What about special needs

What about special needs students? How would we better assess these students? My feelings are that if a student's abilily rests within a 3rd grade level, he/she should be tested at that level. Where I am now, if the student is considered 5th grade he/she takes the 5th grade state assessment no matter where his actual ability level is considered to be. I feel that these students are set up for failure. Any thoughts??