Qualified Disability Expenses

A Qualified Disability Expense (QDE) is a term used in connection with the Achieving a Better Life Experience (ABLE) Act of 2014. The law allows people with disabilities to save money in tax-free ABLE accounts without risking eligibility for federal means-tested benefits. The expenses must help the beneficiary increase their independence and quality of life. These expenses include education, housing, transportation, employment training and support, food, assistive technology, personal support services, health care costs, oversight and monitoring, financial management and administrative services, and funeral and burial expenses.

What is an ABLE Account?

An ABLE (Achieving a Better Life Experience) account is an investment-type savings or checking account that allows people with disabilities to save and invest without jeopardizing their eligibility for certain means-tested public benefits, such as Supplemental Security Income. Withdrawals from these accounts are also tax-free as long as the withdrawn money is spent on qualified disability expenses, which is a very broad category that covers everything from education to housing, employment training and support, food, transportation, assistive technology, and personal support services to financial management and administrative services and legal fees, as well as funeral and burial costs.

How Do ABLE Accounts and Qualified Disability Expenses Work?

The ABLE account owner or authorized individual is responsible for ensuring all ABLE account withdrawals are for qualifying disability expenses. If the money is used for anything else, it is considered a Non-Qualified Withdrawal, and the growth portion will be subject to federal income tax, plus a 10% penalty. In addition, the Non-Qualified Withdrawal may impact SSI and other state needs-based benefits.

ABLE accounts were created to allow people with disabilities to save for their future without losing eligibility for government benefits like Social Security and Medicare. Those who meet certain criteria can put up to $16,000 in an ABLE savings plan each year. In many states, ABLE accounts offer a prepaid debit card that you (or your parent, guardian, or agent) can use to pay for qualified disability expenses. You must spend all the funds loaded on the card by the end of each year, or you’ll face a 10% penalty and income tax.

While the ABLE Act provides guidance for determining which expenses qualify, it is up to each individual to decide how to spend their own ABLE account funds. It is important for people with ABLE accounts to keep track of how the funds are used and to document the specifics in case the Internal Revenue Service conducts an audit of their distributions.

For example, Steve has $500 in his ABLE account that he wants to use for housing-related expenses. He transfers the funds to his prepaid debit card in August and uses it to pay for groceries, rent, utilities, and other rental costs in September, October, November, and December. Before the end of the year, he must have spent all of his ABLE funds on qualified disability expenses or face income tax and a 10% penalty, as well as potentially losing his SSI benefits.