned $50 in income in the few months it has been open, the result might be that she has to pay income taxes on about $1 of that income. Not even $1 of taxes — just the taxes on $1. Since Sharon hasn’t filed or paid taxes in her entire adult lifetime, it’s unlikely that this expenditure will result in any taxation at all.
So there are effectively no rules, right?
Not quite. There are a few items to consider.
First is an odd rule in the Social Security regulations. It only kicks in if Sharon (or any ABLE Act beneficiary) withdraws money from the account for the purpose of paying housing expenses, and then holds the money in her regular bank account for a period of time. Note that it’s not the use of the ABLE Act money for housing — that’s expressly permitted. It’s just if Sharon withdraws money for housing and then doesn’t spend it until the first of the next month.
In that odd situation, the treatment is equally odd. The money in Sharon’s non-ABLE account on the first of the month will be treated as an available resource. If it puts her available resources above the $2,000 threshold, she’ll lose her SSI in that month. Not because she used ABLE money to pay her rent, but because she did it too slowly.
That problem is easy to avoid. Sharon just needs to use her ABLE Act account to pay rent directly, so there’s no time when the money is available on the first day of a new month. If she has to withdraw the money from her ABLE Act account and hold the proceeds, she just needs to make sure she handles both sides of the transaction before the end of the month (better yet, right after the first of the month).
Got it. Anything else to consider?
Yes, but that’s the most important rule (and it’s not all that important, for most people). But we do not recommend that people in Sharon’s position treat the ABLE Act account as a regular checking account. The ABLE custodian does have reporting requirements, and the rules might get tightened up if the system decides there are abuses. Sharon should generally expect to use her SSI check for food and even entertainment, relying on the ABLE Act money for things that are clearly related to her disability.
Some things are easy to rationalize as related to the disability. Special transportation needs, for instance, might include a vehicle modification. Would it include rideshare expenses for Sharon, who has difficult problems with mobility? Almost certainly. But we’d like Sharon to keep track of what she used the money for, and prepare to defend the disability relationship.
Does the qualified disability expense concept have other significance?
You’d think the definition would be useful in other ways, either for benefits, programs or taxes. There is, for example, a special kind of tax-beneficial trust called a “qualified disability trust.” That would be a perfect place to utilize the tax code’s definition of a qualified disability expense, right?
Wrong. The definition of a qualified disability expense does not appear anywhere in the laws or regulations — other than in connection with ABLE Act accounts.
The whole concept of a qualified disability expense is difficult to grasp. The words, and the examples, are clear. But somehow it just doesn’t seem like it can be as straightforward as it is.
ABLE Act accounts are a wonderful boon to Sharon and other people with disabilities. Sometimes they can seem more complicated than they really are. If you have questions, you should look to the information provided by the ABLE Act provider — or consult an attorney with expertise in legal issues involving disabilities.