Category Archives: Family Finance Law

The New Tax Law Means It’s Time to Review Your Estate Plan

February 27, 2019

While the new tax law doubled the federal estate tax exemption, meaning the vast majority of estates will not have to pay any federal estate tax, it doesn’t mean you should ignore its impact on your estate plan.

In December 2017, Republicans in Congress and President Trump increased the federal estate tax exemption to $11.18 million for individuals and $22.36 million for couples, indexed for inflation. (For 2019, the figures are $11.4 million and $22.8 million, respectively.) The tax rate for those few estates subject to taxation is 40 percent.

While most estates won’t be subject to the federal estate tax, you should review your estate plan to make sure the changes won’t have other negative consequences or to see if there is a better way to pass on your assets. One common estate planning technique when the estate tax exemption was smaller was to leave everything that could pass free of the estate tax to the decedent’s children and the rest to the spouse. If you still have that provision in your will, your kids could inherit your entire estate while your spouse would be disinherited.

For example, as recently as 2001 the federal estate tax exemption was a mere $675,000. Someone with, say, an $800,000 estate who hasn’t changed their estate plan since then could see the entire estate go to their children and none to their spouse.

Another consideration is how the new tax law might affect capital gains taxes. When someone inherits property, such as a house or stocks, the property is usually worth more than it was when the original owner purchased it. If the beneficiary were to sell the property, there could be huge capital gains taxes. Fortunately, when someone inherits property, the property’s tax basis is “stepped up,” which means the tax basis would be the current value of the property. If the same property is gifted, there is no “step up” in basis, so the gift recipient would have to pay capital gains taxes. Previously, in order to avoid the estate tax you might have given property to your children or to a trust, even though there would be capital gains consequences. Now, it might be better for your beneficiaries to inherit the property.

In addition, many states have their own estate tax laws with much lower exemptions, so it is important to consult with your attorney to make sure your estate plan still works for you.

For American Workers, 4 Key Retirement Issues to Watch in 2019

February 5, 2019


By Mark Miller

John Chiang, the California state treasurer, spoke at a news conference Wednesday at Loyola Law School in Los Angeles. “The goal is to make sure we stem the tide of the retirement crisis and help Californians realize the dream of a golden retirement,” he said in an interview.
Monica Almeida for The New York Times

It’s going to be a busy year in Washington and state capitals for policymakers working to improve the retirement security of millions of Americans.

New retirement savings options will be on the horizon in 2019 for millions who don’t have access to workplace 401(k) plans. Meanwhile, Congress will try to agree on a plan to avert sharp cuts in traditional pension benefits for over a million workers. The long-running battle over regulation to protect investors will enter a new phase when the Securities and Exchange Commission issues new “best interest” rules governing investment advice. And the House of Representatives could take up legislation to expand Social Security.

Here is a look at crucial retirement policy topics to watch in the year ahead.

Workplace retirement savings plans have proved to be the most effective route to help savers, mainly thanks to features like automatic enrollment, regular payroll deductions and matching employer contributions. Yet one-third of private sector workers had no access to an employer-sponsored retirement plan in 2016, according to the Government Accountability Office. The coverage shortfall is greatest among low-income workers and people working for small companies.

But 2019 will be a turning point in covering more workers.
Some states are starting programs that automatically sign up workers who don’t have workplace 401(k) accounts or Individual Retirement Accounts. Over time, employers in many of these states will be required to set up automatic payroll deductions for these accounts and enroll workers, although they will not need to make matching contributions.

Oregon started its plan this year; California and Illinois will start in 2019; Vermont, Maryland and Connecticut are preparing programs; and New York has passed legislation and is establishing a board to oversee the start of a state program over the next two years. And this week, New Jersey’s General Assembly passed legislation authorizing the creation of a program (the state’s Senate is expected to consider the bill early next year).

The states that have approved plans could eventually extend coverage to 15 million workers, AARP estimates.

California’s plan alone could cover 7.5 million workers, officials there say. The CalSavers program is in a pilot phase through the end of June, and will be open to all employers beginning July 1; mandatory compliance will phase in with three waves based on employer size.

“The goal is to make sure we stem the tide of the retirement crisis and help Californians realize the dream of a golden retirement,” says John Chiang, the state treasurer. “It’s not an easy task, because the current marketplace has failed.”

Meanwhile, Congress will take up legislation next year that would make it easier for employers to band together to join a single 401(k) plan that they can offer to employees. These “open multiple-employer plans” would be offered by private plan custodians; the aim would be to offer employers low-cost plans featuring simplified paperwork.

How quickly would these multiple-employer plans be offered if legislation were approved? “Plan providers will need a year to gear up and get infrastructure in place,” predicts Kathleen Coulombe, a vice president at the American Council of Life Insurers, which supports the legislation. “I’d expect to see plans launch starting in 2020.”

Which approach is better — auto-I.R.A. or a multiple-employer plan? “They are both good ideas, and there’s no inconsistency between them,” says Mark Iwry, one of the architects of a national auto-I.R.A. program that he worked to enact during his time as a senior adviser to the Treasury secretary in the Obama administration. The national auto-I.R.A. would require employers without their own retirement plan to enroll workers.

Mr. Iwry, currently a nonresident senior fellow at the Brookings Institution, sees the two ideas as complementary, with auto-I.R.A.s serving as starter accounts likely to lead many more employers to adopt 401(k) plans.

But Mr. Iwry said the market already had achieved much of the economy of scale and reduced costs promised by multiple-employer plans, with companies sponsoring identical plans using a single low-cost investment lineup and common record-keeping and administration. “The proposed open M.E.P. legislation is desirable and long overdue,” he said. “But in their potential to expand coverage, open M.E.P.s don’t hold a candle to auto-I.R.A.s.” That is because auto-I.R.A. programs achieve big gains in plan participation through mandatory employer participation features and automatic worker enrollment; with open M.E.P.s, takeup will depend on whether financial service providers market them aggressively, and employers’ appetite to sign up. What’s more, not all of these multiple-employer plans will use auto-enrollment.

Mr. Iwry still holds out legislative hope for a national auto-I.R.A. program, noting that the bill’s longtime lead Democratic sponsor, Representative Richard Neal, of Massachusetts, is about to become chairman of the powerful House Ways and Means committee.

Saving One Million Pensions

A special congressional committee is racing to head off an insolvency crisis, one that could lead to sharp cuts in pension benefits for over a million workers and retirees, and sink a federally sponsored insurance backup program.

The problem centers on so-called multiemployer pension plans. Over 10 million workers and retirees are covered by 1,400 of these plans, which are created under collective bargaining agreements and jointly funded by groups of employers in industries like construction, trucking, mining and food retailing.

Plans covering 1.3 million workers and retirees are severely underfunded — the result of stock market crashes in 2001 and 2008-9, and industrial decline that led to consolidation and sliding employment. Cheiron Inc., an actuarial consulting firm, recently forecast that 121 plans might fail within 20 years. Plans are underfunded by a total of $48.9 billion, the firm estimated. Three plans alone account for 65 percent of all unfunded liabilities, led by the Teamsters’ Central States fund, which is falling short by $22.9 billion.

Meanwhile, the Pension Benefit Guaranty Corporation, the federally sponsored insurance backstop for defunct plans, projects that its multiemployer insurance program will run out of money by the end of the 2025 fiscal year, absent reforms.

Congress approved an overhaul in 2014, the Multiemployer Pension Reform Act, but the legislation has faced strong resistance from retiree organizations, consumer groups and some labor unions.

The act allows troubled plans to seek government permission to make deep benefit cuts, if they can show that the reductions would prolong the life of the plan. Benefit cuts vary widely depending on what a plan proposes and the tenure of the worker — but a worker with 25 years of service and a $2,000 monthly benefit could see that benefit cut to as low as $983, according to a cutback calculator created by the Pension Rights Center, an advocacy group. To date, nine plan restructurings have been approved.

This year, the special congressional committee appointed to create a replacement for the pension reform act missed an end-of-November deadline to issue its recommendation. But a draft proposal raises the guaranteed minimum benefits paid by the Pension Benefit Guaranty Corporation if a plan fails. It also would inject federal funds into the agency — perhaps $3 billion annually — to expand its partition program, which allows it to take on benefit payments to so-called orphans — people who earned benefits from employers who have dropped out of plans, often because they have gone out of business.

“It would rely less on cutting benefits, and more on raising money from existing pension plans and taxpayers,” says Joshua Gotbaum, a guest scholar at the Brookings Institution and a former director of the federal pension backstop.

The sticking points in the discussion have included the assumptions used to measure plan liabilities, and how much respective stakeholders, including the government, should contribute to maintain a viable multiemployer system, says Karen Friedman, executive vice president of the Pension Rights Center. “We’re hoping they can find a fair, comprehensive solution that can save these plans, the P.B.G.C. and protect workers and retirees.”

Protecting Investors From Conflicted Advice

The long-running battle to require brokers to look out for the best interests of clients will continue in 2019.
The S.E.C. is moving toward adoption of a “regulation best interest” standard following the end this year of an advice standard created by the Obama-era Labor Department. That regulation, which required advice on retirement accounts to meet fiduciary standards, was opposed by the financial services and insurance industries, which argued that it made advising smaller investors too costly.

The S.E.C. rule would require brokers to put their customers’ financial interests ahead of their own, but it does not require them to act as fiduciaries. The rule also would require disclosures to clients of any potential conflicts, and it reaffirms existing higher standards for registered investment advisers.

The draft regulation has come under fire from consumer advocates who note that it does not clearly define the term “best interest,” and that the proposed disclosure forms are confusing for investors.

“There is a real need to simplify the disclosure forms so that they communicate effectively to investors the information that they actually need to make decisions,” says Cristina Martin Firvida, vice president for financial security and consumer affairs at AARP.

Expanding Social Security

Proposals to overhaul Social Security by progressives are likely to get a hearing in the new Democratic-controlled House.

Most of the winning Democratic candidates who flipped 40 congressional seats in the midterm elections ran on expanding Social Security benefits, said Nancy Altman, president of Social Security Works, a progressive advocacy group. And the likely new chairman of the Ways and Means Social Security Subcommittee, Representative John B. Larson, Democrat of Connecticut, is the author of expansion legislation that has more than 170 co-sponsors in the House, including Mr. Neal, the incoming Ways and Means chairman.

“The Larson bill certainly will get a hearing, and there’s a substantial chance it will move out of committee and even get a vote on the House floor,” Ms. Altman predicted. “That will really elevate the issue and put a spotlight on the Senate and the White House.”

Mr. Larson’s bill includes a 2 percent across-the-board increase in benefits, a more generous annual cost-of-living adjustment and a higher minimum benefit for low-income workers. The bill would pay for the expansion by lifting the cap on wages subject to taxation and a gradual phase-in of a higher payroll tax rate.

Social Security faces a long-run financial imbalance — the program is now spending more than it takes in annually in payroll taxes. The Social Security trustees project that the program will be unable to pay full benefits beginning in 2034; unless Congress takes action, benefits would be slashed by about 25 percent. The funding proposal in Mr. Larson’s bill also would restore the program’s long-range financial balance.

Correction: Dec. 20, 2018
Because of an editing error, an earlier version of a picture caption on this article misstated the day of a news conference at Loyola Law School. The conference was on Wednesday, not Monday.

Key Elder Law Numbers for 2019: Our Annual Roundup

February 4, 2019

Below are figures for 2019 that are frequently used in the elder law practice or are of interest to clients.

Medicaid Spousal Impoverishment Figures for 2019

The new minimum community spouse resource allowance (CSRA) is $25,284 and the maximum CSRA is $126,420. The maximum monthly maintenance needs allowance is $3,160.50. The minimum monthly maintenance needs allowance remains $2,057.50 ($2,572.50 for Alaska and $2,366.25 for Hawaii) until July 1, 2019.

Medicaid Home Equity Limits

Minimum: $585,000

Maximum: $878,000

For CMS’s complete chart of the 2019 SSI and Spousal Impoverishment Standards, click here.

Income Cap

The income cap for 2019 applicable in “income cap” states is $2,313 a month.

Gift and estate tax figures

Federal estate tax exemption: $11.4 million for individuals, $22.8 million for married couples

Lifetime tax exclusion for gifts: $11.4 million

Generation-skipping transfer tax exemption: $11.4 million

Annual gift tax exclusion: $15,000 (unchanged)

Long-Term Care Premium Deductibility Limits for 2019

The Internal Revenue Service has announced the 2019 limitations on the deductibility of long-term care insurance premiums from income. Any premium amounts above these limits are not considered to be a medical expense.

Attained age before the close of the taxable year Maximum deduction
40 or less $420
More than 40 but not more than 50 $790
More than 50 but not more than 60 $1,580
More than 60 but not more than 70 $4,220
More than 70 $5,270

Benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or $370 per day (for 2019), whichever is greater.

For these and other inflation adjustments from the IRS, click here.

Medicare Premiums, Deductibles and Copayments for 2019

  • Part B premium: $135.50/month (was $134)
  • Part B deductible: $185 (was $183)
  • Part A deductible: $1,364 (was $1,340)
  • Co-payment for hospital stay days 61-90: $341/day (was $335)
  • Co-payment for hospital stay days 91 and beyond: $682/day (was $670)
  • Skilled nursing facility co-payment, days 21-100: $170.50/day (was $167.50)

Part B premiums for higher-income beneficiaries:

  • Individuals with annual incomes between $85,000 and $107,000 and married couples with annual incomes between $170,000 and $214,000 will pay a monthly premium of $189.60.
  • Individuals with annual incomes between $107,000 and $133,500 and married couples with annual incomes between $214,000 and $267,000 will pay a monthly premium of $270.90.
  • Individuals with annual incomes between $133,500 and $160,000 and married couples with annual incomes between $267,000 and $320,000 will pay a monthly premium of $352.20.
  • Individuals with annual incomes between above $160,000 and married couples with annual incomes above $320,000 will pay a monthly premium of $433.40.
  • Individuals with annual incomes above $500,000 and married couples with annual incomes above $750,000 will pay a monthly premium of $460.50

High-earner premiums differ for beneficiaries who are married but file a separate tax return from their spouse. Those with incomes greater than $85,000 and less than $415,000 will pay a monthly premium of $433.40. Those with incomes greater than $415,000 will pay a monthly premium of $460.50.

For Medicare’s “Medicare 2019 costs at a glance,” click here.

Social Security Benefits for 2019

The new monthly federal Supplemental Security Income (SSI) payment standard is $771 for an individual and $1,157 for a couple.

Estimated average monthly Social Security retirement payment: $1,461 a month for individuals and $2,448 for couples

Maximum amount of earnings subject to Social Security taxation: $132,900 (was $128,400)

For a complete list of the 2019 Social Security figures, go to:

CFPB Releases “Managing Someone Else’s Money” Guides

January 2, 2019

Millions of Americans manage money or property for a loved one who’s unable to pay bills or make financial decisions. To help financial caregivers, we’ve released easy-to-understand guides.

About the guides

The guides help you understand your role as a financial caregiver, also called a fiduciary. Each guide explains your responsibilities as a fiduciary, how to spot financial exploitation, and avoid scams. Each guide also includes a “Where to go for help” section with a list of relevant resources.

Managing Someone Else’s Money guides

Featured video
If you are serving as a financial caregiver, navigating your role can be difficult. We’re here to help.

Find the right guide for you

The guides are tailored to the needs of people in four different fiduciary roles:

Power of attorney

Guides for those who have been named in a power of attorney to make decisions about money and property for someone else.

View power of attorney guides

Court-appointed guardians

Guides for those who have been appointed by a court to be guardians of property or conservators, giving them the duty and the power to make financial decisions on someone’s behalf.

View guides for court-appointed guardians


Guides for those who have been named as trustees under revocable living trusts.

View guides for trustees

Government fiduciaries

Guides for those who have been appointed by a government agency to manage another person’s income benefits, such as Social Security or Veterans Affairs benefit checks.

View guides for government fiduciaries

Why Social Security may survive longer than the government expects

December 26, 2018

Social Security might have a shot at surviving for another generation — and that’s thanks to 78.1 million individuals who will be contributing to it.

These 78.1 million individuals who come after millennials and were born after 1997 make up what is known as Generation Z.

Morgan Stanley says it is more optimistic about the impact of Generation Z than the Congressional Budget Office.

The Wall Street firm’s more bullish assessment on labor-force participation in particular means that its view of potential GDP by 2040 is above the CBO’s by 2.4% to 4.3%. Morgan Stanley says the CBO is understating potential labor force growth by between 0.2% to 0.3% per year in the 15 years through 2040.

While this may seem like a small variance, given that the continued funding of Social Security depends upon the number of people working, the variance has tremendous implications.

Currently, there are approximately 58 million beneficiaries receiving monthly Social Security payments averaging $1,249.55 . As of now, Social Security is funded through 2034, according to the Social Security Administration.

According to the Morgan Stanley report, the increase in the expected number of workers may allow Social Security to remain alive well beyond 2034.

If Morgan Stanley is right, the Social Security trust fund reserves may become depleted in 2062. It likely will delay the date of depletion for Medicare funds as well, the report said.

“Extending the deadline would likely push action off until the new depletion date, therefore removing the near- to medium-term prospects of raising the payroll tax, raising the taxable maximum to cover more or all earnings, raising the retirement age, and/or decreasing benefits,” the report says.

The Morgan Stanley report, if it’s right, also would provide a floor to stocksSPX, +2.46%   and interest rates TMUBMUSD10Y, +0.00%  over the long term.

The most obvious benefit, the firm says, is the tailwind to sales growth. “To the extent the rise of Gens Y and Z in the labor force support a higher potential GDP growth rate in the U.S., this relationship would indicate a modestly higher potential longer-run growth rate for corporate sales and earnings,” the report said.

IRS Announces Higher 2019 Estate And Gift Tax Limits

December 24, 2018

Ashlea Ebeling Forbes Staff

The Internal Revenue Service announced today the official estate and gift tax limits for 2019: The estate and gift tax exemption is $11.4 million per individual, up from $11.18 million in 2018. That means an individual can leave $11.4 million to heirs and pay no federal estate or gift tax, while a married couple will be able to shield $22.8 million. The annual gift exclusion amount remains the same at $15,000.

For the ultra rich, these numbers represent planning opportunities. For everybody else, they serve as a reminder: Even if you don’t have a taxable estate, you still need an estate plan.

The IRS announced the new inflation-adjusted numbers in Rev. Proc. 2018-57. Forbes contributor Kelly Phillips Erb has all the details on 2019 tax brackets, standard deduction amounts and more. We have all the details on the new higher 2019 retirement account limits too.

The Trump tax cuts slashed the number of estates subject to the federal estate tax, by doubling the exemption amount from a base level of $5 million per person. So, there were only an estimated 1,890 taxable estates in 2018 (according to the Tax Policy Center). That compares with 4,687 taxable estates in 2013 reflecting a base $5 million exemption, and 52,000 taxable estates in 2000 when the exemption was $675,000 (Table 2, JCT 2015 Wealth Transfer Tax System Report).

For now, death tax foes are trying to make the new doubled exemption amounts permanent; the Trump tax cuts are scheduled to expire at year-end 2025. “Permanence [of the doubled exemption] would make the score of repeal much cheaper and provide predictability,” says Palmer Schoening of the anti-death tax Family Business Coalition, noting that the ultimate goal is still to repeal the estate tax. The mid-term elections, however, put a damper on the viability of Tax Reform 2.0, the Republicans’ latest push to make that doubled exemption permanent.

In the meantime, the wealthy will continue to plan around the estate tax, whittling down their estates with lifetime wealth transfer strategies to keep below the new threshold and avoid the 40% federal estate tax. Now, a couple who has used up every dollar of their exemption before the increase has another $440,000 of exemption value to pass on tax free. For planning tips, see Trusts In The Age of Trump: Time To Re-Engineer Your Estate Plan.

What about the $15,000 annual exclusion amount? You can give away $15,000 to as many individuals as you’d like. A husband and wife can each make $15,000 gifts. So, a couple could make $15,000 gifts to each of their four grandchildren, for a total of $120,000. Lifetime gifts beyond the annual exclusion amount count towards the $11.4 million combined estate/gift tax exemption. See The Gift Tax Return Trap And How To Avoid It.

Warning: The $22.8 million number per couple isn’t automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. But to use your late spouse’s unused exemption – a move called “portability”—you must elect it on the estate tax return of the first spouse to die, even when no tax is due. The problem is if you don’t know what portability is and how to elect it, you could be hit with a surprise federal estate tax bill.

And note, if you live in one of the 17 states or the District of Columbia that levy separate estate and/or inheritance taxes, there’s even more at stake, with death taxes sometimes starting at the first dollar of an estate. Several states were in line to match the federal exemption amount for 2018, but state legislators determined the new doubled exemption was just too high. See States Rebel, Won’t Conform To Trump’s Estate Tax Cuts. Most states haven’t announced their inflation-adjusted numbers yet for 2019, but we’ll keep you posted.

A Comparison of 529 ABLE Accounts, Pooled Special Needs Trusts, and Special Needs Trusts

December 11, 2018

This article and the accompanying chart were originally published in 2016 by Joanne Marcus, MSW, and Theresa M. Varnet, MSW, JD.
The 2018 updates were provided by Karen Dunivan Konvicka, JD.

The ABLE Act allows an individual with a disability to have a tax-preferred savings account without jeopardizing his or her Medicaid and SSI eligibility. See a comparison chart of ABLE accounts and trusts at the end of this article.

Download PDF of article (19 pages)

IRS Announces Higher 2019 Retirement Plan Contribution Limits For 401(k)s and More

November 26, 2018

NAELA news:
Ashlea Ebeling, 

Get ready to save more for retirement in 2019! The Treasury Department has announced inflation-adjusted figures for retirement account savings for 2019, and there are a lot of changes that will help savers stuff these accounts.
After six years stuck at $5,500, the amount you can contribute to an Individual Retirement Account is being bumped up to $6,000 for 2019. The amount you can contribute to your 401(k) or similar workplace retirement plan goes up from $18,500 in 2018 to $19,000 in 2019. Catch-up contribution limits if you’re 50 or older in 2019 remain unchanged at $6,000 for workplace plans and $1,000 for IRAs.

That means that many high earners and super-savers age 50-plus can sock away $32,000 in these tax-advantaged accounts. If your employer allows aftertax contributions or you’re self-employed, you can save even more. The overall defined contribution plan limit moves up to $56,000, from $55,000.

Do these limits seem unreachable? During 2017, 13% of employees with retirement plans at work saved the then-statutory maximum of $18,000/$24,000, according to Vanguard’s How America Saves. In plans offering catch-up contributions,14% of those age 50 or older took advantage of the extra savings opportunity.

We outline the numbers below; see IRS Notice 2018-83 for technical guidance.

401(k)s. The annual contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, is $19,000 for 2019—a $500 boost over 2018. Note, you can make changes to your 401(k) election at any time during the year, not just during open enrollment season when most employers send you a reminder to update your elections for the next plan year.


The 401(k) Catch-Up. The catch-up contribution limit for employees age 50 or older in these plans stays the same at $6,000 for 2019. Even if you don’t turn 50 until December 31, 2019, you can make the additional $6,000 catch-up contribution for the year.

SEP IRAs and Solo 401(k)s. For the self-employed and small business owners, the amount they can save in a SEP IRA or a solo 401(k) goes up from $55,000 in 2018 to $56,000 in 2019. That’s based on the amount they can contribute as an employer, as a percentage of their salary; the compensation limit used in the savings calculation also goes up from $275,000 in 2018 to $280,000 in 2019.

Aftertax 401(k) contributions. If your employer allows aftertax contributions to your 401(k), you also get the advantage of the $56,000 limit for 2019. It’s an overall cap, including your $19,000 (pretax or Roth) salary deferrals plus any employer contributions (but not catch-up contributions). For how to rollover aftertax 401(k) money into a Roth IRA, see Roth Road To Riches.

The SIMPLE. The limit on SIMPLE retirement accounts goes up from $12,500 in 2018 to $13,000 in 2019. The SIMPLE catch-up limit is still $3,000. Here’s how a SIMPLE works in practice.

Defined Benefit Plans. UPDATE The limitation on the annual benefit of a defined benefit plan goes up from $220,000 in 2018 to $225,000 in 2019. These are powerful pension plans (an individual version of the kind that used to be more common in the corporate world before 401(k)s took over) for high-earning self-employed folks.

Individual Retirement Accounts. The limit on annual contributions to an Individual Retirement Account (pretax or Roth or a combination) is moving up to $6,000 for 2019, up from $5,500. The catch-up contribution limit, which is not subject to inflation adjustments, remains at $1,000. (Remember that 2018 IRA contributions can be made until April 15, 2019.)

Deductible IRA Phase-Outs. You can earn a little more in 2019 and get to deduct your contributions to a traditional pretax IRA. Note, even if you earn too much to get a deduction for contributing to an IRA, you can still contribute; it’s just nondeductible.

In 2019, the deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $64,000 and $74,000, up from $63,000 and $73,000 in 2018. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $103,000 to $123,000 for 2019, up from $101,000 to $121,000.

For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $193,000 and $203,000 in 2019, up from $189,000 and $199,000 in 2018.

Roth IRA Phase-Outs. The inflation adjustment helps Roth IRA savers too. In 2019, the AGI phase-out range for taxpayers making contributions to a Roth IRA is $193,000 to $203,000 for married couples filing jointly, up from $189,000 to $199,000 in 2018. For singles and heads of household, the income phase-out range is $122,000 to $137,000, up from $120,000 to $135,000 in 2018.

If you earn too much to open a Roth IRA, you can open a nondeductible IRA and convert it to a Roth IRA as Congress lifted any income restrictions for Roth IRA conversions. To learn more about the backdoor Roth, see Congress Blesses Roth IRAs For Everyone, Even The Well-Paid.

Saver’s Credit. The income limit for the saver’s credit for low- and moderate-income workers is $64,000 for married couples filing jointly for 2019, up from $63,000; $48,000 for heads of household, up from $47,250; and $32,000 for singles and married filing separately, up from $31,500. See Grab The Saver’s Credit for details on how it can pay off.

QLACs. The dollar limit on the amount of your IRA or 401(k) you can invest in a qualified longevity annuity contract remains unchanged at $130,000. See Make Your Retirement Money Last For Life for how QLACs work.

Disability, Poverty, and the Policy Behind the ABLE Act

November 2, 2018


By Nancy Susan Germany, Esq.

I. Introduction

The Achieving a Better Life Experience (ABLE) Act enables independence and self-reliance for
persons with disabilities. The act created the ABLE account, a powerful tool to help persons
with disabilities save money and control their own future. The ABLE account has become
enormously popular. States that have implemented ABLE programs report thousands of participants and millions of dollars being saved by persons with disabilities. Ohio opened the first ABLE program on June 1, 2016. Since then more than 34 states have started ABLE programs, with more states joining on a regular basis.

ABLE accounts allow persons with disabilities to save money without jeopardizing their
eligibility for public benefits. ABLE account income grows tax free and if spent on qualified
disability expenses (QDEs) remains tax free. Persons with disabilities are in control of theirown accounts, thus giving them more self-determination in their financial futures. This freedom to control their own money is a first for many persons with disabilities.

The ABLE account has rare bipartisan support and indicates Congress’s attempt to address the situation of people with disabilities who live in poverty, survive on meager incomes, and face asset limitations in an effort to maintain public benefit eligibility. The use of ABLE accounts will likely be expanded in the future.

Strict limitations apply to ABLE account use. An ABLE account can only be used by persons disabled prior to age 26 and must be funded with cash. The maximum funding amount each year is limited to the annual gift tax exemption amount ($15,000 in 2018). For Supplemental Security Income (SSI) eligibility purposes, an ABLE account is exempt up to $100,000; for Medicaid-only eligibility purposes, it is exempt up to a state’s 529 plan limit. If ABLE account income is spent on non-QDEs, it is taxed, and a penalty is assessed, and on the death of the person with a disability, payback to the state Medicaid agency applies. Due to these limitations, the ABLE account is not enough to break the cycle of poverty for many persons with disabilities. It does, however, provide some relief and can be used as part of an effective special needs plan.

This article reviews how the ABLE account came into existence, compares ABLE accounts with special needs trusts (SNTs), and discusses ABLE account legal requirements, how various federal agencies have interpreted ABLE accounts, and the options available in states’ ABLE programs.

II. ABLE Accounts Are the Latest Attempt to Reduce Historic and Systemic Poverty for Persons With Disabilities

A. Disability and Poverty
Persons with disabilities live in poverty and are unemployed and underemployed at a far higher rate than people without disabilities. One study concludes, “Disability and poverty are intricately linked as both a cause and consequence of each other.”1 The number of people with disabilities increased from 11.9 percent in 2010 to 12.8 percent in 2016.2In other words, in 2016, 40,890,900 of the 319,215,200 individuals of all ages in the United States reported having one or more disabilities.3

The number of people with disabilities, which depends on how the term “disability” is defined, is sometimes difficult to assess. The World Health Organization (WHO), which has conducted numerous studies on this issue, defines disability “not necessarily by a person’s defined medical condition, but by an environment that erects barriers to [his or her] participation in the social and economic life of their communities.”4 The Cornell University Yang-Tan Institute on Employment and Disability obtains its information on persons with disabilities from three data sources: the American Community Survey, Current Population Survey, and 2000 Census.5

People with disabilities have a high rate of unemployment. In 2016, the employment rate for working age people with disabilities was 36.2 percent versus 78.9 percent for persons without disabilities.6 In 34 states, an employment gap of 40 percent or higher exists between employed people without disabilities and employed people with disabilities.7 People with disabilities also work full-time at a much lower rate (23 percent) than persons without disabilities (59.4 percent).8

The number of people with disabilities living in poverty is staggering. In 2016, 5,323,500 persons with disabilities were living in poverty and at a significantly higher rate than those without disabilities.9 From 2009 through 2016, the percentage of people with disabilities living in poverty ranged from 20.9 percent to 23 percent.10 The percentage of people without disabilities living in poverty ranged from 13.1 percent to 15.1 percent.11 The percentage of working age persons with disabilities living in poverty was 26.6 percent, while the percentage of those of the same age without disabilities living in poverty was 10.9 percent.12 In 2016, the median earnings of Americans with disabilities ages 16 and older was $21,572; the median earnings of those without disabilities was $31,874.13

Because so many people with disabilities are living in poverty, are unemployed, or are unable to work, they rely on public benefits to help them pay for food, shelter, and medical care.

B. Public Benefit Programs’ Income and Asset Limits Make Saving Money Difficult for Persons With Disabilities

Many people with disabilities use SSI to help pay for their food and shelter. In 2016, 3,858,100 working age persons with disabilities used SSI to meet their primary needs.14 The issue with SSI is that for an individual with a disability to qualify, his or her countable assets cannot exceed $2,000; this amount is $3,000 for a couple.15 This limit has not changed since 1989 and is not indexed for inflation.16

Given the resource and income limitations imposed by means-tested public benefit programs, there has long been a need for a program that offers options for people in the disability community to have access to or save assets and not be forced to spend down every month in order to retain benefits eligibility. The issue was described in an earlier NAELA Journal article:

After all, a $2,000 limit on resources makes it virtually impossible to save in order to fix a roof, deal with a plumbing emergency, or repair a car without running afoul of these asset limits. Requiring individuals to spend down virtually all of their resources before they can qualify for needed long-term services and supports takes away the minimal safety net that anyone living in the community requires. It raises the specter that even a small emergency or unplanned expense can cascade into a crisis, potentially forcing an individual to move into an institution or worse, become homeless. The limit also discourages responsible planning. Advocates frequently report cases in which an individual, seeking to do the right thing, saves up from his or her minimal income for an anticipated expense and instead ends up losing coverage or facing an overpayment requirement.17

C. The ABLE Act Was Designed to Help People With Disabilities

The ABLE Act recognizes the special financial burdens on persons with disabilities and the struggles they face in achieving and sustaining a meaningful quality of life. The stated purpose of the ABLE Act is as follows:

(1) To encourage and assist individuals and families in saving private funds for the purpose of supporting individuals with disabilities to maintain health, independence, and quality of life.

(2) To provide secure funding for disability-related expenses on behalf of designated beneficiaries with disabilities that will supplement, but not supplant, benefits provided through private insurance, the Medicaid program under title XIX of the Social Security Act [42 U.S.C. 1396 et seq.], the supplemental security income program under title XVI of such Act [42 U.S.C. 1381 et seq.], the beneficiary’s employment, and other sources.18

Simply put, this act is intended to improve the quality of life for persons with disabilities and their families who depend on various forms of public benefits to provide income, health care, food, and housing assistance. As described previously, eligibility for these public benefits typically requires the person with a disability to have less than $2,000 in countable assets. For the first time, legislation, in the form of the ABLE Act, recognizes the significant hardships of living with a disability. These hardships include paying the costs related to raising a child with a disability and the costs a working age adult with a disability must pay for accessible housing, reliable transportation, personal assistance services, assistive technology, and health care not otherwise covered.

For the first time, eligible individuals and their families have the opportunity to establish ABLE accounts, which will not affect their eligibility for SSI, Medicaid, and other public benefits. An ABLE account is a tax-advantaged savings plan for people with disabilities who were disabled or blind prior to age 26.19 The person with a disability is the ABLE account owner, and income earned by the account is not taxed. Contributions to the account may be made by any person (e.g., person with a disability, family member, friend, SNT trustee) using after-tax dollars. The contributions are not tax deductible, although some states may allow for state income tax deductions.20

As a result of these features, ABLE accounts have become very popular for persons with disabilities. In the fourth quarter of 2017, the number of ABLE accounts grew by 31 percent. As of this writing, 17,314 accounts exist, with $72 million in assets.21 This number is expected to significantly rise as more states open ABLE programs.

III. The ABLE Act’s History

On December 19, 2014, President Obama signed the Stephen Beck Jr. Achieving a Better Life Experience (ABLE) Act of 2014 into law as part of the Tax Increase Prevention Act of 2014. The ABLE Act was initially sponsored in 2007 by Rep. Ander Crenshaw, R-Fla. At that time, it was called the Financial Security Accounts for Individuals With Disabilities Act of 2007 (H.R. 2370). It underwent many changes. The second version of the bill, later known as H.R. 1205, became the ABLE Act and was introduced in February 2009 with bipartisan support of 203 members of Congress. However, without any action, H.R. 1205 died at the end of the 111th Congress.22 In the 112th Congress, the ABLE Act of 2011, H.R. 3423, was introduced in November 2011 and gained the support of 235 House members. However, it did not have enough support to go to committee or the House floor.

In its third round, in February 2013, the final draft of the ABLE Act was reintroduced in the 113th Congress as the ABLE Act of 2014, H.R. 647. The final version included minor changes, and H.R. 647 gained 380 co-sponsors in the House (194 Republicans and 186 Democrats).23 Its Senate counterpart, Sen. 313, gained 76 Senate co-sponsors (29 Republicans and 47 Democrats).24 The bill passed the House in December 2014 by a vote of 404 to 1725 and in the Senate by a vote of 76 to 16.26

In more recent legislation, under the 2017 Tax Cuts and Jobs Act,27 funds from a 529 plan can now be rolled over into an ABLE account.28 This rollover counts toward the $15,000 funding limit. The new law also gives an account owner who works the right to contribute up to $12,060 in earnings above the $15,000 funding limit.29 Finally, the new law allows ABLE account owners who contribute to their own accounts to take advantage of the Retirement Savings Contributions Credit, which provides a special tax break to low- and moderate-income taxpayers who are saving for retirement.30

IV. ABLE Account Legal Requirements

The ABLE account was established under § 529 of the Internal Revenue Code and in some ways is similar to the traditional 529 college savings account. However, there are significant differences, as described below.

A. ABLE Account Age and Disability Requirements
An ABLE account is started and owned by a designated beneficiary, who is a qualified person with a disability that occurred prior to age 26.31 The designated beneficiary can establish disability in one of two ways:

1. By showing, based on a disability that began before age 26, that he or she is currently eligible for Social Security Disability Insurance (SSDI) or SSI disability benefits; or

2. By certifying, or having a parent or guardian certify, that he or she has a medically determinable impairment that “results in marked and severe functional limitations” that has lasted or is expected to last for 12 consecutive months or is likely to result in death, with the disability or blindness occurring before age 26.32

If an individual is not already receiving SSI or SSDI, he or she must meet the Social Security Administration (SSA) definition of “disability”:

[A] medically determinable physical or mental impairment or combination of impairments that causes marked and severe functional limitations, and that can be expected to cause death or that has lasted or can be expected to last for a continuous period of not less than 12 months.33

For persons who are not already receiving SSI or SSDI, the ABLE Act requires that the certification of disability be filed with the Treasury secretary.34 The proposed regulations defined this requirement to mean that the individual, his or her agent under power of attorney, or his or her parent or guardian must certify under penalty of perjury that he or she has a “signed physician’s diagnosis” documenting the disability and will provide it if requested by the ABLE plan administrator or the IRS.35 This means that eligible individuals with disabilities will not have to provide the written diagnosis when opening an ABLE account and ABLE programs will not have to receive, retain, or evaluate detailed medical records. It also means that submission of a doctor’s letter is not necessary unless requested.

B. Opening and Contributing to an ABLE Account
An individual opens an ABLE account by joining a state ABLE program.36An account may be opened by the designated beneficiary or his or her agent, guardian, or parent (if a minor).37 There is no minimum age for setting up an ABLE account; therefore, even very young children may have one. However, the ABLE account is always owned by the designated beneficiary.38 Moreover, a designated beneficiary is permitted to have only one ABLE account.39 If more than one account is opened, the subsequent account is considered countable by the public benefit agency and provides no tax benefit to the person with a disability.40 However, if all amounts contributed to a subsequent ABLE account are returned in a timely manner, the account is treated as if it had never been opened.41

An ABLE account can only be funded with cash.42 If, however, funds are rolled over from one ABLE account to another for the benefit of the designated beneficiary, the rollover amount is considered an in-kind contribution and thus is not taxed.43 Any person can contribute to an individual’s ABLE account, including the person with a disability.44“Person” is defined to include a trust or estate.45 At this time, there is no prohibition on an SNT funding an ABLE account.46 The contribution to an ABLE account is also deemed a completed gift for gift tax purposes.47

There is no federal income tax deduction on ABLE account contributions, but some states’ programs authorize a state income tax deduction.48 As different states implement ABLE programs across the nation, some states have enacted laws that allow state tax deductions for contributions to ABLE accounts for their residents.49 For example, in Iowa, the maximum deductible account contribution is $3,128, and in Michigan, the amount is $5,000 for individuals and $10,000 for joint filers.50

Each year, an ABLE account can only be funded up to the single annual federal gift tax exclusion amount (as set forth in I.R.C. § 2504(b)), which is currently $15,000.51 This annual limitation applies to the total annual amount contributed to the account on an aggregate basis. This amount is expected to increase every few years because it is adjusted for inflation.

The original ABLE Act required beneficiaries to open ABLE accounts in their home states only. However, when Congress amended the ABLE Act in December 2015 as part of the tax extenders package, it eliminated the home state residency requirement.52 Now, an individual can open an ABLE account in any state that offers a nationwide ABLE program. To determine which state ABLE programs are accepting out-of-state enrollment, see the individual state pages on the ABLE National Resource Center website.53 State ABLE programs accepting enrollment nationwide include Ohio and Nebraska. Florida is an example of a state whose ABLE program accepts in-state residents only.

C. ABLE Account Size Limit
The limit on the size of an ABLE account is based on the needs-based public benefits the individual is receiving. The funds in an ABLE account are not counted toward the resource limit for any federally funded benefit that has at least one financial criterion for eligibility.54 If the designated beneficiary receives SSI, the ABLE account may grow up to $100,000 and is not counted as a resource for SSI eligibility.55

If an ABLE account grows to more than $100,000, the designated beneficiary’s SSI benefits are not terminated. Rather, the SSI benefits are suspended until the ABLE account balance drops below $100,000, at which point the SSI benefits resume.56 A suspension of SSI benefits due to too much money in an ABLE account does not mean an immediate loss of Medicaid benefits.57 Medicaid eligibility and benefits will continue uninterrupted.

The Social Security Program Operations Manual System (POMS) provides an example:

EXAMPLE: Excess resources — recipient is suspended but retains eligibility for Medicaid

Paul is the designated beneficiary of an ABLE account with a balance of $101,000 on the first of the month. Paul’s only other countable resource is a checking account with a balance of $1,500. Paul’s countable resources are $2,500 and therefore exceed the SSI resource limit. However, since Paul’s ABLE account balance causes him to exceed the resource limit (i.e., his countable resources other than the ABLE account are less than $2,000), Paul’s SSI eligibility [is suspended] and his cash benefits [are stopped], but he retains eligibility for Medicaid in his State.58

Under the ABLE Act, if the designated beneficiary is receiving Medicaid only, not SSI, the ABLE account may grow up to the state’s limit under its qualified state tuition program (i.e., 529 plan).59 The dollar limits of what can be retained in an ABLE account vary by state. For example, Nebraska’s account limit is $400,000; Nevada’s limit is $370,000; and Michigan’s limit is $500,000.60

D. The ABLE Act’s Payback Requirement
The ABLE Act states that when a designated beneficiary with assets in an ABLE account dies, the assets are subject to “payback” to the state Medicaid program, up to the value of the Medicaid services provided to the beneficiary from when the account was opened to the filing of a claim by the state.61 The state is considered a creditor of the ABLE account and not a beneficiary.62

The payback amount is calculated after:

• All outstanding QDEs for the designated beneficiary are paid,

• Funeral and burial expenses for the designated beneficiary are paid, and

• Medicaid premiums paid by the beneficiary are subtracted.63

Despite the federal law, several states have passed laws stating that the state will not seek payback from an ABLE account on the death of a designated beneficiary.64 At this point, it is not known whether these laws will be successful.

E. ABLE Account Tax Treatment and Qualified Disability Expenses
An ABLE account receives tax treatment similar to that of a traditional 529 college savings plan. Income earned in an ABLE account grows tax free.65Distributions from an ABLE account for the payment of QDEs are also not taxed.66 The ABLE Act defines QDEs as “expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary.”67 It then lists a range of categories of potential uses for funds set aside in ABLE accounts, including the following:

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.68

In the proposed regulations released in June 2015, the IRS stated that QDEs should be “broadly construed to permit … basic living expenses and should not be limited to expenses for which there is a medical necessity or which provide no benefits to others” and should include any benefit related to the designated beneficiary “in maintaining or improving his or her health, independence, or quality of life.”69 A new computer with adaptive technology that could improve the beneficiary’s general well-being is a good example of a potentially allowable expense. It is important to note that distributions for recreation appear limited and distributions for housing must be administered very carefully, as detailed later in this article.

A penalty is incurred if an ABLE account recipient makes a distribution for non-QDEs. Distributions for non-QDEs are considered gross income and subject to a 10 percent penalty.70 Following are a few exceptions to incurring the penalty:

• The penalty does not apply to any distribution made from an ABLE account on or after the designated beneficiary’s death to the designated beneficiary’s estate, heir or legatee, or creditor.71

• The penalty does not apply if the ABLE account refunds excess account contributions.72

F. ABLE Account Investment Options

Similar to state 529 college savings plans, states offer qualified individuals and families multiple options for establishing ABLE accounts with varied investment strategies.73 People with disabilities and their families need to project future needs and costs over time and to assess their risk tolerance when selecting investment strategies. The ABLE Act limits account contributors and designated beneficiaries from changing the way their money is invested to two times per year.74

G. ABLE Administrator Reporting Requirements
ABLE administrators are required to report monthly to SSA and Medicaid regarding any ABLE account distributions made for QDEs. When an ABLE account is established, the following information must be provided to the SSA:

• Name of the designated beneficiary

• State ABLE program administering the account

• Name of the person who has signature authority (if different from the designated beneficiary)

• Unique account number the state assigns to the ABLE account

• Account opened date

• First-of-the-month account balance or information sufficient to derive a first-of-the-month balance75

Reporting to SSA is required monthly; however, it is unclear how SSA will monitor these reports, given the number of ABLE accounts and the staffing necessary, or whether accounts will be subject to random auditing.

V. Federal Administrative Guidance for ABLE Accounts

Department of the Treasury ABLE account regulations state that, in general, neither the ABLE account nor distributions from the account will be treated as income or resources in determining a designated beneficiary’s eligibility for any federal benefit program. Several federal agencies have provided guidance on the use of ABLE accounts, including SSA, the Centers for Medicaid & Medicare Services (CMS), and the U.S. Department of Agriculture (USDA). Although other agencies have not provided guidance, an ABLE account should be exempt for any federal program that has an income or resource eligibility standard.

A. SSA POMS Guidance on ABLE Accounts
The most comprehensive guidance on ABLE accounts issued thus far is the SSA POMS. The POMS is a primary source of information SSA employees use to process claims for Social Security benefits, including SSI. While the POMS does not have the force of law, courts do defer to SSA’s interpretation of the law.76 SSA issued POMS SI 01130.740 (Achieving a Better Life Experience (ABLE) Accounts) and updated it on March 7, 2018.77 It provides a thorough overview of how SSA treats ABLE accounts for SSI eligibility purposes.

The ABLE POMS is organized as follows:

A. What is an ABLE Account?

B. Definition of ABLE terms

C. When to exclude ABLE account contributions, balances, earnings, and distributions

D. When to count ABLE account balances and distributions

E. How to verify, document, and record ABLE account balances

F. How to verify, document, and record ABLE account distributions

G. Handling and recording ABLE prepaid debit card information

The POMS makes several interesting clarifications concerning the use of ABLE accounts, stating that contributions to an ABLE account are exempt, even if made from a trust.78 Thus, an SNT trustee is authorized to make contributions to a beneficiary’s ABLE account. Factors a trustee should consider when making such a contribution are discussed below.

The POMS states that all distributions from an ABLE account will not be treated as public benefit “income.”79 Instead, it will be treated as a conversion of a resource. This is an important distinction, because if a distribution is made from an ABLE account, even if not for a QDE,80 the SSI recipient will not be penalized by SSA’s income rules for public benefit eligibility purposes. These rules can be difficult to understand because many people confuse the word “income” with how the IRS defines the word. The definition of income is different for SSI eligibility purposes. In general, SSA will reduce the SSI recipient’s monthly check by the receipt of SSA income.81 Income is generally defined for Social Security benefit purposes as either earned82 or unearned.83 For example, any money received by the beneficiary directly will be considered unearned income to the beneficiary under the SSI rules, and, after a set-aside of the first $20 each month, will reduce his or her SSI benefits on a dollar-for-dollar basis.84 For example, if an SNT trustee distributes $500 from the trust directly to a beneficiary who is an SSI recipient, the recipient would lose $480 from the monthly SSI check. If instead, the SSI recipient receives $500 from an ABLE account, there would be no reduction of the monthly SSI check as unearned income because it would be treated as a transfer of a resource, not income. As stated in the POMS:

Do not count distributions from an ABLE account as income of the designated beneficiary, regardless of whether the distributions are for a QDE not related to housing, for a housing expense, or for a non-qualified expense.85

Thus, as another example, if an SNT trustee pays for a recipient’s food, a penalty is triggered under SSA’s in-kind support and maintenance (ISM) rules (described below). However, because ISM is a type of SSI income, if an ABLE account pays for food, there is no ISM penalty. As discussed below, there may be a resource issue, but there is no SSI income issue even if the distribution is made for a non-QDE.

The POMS also provides a unique treatment of paying for housing expenses from an ABLE account. The POMS defines “housing expenses” the same way it defines “shelter,” with the exception of food.86 To understand the distinction, a brief discussion of how SSA treats the receipt of food or shelter by an SSI recipient is necessary.

If an SSI recipient receives “food or shelter, or something the recipient can use to get one of those [two] items” from another person, the recipient will have income in the form of ISM.87 SSA will penalize the SSI recipient for receipt of such income.88 The recipient’s SSI benefits will be reduced by (1) the lesser of one-third of the federal benefit rate (FBR) plus the $20 general income exclusion or (2) the actual value of what was received.89Thus, in 2018, if an SNT trustee pays the SSI recipient’s rent in the amount of $1,000 per month, SSA will reduce the recipient’s monthly SSI check by $270 per month.90 However, if the rent is paid out of the ABLE account, there is no ISM penalty. Therefore, an SSI recipient whose monthly rent is paid by someone else could instead transfer that money to an ABLE account, pay his or her monthly rent, and have an additional $3,240 per year to spend on other items. However, as described in the following example, the rent payment must be made in the same calendar month as the ABLE account disbursement or SSA will count it as a resource.

Ellie, a 24-year-old woman who has Down syndrome, has lived with her parents her entire life. Recently, the family moved from Ohio to Denver. When the family lived in Ohio, Ellie’s parents opened an ABLE account for her.

Recently, Ellie, who receives SSI and Medicaid, got a part-time job at Target. Therefore, she has to abide by strict income and asset requirements to maintain her SSI and Medicaid eligibility. Through her job coach, Ellie made two very close friends, Sally and Linda, who also receive public benefits. Like Ellie, both Sally and Linda work part-time. The women decided that they would like to move into an apartment together near where they work. Currently, Ellie receives $735 per month from SSI and approximately $370 per month from working at Target. Unfortunately, rent in Denver averages $2,900 per month for a three-bedroom apartment.

Ellie’s parents settled a third-party SNT when Ellie was 12 and have been contributing to it ever since. Recently, they closed Ellie’s Ohio ABLE account and opened an account in Colorado. To afford Ellie’s share of the rent, Ellie’s parents set up a plan in which, as trustees of Ellie’s SNT, they transfer $1,000 per month from her trust account into the ABLE account on the first of every month (her rent is due on the third of the month). On the second of the month, they help Ellie pay her rent from her ABLE account. There is no reduction in Ellie’s SSI check, and she has a safe place to live.

The POMS provides an interesting analysis of how ABLE account distributions are treated. SSA treats distributions depending on whether they are for QDEs, housing expenses, or non-QDEs. In general:

• Disbursements made for QDEs (except housing expenses) will remain exempt even if retained by the recipient after the month of disbursement as long as the disbursement is later made for a QDE (that is not a housing expense).91

• Disbursements made for a QDE that is a housing expense will be exempt in the month made, but if the disbursement is retained by the recipient beyond the month of disbursement, it will be treated as a countable resource, even if later used for housing expenses.92

• Disbursements made for a non-QDE will be exempt in the month made, but if retained by the recipient beyond the month of disbursement will be treated as a countable resource.93

For example, if the SSI recipient takes an ABLE account distribution of $20,000 to pay for a wheelchair in March and holds the money in his or her checking account until June — and then pays for the wheelchair — the entire $20,000 is exempt for all months it was held. The funds do not need to be segregated; the ABLE account disbursement can be commingled with the SSI recipient’s other funds.94

If instead the SSI recipient takes an ABLE account distribution of $2,000 to pay for rent and utilities in March and uses $1,000 to pay for rent and utilities in April, the entire $2,000 will be counted as a resource for the month of April (thus disqualifying the SSI recipient from April’s SSI check). If the SSI recipient uses the remaining $1,000 to pay for May rent and utilities, this $1,000 will be counted as a resource for May. If the SSI recipient’s other countable resources add up to more than $2,000, he or she will lose May’s SSI check. The lesson here is that if the SSI recipient had used the entire $2,000 in March, there would have been no loss of SSI. It is important that an ABLE account disbursement to pay for housing expenses be used to pay those expenses in the same calendar month of the disbursement.

The distribution from an ABLE account for a non-QDE is also interesting. For example, if a $10,000 disbursement is made from an ABLE account in April to be used for gambling in Las Vegas and the entire amount is used in April, there is no penalty of loss of SSI.95 An IRS income tax penalty of ordinary income plus 10 percent96 could be assessed — with no effect on the SSI check. If, however, $3,000 remains on May 1, the $3,000 would be counted as the SSI recipient’s resources and would disqualify the recipient from his or her SSI check for that month.

The SSA POMS treats a disbursement made for a QDE and retained by the SSI recipient differently if the intent behind the disbursement changed. For example, as stated in the SSA POMS:

In June, Jennifer takes a $7,000 distribution from her ABLE account to pay an educational expense that is a QDE. Her educational expense is due in September. In August, Jennifer gets a job offer and decides not to return to school. The $7,000 becomes a countable resource in September because she no longer intends to use it for an educational expense that is a QDE, unless Jennifer re-designates it for another QDE or returns the funds to her ABLE account prior to September.97

B. Director’s Letter on ABLE Accounts
The CMS Center for Medicaid and CHIP (Children’s Health Insurance Program) Services director issued a letter to state Medicaid directors, Implications of the ABLE Act for State Medicaid Programs, which addresses individuals whose Medi­caid eligibility is determined by their modified adjusted gross income (MAGI) and those whose Medicaid eligibility is determined by non-MAGI sources.98 The letter states that even for Medicaid without resource limitations, ABLE account earnings and distributions will have no impact on the income calculation for eligibility for MAGI-based Medicaid. However, if distributions are made for non-QDEs, those disbursements may be counted as income when calculating Medicaid eligibility.99

The letter also makes it clear that SNT contributions to an ABLE account will be treated as qualifying contributions and not count against the SNT beneficiary. As stated in the letter:

Some ABLE account beneficiaries may also be a beneficiary of a special needs trust (SNT) or pooled trust, as described in section 1917(d)(4) of the Act. Distributions from such trusts made on behalf of the trust beneficiary to the beneficiary’s ABLE account should be treated the same as contributions to ABLE accounts from any other third party. Thus, while disbursements from an SNT or pooled trust can be considered in some circumstances income to the trust beneficiary, disbursements from an SNT or pooled trust to the ABLE account of the trust beneficiary are not counted as income under section 103. Therefore, states should disregard as income a distribution from an SNT or pooled trust that is deposited into the ABLE account of the SNT or pooled trust beneficiary.100

C. USDA’s Treatment of ABLE Accounts for Determining Supplemental Nutrition Assistance Program Eligibility
The director of the Program Development Division, Supplemental Nutrition Assistance Program (SNAP), initially issued a letter to regional directors stating that ABLE accounts are exempt for purposes of determining eligibility for SNAP, historically known as the food stamp program.101 Regulations were then issued in January 2017 stating that ABLE account assets are also considered excluded resources for determining SNAP eligibility.102

VI. Comparing ABLE Accounts With Special Needs Trusts

It is important to compare ABLE accounts with SNTs to understand the differences between them. Some people believe that an ABLE account is an SNT replacement; however, this belief is incorrect. An ABLE account is an additional planning tool, but it does not offer the same level of protection for persons with disabilities as SNTs.

For many years, the SNT has been the primary planning tool for persons with disabilities.103 Through the years, special needs planners have created a variety of ways to allow persons with disabilities to lead more than a subsistence existence, including various trusts to hold money for the benefit of persons with disabilities. These trusts came of age when Congress passed the Omnibus Budget Reconciliation Act of 1993 (OBRA 93), which provided exceptions to transfer penalties and eligibility rules for Medicaid for three unique trusts:104

1. A trust that contains the assets of a disabled individual under age 65, established for the benefit of the individual by the individual, a parent, a grandparent, a legal guardian, or the court, in which the state Medicaid agency receives all amounts remaining in the trust on the beneficiary’s death up to the amount of benefits paid.105 This trust is commonly known as a “(d)(4)(A) SNT.”

2. A trust that is composed only of pension, Social Security, and other income in a state that does not allow income “spend-down.”106 This trust is commonly known as a “Miller trust” (after Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990)).

3. A trust containing the assets of a disabled individual (a) established and managed by a nonprofit corporation and in which separate accounts of pooled assets are maintained; (b) established by a parent, a grandparent, a legal guardian, the individual, or the court; and (c) in which the state, on the beneficiary’s death, receives all amounts remaining in the beneficiary’s account (unless the account is retained by the nonprofit corporation) up to the amount of Medicaid benefits paid.107 This trust is commonly known as a “pooled SNT.”

The same trust exceptions were expressly adopted for SSI in 1999.108 The statute also created an exception for trusts set up using other people’s assets, typically assets from an inheritance. This trust is commonly called a third-party SNT.109

SNTs have many benefits. SNTs can be funded with any amount and preserve an individual’s eligibility for public benefits. SNTs can hold all types of assets, including real estate and other noncash assets. For persons who lack capacity or have diminished capacity, SNTs provide additional protection. For example, an SNT requires the trustee to follow a discretionary standard when making distributions. A good trustee provides a great deal of oversight and consideration of public benefit eligibility requirements prior to making distributions from an SNT. Due to the nature of the SNT, there is also spendthrift and creditor protection, frequent accountings, and possible asset protection. The protection afforded by an SNT provides a barrier between potential financial predators and the beneficiary’s assets.

An SNT, however, can have significant costs associated with establishing and administering it. It may require paying an attorney to assist in its establishment and certified public accounts and other professionals to assist in its administration. Plus, persons with disabilities cannot be in control of their own SNTs, even if they have the capacity to manage their own financial affairs.

In comparison, ABLE accounts are relatively simple and inexpensive to set up. They give persons with disabilities the autonomy to control their own finances, and persons over the age of 65 can use them without incurring a penalty or losing public benefits. However, use of ABLE accounts is limited to persons disabled before age 26 (which precludes a substantial number of persons with disabilities from using them). An ABLE account can only own cash and can only be funded up to $15,000 per year. If a person with a disability has countable real estate, other noncash assets, or assets greater than $15,000, an SNT still needs to be used.

An ABLE account also has little to no oversight on distributions and lacks a discretionary distribution standard. The person with a disability, therefore, can request the funds for any purpose, even for non-QDEs. Plus, if the person with a disability is subject to undue influence, there is no barrier protecting his or her funds from potential predators. There also is no creditor protection for an ABLE account. Unlike a discretionary spendthrift trust, an ABLE account is an asset belonging to the beneficiary and therefore can be fully attached by creditors and even ex-spouses. The $15,000 per year aggregate contribution limit may be difficult to manage because multiple contributors must coordinate their efforts to avoid exceeding the contribution limit.

Funding an ABLE account is not always in the best interest of an SNT beneficiary. An SNT beneficiary with diminished capacity may be unable to manage the money or be vulnerable to financial predators. An ABLE account may be the first time a beneficiary has ever had to manage money. It may be difficult for him or her to recognize the need for keeping accurate records, spending prudently, and following the rules.

Special needs planners should, depending on the circumstances, consider additional tools to assist in the administration of ABLE accounts, such as the use of guardians, conservators, agents, professional bookkeepers, other fiduciaries, and case managers. This will ensure increased transparency and communication with the person with a disability regarding the use of his or her ABLE account distributions and help avoid issues with fraud, exploitation, and public benefit ineligibility.

VII. Comparing ABLE Programs
State ABLE programs vary widely in investment opportunities, ease of use, and cost. It is important for the special needs practitioner to know how to compare the different ABLE programs. The best way to do this is to use the ABLE National Resource Center’s website, which has a tool for comparing programs.110 It can evaluate up to three programs at a time, providing answers to the following questions, which, according to the center, are important questions that should be asked:

• Opening an Account

» Is there a minimum contribution to open an ABLE account?

» Is there a fee to open an account and, if so, how much is it?

» What proof does the ABLE program require for opening an account or showing that disbursements are qualified expenses?

» Maintaining the account and fees

» What type of fees are associated with the account?

» Are there restrictions on how often withdraws can be made?

• Investment Opportunities

» What investment options does the state ABLE program offer?

» Does the program offer any unique or value-added elements to help beneficiaries save, contribute to the account, grow the account, and manage the investments (e.g., a match or rewards program, financial literacy information or program for beneficiaries)?

• Unique to State

» Does the state offer a state income tax deduction for contributions to the account?

» Does the program offer a debit card/purchasing card? If so, are there added costs for this?

VIII. Conclusion

An ABLE account provides unique options for planning that were not possible before. However, special needs planners need to approach these accounts prudently, thoroughly evaluating how these accounts may be used and how they complement other aspects of a special needs plan. It is crucial for planners to fully educate clients about the advantages and disadvantages of ABLE accounts and to provide their professional support and oversight as part of an effective special needs plan.

The future of ABLE accounts looks bright. These accounts offer people with disabilities and their families an exciting, affordable prospect for planning and saving.

1 Jeanine Braithwaite & Daniel Mont, Disability and Poverty: A Survey of World Bank Poverty Assessments and Implications, 3(3) ALTER – European J. Disability Research 219, 220 (2009).

2 L. Kraus et al., 2017 Disability Statistics Annual Report (U.N.H. 2018).

3 W. Erickson et al., 2016 Disability Status Report: United States (Cornell U. Yang-Tan Inst. on Employment & Disability 2018).

4 Braithwaite & Mont, supra n. 1, at 220.

5 See Cornell U., Disability Statistics, June 13, 2018).

6 Id. at 29.

7 Kraus et al., supra n. 2, at 18.

8 Erickson et al., supra n. 3, at 35.

9 Id. at 42.

10 Id. at 23.

11 Id.

12 Id. at 41.

13 Kraus et al., supra n. 2, at 3.

14 Id. at 43. In 2016, the percentage of working age people with disabilities receiving Supplemental Security Income (SSI) payments was 19.2 percent, or 3,858,100 people.

15 20 C.F.R. § 416.1201(a). Certain assets are not counted, such as a principal residence, one automobile, household items, and a few other items. See 42 U.S.C. § 1382b(a).

16 “When the SSI program began in 1974, the asset limits were $1,500 per individual and $2,250 per couple. Asset limits were last revised over twenty years ago to $2,000 per individual and $3,000 per couple as specified in the law’s schedule of increases. That means that since 1989 no adjustments have been made for inflation or cost of living. If the 1974 limits had been even moderately adjusted for inflation, the 2010 limits would be $6,592 and $9,889 respectively.” Karen Harris & Hannah Weinberger-Divack, Accessible Assets: Bringing Together the Disability and Asset-Building Communities, 44 Clearinghouse Rev.: J. Poverty L. & Policy Clearinghouse 4 (May/June 2010).

17 Georgia Burke et al., Medicaid and Supplemental Security Income Eligibility: Time for a Tune-Up, 12 NAELA J. 1, 6 (2016).

18 ABLE Act of 2014, Pub. L. No. 113-295, div. B, tit. I, § 101, 128 Stat. 4056 (2014).

19 26 U.S.C. § 529A; Social Security Program Operations Manual System (POMS) SI 01130.740(A); H.R. 647, 113th Cong. (Dec. 2014); Ltr. From Brian Neale, Dir., Ctrs. for Medicare & Medicaid Servs., Ctr. for Medicaid & CHIP Servs., to St. Medicaid Dirs., SMD 17-002, RE: Implications of the ABLE Act for State Medicaid Programs, (Sept. 7, 2017) [hereinafter Neale Ltr. to St. Medicaid Dirs.].

20 Id.

21 See ABLE Alliance for Fin. Empowerment, ABLE Accounts Continue to Grow in Popularity, (Feb. 16, 2018).

22 John M. Ariale, Realizing the Full Value of ABLE: A Legislative Update & the ABLE Alliance for Financial Empowerment (AAFE) 3 (Cloakroom Advisors 2016).

23, H.R. 647 – ABLE Act of 2014, 113th Congress (2013–2014), Co-Sponsors, (accessed May 21, 2018).

24, S. 313 – ABLE Act of 2013, 113th Congress (2013–2014), Co-Sponsors, (accessed May 21, 2018).

25, H.R. 647 – ABLE Act of 2014, 113th Congress (2013–2014), All Actions, (accessed May 21, 2018).

26 GovTrack, H.R. 5771 (113th): Tax Increase Prevention Act of 2014, (accessed May 21, 2018).

27 Pub. L. No. 115-97.

28 Id. at § 11025.

29 Id. at § 11024(a).

30 Id. at § 11024(b).

31 26 U.S.C. at § 529A(b)(1)(B); 26 C.F.R. § 1.529A-1(b)(4).

32 26 U.S.C. at § 529A. See proposed regulations, 26 C.F.R. § 1.529A-2(e)(2), noting that the phrase “marked and severe limitations” means the standard of disability for children under 18 claiming SSI benefits based on disability.

33 20 C.F.R. at § 426.906.

34 26 U.S.C. at § 529A(e)(1).

35 26 C.F.R. at § 1.529A-2(e). See also IRS, New IRS Guidance to Simplify ABLE Program Administration, (Nov. 20, 2015).

36 For example, see Ohio’s ABLE program at Josh Mandel, Treas. of Ohio, STABLE Account, (accessed June 13, 2018).

37 26 C.F.R. at § 1.529A-1(b)(4).

38 Id.; 26 U.S.C. at § 529A(e)(3).

39 26 U.S.C. at § 529A(b)(1)(B).

40 Id. at § 529A(c)(4).

41 26 C.F.R. at § 1.529A-2(c)(2)(ii).

42 26 U.S.C. at § 529A(b)(2)(A); 26 C.F.R. at § 1.529A-2(g)(1).

43 26 C.F.R. at § 1.529A-1(b)(17).

44 26 U.S.C. at § 529A(b)(1)(A); 26 C.F.R. at § 1.529A-2(a)(4).

45 26 U.S.C. at § 7701(a)(1) (defines “person” to include an individual, trust, estate, partnership, or corporation); POMS SI 01330.740.B.2; Neale Ltr. to St. Medicaid Dirs., supra n. 19, at 4 n. 1.

46 POMS SI 01130.740(B)(2).

47 26 C.F.R. at §§ 1.529A-3(b)(2), 1.529A-4(a)(1).

48 To determine whether a state provides an income tax deduction and if so, how much, see ABLE Natl. Resource Ctr., Shop the States to Choose the Best ABLE Program for You! June 7, 2018).

49 Id.

50 Id.

51 26 U.S.C. at § 529A(b)(2)(B); 26 C.F.R. at § 1.529A-2(g)(2).

52 Pub. L. No. 114-113 (H.R. 2029) (2015); POMS SI 01130.740(A).

53 ABLE Natl. Resource Ctr., What We’re About,, scroll down to Which state has the best program for you? (accessed June 7, 2018).

54 128 Stat. at § 103(a).

55 POMS SI 01130.740(C)(3).

56 POMS SI 01130.740(D)(1)(a).

57 128 Stat. at § 103(b)(2); POMS SI 01130.740(D)(1)(a).

58 Id.

59 26 C.F.R. at § 1.529A-2(g)(3).

60 For a list of all states’ 529 plan limits, see, Compare by Features,[]=308&page=compare_plan_questions (accessed June 1, 2018).

61 26 U.S.C. at § 529A(f).

62 Id.

63 26 C.F.R. at §§ 1.529A-2(p), 1.529A-3(b)(4).

64 Pennsylvania and California have already passed laws. See Pennsylvania Achieving a Better Life Experience Act, Act 17, § 503 (2016), and Cal. Welf. & Inst. Code § 4885(b) (2018). Oregon and Illinois have also indicated that they will be passing similar laws.

65 26 U.S.C. at § 529A(a).

66 Id. at § 529A(c)(1)(B); 26 C.F.R. at § 1.529A-3(a).

67 26 U.S.C. at § 529A(e)(5).

68 Id.

69 26 C.F.R. at § 1.529A-2(h)(1).

70 Id. at §§ 1.529A-3(a), (d)(1); 26 U.S.C. at § 529A(c)(3)(A).

71 26 C.F.R. at § 1.529A-3(d)(2)(i).

72 Id. at § 1.529A-3(d)(2)(ii).

73 A review of each state’s investment options appear at ABLE Natl. Resource Ctr., supra n. 48.

74 26 U.S.C. at § 529A(b)(4).

75 Id. at § 529A(d).

76 Draper v. Colvin, 779 F.3d 556, 559–563 (8th Cir. 2015).

77 The POMS is located at Soc. Sec. Administration, POMS Home, (accessed June 1, 2018).

78 POMS SI 01130.740(B)(2).

79 POMS SI 01130.740(C)(4).

80 The POMS states that qualified disability expenses (QDEs) are expenses related to the blindness or disability of the designated beneficiary that are paid for the benefit of the designated beneficiary. In general, QDEs include expenses for education, housing, transportation, employment training and support, assistive technology and related services, personal support services, health, prevention and wellness, financial management and administrative services, legal fees, ABLE account oversight and monitoring, funeral and burial, and basic living. POMS SI 01130.740(B)(8).

81 The monthly SSI payment is computed by reducing the federal benefit rate (FBR) plus any state supplemental payment (SSP) by the amount of countable income and any deductions due to a prior overpayment.

82 20 C.F.R. at §§ 416.1104, 416.1110–416.1112 (earned income).

83 Id. at §§ 416.1120–416.1124 (unearned income).

84 Id. at § 416.1124(c)(12); POMS SI 00810.
420, 01120.200(E)(1)(a).

85 POMS SI 01130.740(B)(4).

86 Housing expenses for purposes of an ABLE account are similar to household expenses for in-kind support and maintenance (ISM) purposes, with the exception of food. Housing expenses include mortgage expenses (including property insurance required by the mortgage holder) and expenses for real property taxes, rent, heating fuel, gas, electricity, water, sewer, and garbage removal. POMS SI 01130.740(B)(9).

87 ISM consists of food and shelter provided directly to the recipient or paid for by a third party. 20 C.F.R. at § 416.1102. ISM reduces an SSI recipient’s SSI benefits, but not dollar for dollar as does unearned cash. Instead, depending on the recipient’s living arrangements, the maximum reduction is subject to either (1) the one-third reduction rule (also referred to as the value of the one-third reduction (VTR)) if the SSI recipient is living in the household of a person who provides both food and shelter or (2) the presumed maximum value (PMV) rule in all other situations in which the SSI beneficiary is receiving countable ISM. 20 C.F.R. at § 416.1130(c); see generally 20 C.F.R. at §§ 416.1130–416.1148. VTR is defined as one-third of the FBR. 20 C.F.R. at § 416.1131(a). PMV is defined as one-third of the FBR plus the general income exclusion of $20. 20 C.F.R. at § 416.1140(a)(1).

88 POMS SI 01120.200(E)(1)(b).

89 20 C.F.R. at § 416.1140.

90 This amount is calculated by taking one-third of the 2018 FBR of $750 ($250) and adding $20. 20 C.F.R. at § 416.1140(a)(1).

91 POMS SI 01130.740(C)(5).

92 POMS SI 01130.740(D)(2).

93 Id.

94 POMS SI 01130.700(B)(1).

95 POMS SI 01130.740(D)(2).

96 26 U.S.C. at § 529A(c)(3)(A); 26 C.F.R. at § 1.529A-3(a), (d)(1).

97 POMS SI 01130.740(D)(3)(c).

98 Neale Ltr. to St. Medicaid Dirs., supra n. 19.

99 Id. at 5–6.

100 Id. at 4.

101 See Ltr. From Lizbeth Silbermann, Dir., Program Dev. Div., Supp. Nutrition Assistance Program, to all SNAP Regl. Dirs., Treatment of ABLE Accounts in Determining SNAP Eligibility, (Aug. 4, 2016).

102 7 C.F.R. 273.8(e)(2)(ii).

103 42 U.S.C. at § 1396p(d)(4).

104 The safe-harbor trust exceptions in 42 U.S.C. § 1396p(d)(4) apply to Medicaid eligibility rules. The federal special needs trust (SNT) statutory exception was the first congressional policy permitting SNTs and continuing eligibility for Medicaid for persons with disabilities. Before then, there was much litigation involving common law SNTs between applicants and the states. Many states opposed such trusts on policy grounds.

105 42 U.S.C. at § 1396p(d)(4)(A).

106 Id. at § 1396p(d)(4)(B).

107 Id. at § 1396p(d)(4)(C).

108 Id. at § 1382b(e)(5) (SSI financial eligibility is preserved if assets are held in a qualifying trust). 42 U.S.C. § 1382b(e)(5) refers to the Medicaid safe harbor trust rules in 42 U.S.C. § 1396p(d)(4).

109 For Medicaid, a third-party SNT established on or after August 11, 1993, is not affected by the OBRA 93 trust rules. See 42 U.S.C. at § 1396p(d)(2)(A). For SSI purposes, the regulations allow third-party SNTs. See 42 U.S.C. at § 1382b(e)(3)(A); 20 C.F.R. at § 416.1201(a)(1). Some people use the phrase “supplemental needs trust” to distinguish a third-party SNT from a first-party SNT.

110 ABLE Natl. Resource Ctr., What Are ABLE Accounts? (accessed June 7, 2018).

About the Author

Nancy Susan “Susie” Germany is an attorney with The Germany Law Firm, PC, Denver, Colorado,
and a Deputy Public Administrator for the 17th Judicial District. Her practice focuses in the areas
of special needs planning, elder law, guardianships and conservatorships, trust and estate
planning, fiduciary representation, and probate and trust administration. Ms. Germany is a
member of the Alaska Bar Association and the Colorado Bar Association, and is a past co-chair of
the Elder Law Section of the Colorado Bar Association. She is also a director for Front Range
Hospice and former president and director for the Colorado Fund for People With Disabilities. She
serves on the board of Cultivate, an organization providing yardwork and grocery delivery to low
income seniors in Boulder County. Ms. Germany often teaches continuing legal education courses
and gives presentations on special needs planning, elder law, financial exploitation, and probate


A Closer Look — through the eyes of an experienced actuary — At Long-Term Care Insurance

November 1, 2018

By Katherine C. Pearson, Dickinson Law, Penn State

Jack Cumming, a California CCRC resident, frequently comments on Elder Law Prof Blog posts, bringing to bear his deep expertise in financial planning matters and his equally engaged commitment to historical accuracy in a wide variety of issues. Jack is a Fellow of the Society of Actuaries, and a Certified Aging Services Professional by Examination. During what I might call Jack’s “official career” as a professional actuary, he served as an independent consulting actuary for life and health insurance operations, and before that as a corporate officer and chief actuary for insurance companies.

I first came to know Jack during what I’ll call his “second” career.  Jack helped many, including me, understand concerns about actuarial soundness issues in Continuing Care Retirement Communities. He came to his specialized expertise in CCRCs in a unique way, by moving to a California CCRC with his wife and discovering issues that can benefit from actuarial analysis. Over the last 12 years, Jack has advised CCRC residents and providers, as well as their organizations across the nation.

Jack recently commented on an item I posted on September 12, that described a particular history of poor actuarial decisions contributing to failure of a large Pennsylvania long-term care insurance company. In that post, I also reported on a new hybrid type of long-term care product, announced by New York Life Insurance Company.  Jack’s response was, as usual, so insightful that, with Jack’s permission, I am posting his commentary here, elaborated by him, as a blog post in its own right. 

Jack writes:
A number of thoughts come to mind when reading the recent Elder Law Prof Blog post on long term care insurance (LTCi).  The Elder Law post lists a perfect storm of what turned out to be foolhardy expectations.  Morbidity was underestimated, so were contract lapse rates and mortality.  Anticipated investment returns turned out to be overstated, medical and care costs escalated, and efforts to raise premiums without triggering shock lapses proved insufficient.  The result for the industry has been devastating, as anyone who has been close to LTCi, is well aware.  Fortunately, LTCi was a small part of the business of many insurers offering the product, so losses were absorbed.  Penn Treaty, an LTCi specialist company, was not so lucky.

Now, with the benefit of hindsight, it thus appears that there were significant and material optimistic misjudgments made in bringing LTCi to the market.  First, the data used for the initial pricing were not sufficiently vetted. Pricing actuaries used what data they could find but, for the most part, they failed to take into account the fact that the very existence of such insurance, then being introduced for the first time, would make it more likely that people would use the benefits.

Moreover, the opportunity for LTC providers to receive payments promoted the growth of the provider industry to deliver services that the insurance would cover. Thus, historical data from the time before there was insurance was misleading.   Since the products lacked incentives for policyholders, or those offering services to them, to restrain their use, it was predictable that people would seek to make the most of their coverage.  And they did and continue to do so.

Long Term Care Insurance developed originally to give the sales agents of the large life insurance companies a product that they could sell as part of a product portfolio centered on the sale of life insurance.  Such a portfolio, in addition to life and long term care insurance, often included disability income and health insurance.  Most of the pricing actuaries who were involved in the early development of LTCi products were life insurance specialists influenced by life insurance concepts. There’s little discretion or volunteerism about dying, so mortality data used in setting life insurance premiums tend to be relatively stable and predictable. The consequence is that underwriting and claims in large life insurance companies are principally administrative, e.g. for claims, confirm the death and send a check. More subjective risks, such as disability income (DI) insurance and LTCi, require active management over the duration of a claim by highly skilled executives experienced and specialized in those particular undertakings.

Pricing LTCi merely by taking a table and developing rates, as is sufficient for life insurance, is not adequate for subjective risks.  In the beginning, life insurer corporate managements tended to believe that they knew insurance and had actuaries on staff, so executives responded to pleas from their sales agents and deployed LTCi products into the market. The result of that cavalier beginning is that both DI and LTCi have proven to be highly challenging and largely unprofitable for most companies offering the products. These are products that call for active management, and continuous awareness of developing trends, beyond the administrative capabilities inherent in traditional life insurance.

Genworth has been a prominent insurer specializing in LTCi, and they appear to have made a go of it.  Genworth’s motivations for agreeing to be acquired by China Oceanwide Holdings Group Co., Ltd. are somewhat obscure, though.  Recently, Genworth has been pushing LTCi rates higher in order to maintain the financial health of the business.  The danger is that if rising rates drive the healthier insureds to lapse their policies, an accelerating upward loss ratio spiral can result.  There is one company that does specialize very effectively in LTCi and that is Lifecare Assurance.  Lifecare is notable because it is able to provide a product to be marketed under the brands of other primary insurance companies, providing a full turnkey operation and exceptional expertise.  That approach can allow companies that might otherwise struggle with LTCi to offer a product for their sales agents with little or no financial exposure for the “private label” insurer to have to absorb.

The recent Elder Law Prof Blog post mentioned a fresh New York Life product [outlined as a new “long term care option” here].  To develop the product, New York Life hired Aaron Ball from Genworth to rethink its LTCi approach and the My Care product is the result.  If Mr. Ball is able to hone and motivate the needed specializations within the larger New York Life operation, then New York Life’s approach may be an exception to the traditional struggles of life insurance companies with the product. That will depend on whether those who are able to manage the business are allowed to build their careers exclusively within LTCi as it grows as a demanding business within the larger corporate structure.  Since life insurance is a sales-driven business, support for sales tends to take precedence in a life insurance company over other predictors of financial success.  That approach does not work well for subjective risks like LTCi.

More recently, the Continuing Care Retirement industry has been exploring Continuing Care at Home (CCaH), which allows people to receive in home LTC benefits without having to move onto a campus. While CCaH is essentially the same as LTCi, often with case management built in, state insurance departments have not required that CCaH providers be licensed or capitalized as insurance companies. That may portend future financial problems as claims experience develops and as the insureds age.  With a product like CCaH or LTCi, early experience tends to be favorable, and may seem to confirm the developers’ optimism, only to have neglected undercurrents surface later.

Any insurance enterprise can show favorable early results unless sufficient account is taken of the potential for deferred claims later as the book of business matures. There is much to be said for the case managed model for a product like LTCi. It can give the financial guarantor, the insurance company in the case of LTCi, an edge in seeking to manage risk exposures and benefit responses to expectations. The challenge is that others may push back against reasonable limits on claims abuse since the providers of services stand to benefit from accelerating claims rates and durations.  The plaintiffs’ bar has been quite successful in curbing insurance company efforts to manage covered risks.

Thus, it seems unlikely that a healthy CCaH market can develop as a standalone venture, as is the model for some CCaH variants of LTCi. Linking CCaH to bricks and mortar CCRCs helps to dampen the financial failure risk.  Conventional LTCi insurers are also tying some LTCi products to related asset products like annuities to temper the insurer’s exposure. This can also help to ensure that policyholders have incentives to try to contain claims within what is reasonably needed.

As mentioned, the plaintiffs’ bar can be a challenge for LTCi.  A major step forward could be made toward viability of both DI and LTCi if the American legal system could be changed to require that unsuccessful plaintiffs pay defendants’ legal fees and other expenses. There is also a question whether contingent fee legal representation is as ethical as we would hope that our justice system might be.  Another intriguing legal question concerns where the responsibility of regulators leaves off and where the liability exposure of long term care service purveyors should begin. I’d love to know how law students think about questions like these, which are fundamental to today’s practice of law.