ABLE Accounts: The Direct Funding Debate

Without more specific legal authority, many plaintiff attorneys, special needs attorneys and settlement planning professionals may be unwilling to recommend direct funding of ABLE accounts with structured settlements because of the risk their disabled client might lose his or her means-tested government benefits.

In this article, we'll explore the current arguments for and against direct funding of ABLE accounts; suggest reasons why the National Structured Settlements Trade Association (NSSTA) should prioritize direct funding on its lobbying agenda; and reference current legislative and regulatory opportunities for doing so.

The Direct Funding Debate

What are the current arguments for and against direct funding? Note: there does not appear to be any specific legal authority for or against.

The primary interpretive argument against permitting direct payment of structured settlement annuities to fund ABLE accounts appears to focus on the definition of “income” under Social Security Law (which is different than the tax definition) and “examples of payments that might be direct-deposited into an ABLE account, but still are counted as income ..” (which do not mention structured settlements or annuities) but include benefit payments (Title II, Veterans Administration, pensions, etc.); and mandatory support payments (child support or alimony) – which appears in the Social Security Administration’s ABLE POMS.

The alternative interpretive arguments in favor of permitting direct payment of structured settlement annuities to fund ABLE accounts would appear to be:

  • The public policy supporting the ABLE Act includes language (“to provide secure funding for disability expenses”) that seems to support the “secure funding” provided by structured settlement annuities.
  • The ABLE POMS permit special needs trusts and pooled trusts to fund ABLE accounts – apparently so long as the payments are irrevocably assigned to the ABLE account.
  • Likewise, structured settlement annuities are permitted to fund special needs trusts and/or pooled trusts so long as the payments are irrevocably assigned to the trust.
  • Therefore, structured settlement annuities arguably should be allowed to directly fund ABLE accounts so long as the payments are irrevocably assigned to the ABLE account.
  • Representatives of two ABLE funds (Ohio and Texas) have informed the author their funds have already accepted direct payments of structured settlement payments.

Why should direct funding of ABLE accounts represent a NSSTA priority?

First, without specific authority permitting direct funding,  the risk of losing means-tested government benefits substantially restricts the potential use of structured settlements annuities in an otherwise applicable and growing market.

Second, the public policy supporting the ABLE Act provides an excellent model for how structured settlement funding can, and should, be integrated with personal injury settlement planning:

 “(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 . . . [and] (2) To provide secure funding for disability-related expenses on behalf of designated beneficiaries that will supplement, but not supplant, . . . ” federal benefit programs including SSI, Medicaid, and other federal sources.”

Third, the ABLE market is growing. 49 states and the District of Columbia now have ABLE legislation. As of December 31, 2018, there were 34,707 ABLE accounts in existence with $171,692,577 under management.

  • Maximizing this potential structured settlement sub-market requires direct funding of ABLE accounts with structured settlement annuities.
    • Note: although ABLE account funding currently is limited to $15,000 per year per individual, structured settlements could also fund one or more special needs trusts (or a pooled trust) per individual in a specific case (in addition to the direct funding of an ABLE account) providing significantly greater resources for an injury victim and greater settlement planning options and flexibility.
  • Direct funding requires legislative or regulatory clarification.
  • Public policy supports direct funding, as should disability and special needs planning associations.

Fourth, because of the success and popularity of ABLE accounts, proponents continue to propose and enact legislative improvements.

What are some of the continuing legislative and regulatory ABLE developments?

The Tax Cuts and Jobs Act of 2017 added three improvements to the ABLE Act which are summarized in this Knowledge Network article. The final ABLE Tax Regulations have not yet been published. Many state legislative amendments have been, and continue to be, enacted.

The most recent federal legislative proposal is the ABLE Age Adjustment Act (S. 651/H.R. 1814) which would amend Section 529A(e) of the Internal Revenue Code to increase the eligibility threshold for ABLE accounts for onset of disability from prior to age 26 to prior to age 46.

Although the Senators championing S. 651 have made a preliminary strategic decision to limit the scope of the bill only to age adjustment and not to tackle other issues, they appear to recognize that opportunities to deal with other matters may very well be on the horizon

In Closing

NSSTA, therefore, should strongly consider proposing an amendment to the ABLE Act (or the proposed ABLE Tax Regulations) clarifying that structured settlement annuities direct-deposited into ABLE accounts do not represent income for purposes of Social Security and therefore do not jeopardize any means-tested government benefits the owner of an ABLE account might otherwise receive or be entitled to receive. 

Such a provision would not only be consistent with the public policy supporting the ABLE Act but also would likely gain the support of the special needs and disability communities.  It would also help grow the structured settlement market.

Check out related articles in the Independent Life Knowledge Network for more details on the ABLE Act and ABLE Accounts.