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Medicaid and Retirement Accounts

Statistics tell us that approximately 25% of us will need some sort of extended long-term nursing care during our lives – and as our life spans increase with improvements in medical care, this number is likely to increase.

Most of us have experienced family or friends needing this type of long-term nursing care. Since Medicare doesn’t provide much in the way of long-term care benefits, the individual is left with three possible sources to pay for long-term care:

  1. private payments from your savings and other sources
  2. long-term care insurance coverage (LTCI)
  3. Medicaid

old man and sheep by Kris HaamerGiven the tremendous costs for long-term care, many individuals are faced with the distinct possibility that any savings that they have amassed over their lifetimes (and that they hoped to pass along to their heirs) could be quickly wiped out or drastically reduced with a stint in a skilled-care facility. Then who will take care of the sheep?

Medicaid

Briefly, Medicaid was originally introduced in 1965 (alongside Medicare) as a “safety net” for healthcare, primarily to help the poverty-stricken. Along in the late ’80’s, it became clear that this safety net could be beneficial to people of modest means as well. So the laws were adjusted to allow for additional beneficiaries of the program through some simple planning. Later during the early ’90’s, the eligibility requirements were tightened up a bit, but with planning, certain beneficiaries can still receive Medicaid benefits.

Eligibility for Medicaid is based upon the assets available to the individual – only about $2,000 is allowed to remain in savings vehicles. Community (joint, owned by both members of a married couple) accounts are subject to special rules, and depending upon how your state chooses to administer the program, half of these jointly-held accounts could be considered eligible assets. Other assets, including primary residences, annuities, and life estates, receive special treatment under Medicaid eligibility rules as well.

Retirement Accounts and Medicaid Eligibility

How are your IRA, 401(k), and other accounts viewed with regard to Medicaid eligibility? As a general rule, retirement accounts are included as available assets. Even if the individual is under age 59½ and otherwise ineligible for distributions without penalty. The retirement accounts must be liquidated before the individual can be eligible for Medicaid coverage.

One way to protect assets from liquidation is if the account is in periodic payment status. This might mean the account is subject to Required Minimum Distribution (RMD) either due to age 70½ requirement or if the IRA is inherited and subject to inherited RMD. In some states, an account in periodic payment status is considered an income source rather than an asset. The circumstances might help to protect the account’s assets from being included in total for Medicaid eligibility.

For example, if an individual was in RMD status due to being over age 70½, his account would be considered in payment status. If the account was worth $200,000, this amount would not be counted against him for Medicaid eligility, but the periodic income stream would be. If he is age 72, his annual required payment from the account would be roughly $7,812, which would be considered for his income budget, approximately $651 per month. If this was his only income, that amount would be paid to the nursing home – with the balance of the cost of the nursing care paid by Medicaid.

If the individual is married and the other spouse is not applying for Medicaid, there are allowances made for monthly minimum maintenance (of the non-Medicaid spouse) as well. In 2019, the maximum monthly maintenance needs allowance is $3,160.50. This is the most in monthly income that a community spouse is allowed to have if her own income is not enough to live on and she must take some or all of the institutionalized spouse’s income. The minimum monthly maintenance needs allowance for the lower 48 states remains $2,057.50 ($2,572.50 for Alaska and $2,366.25 for Hawaii) until July 1, 2019.

Not all states utilize a minimum and maximum income allowance. Some states use just one figure that falls somewhere between the federally set minimum and maximum figures. For example, as of 2019, New York, Texas, and California all use a standard monthly figure of $3,160.50 (the maximum), and Illinois uses a standard monthly figure of $2,739.

What About a Roth IRA?

So, if you’re thinking ahead you’re wondering how this impacts a Roth IRA… since a Roth IRA is not subject to minimum distribution rules. Rightly so – the Roth IRA is never in a payment status as long as the original owner is living. As such, your own Roth IRA assets are counted toward Medicaid eligibility status. These assets would have to be spent down before the individual could become eligible for Medicaid.

Bottom line…

So the bottom line is that you need to consider lots of things as you think about Medicaid eligibility. If you have significant assets available, you could be better off to consider a Long-Term Care Insurance (LTCI) strategy, as otherwise your assets might have to be spent down and quite possibly depleted. Unfortunately there isn’t a “rule of thumb” to use in determining whether LTCI makes sense. Each individual’s situation will be a little different, taking into account medical history, family medical history, asset base, age, etc.. This is the sort of analysis that you need to do as you near retirement age in order to consider whether or not LTCI or Medicaid could be a part of your future healthcare plans.

8 Comments

  1. Ritch says:

    Jim,

    A very interesting and informative article which gives rise to a question you may or may not have the answer for.

    While I can (and do) understand the reasoning behind Medicaid’s possibly NOT choosing to include a Traditional IRA or other Qualified Retirement Plan for which one is currently receiving their annual RMD as a “Countable Asset” for Medicaid qualification purposes, there’s the other side of that coin, and it’s the Medicaid Recovery Process. Wouldn’t the asset that’s providing the RMD still be a target for Medicaid Recovery if/when the Nursing Home Resident dies?

    Here’s an example. A gentleman, age 71, enters the Nursing Home, where he lives for exactly 6 years before passing away. His only potentially countable asset is an IRA account with a balance of $500,000. To make the math simple, let’s assume his IRA return perfectly matches the equivalent RMD withdrawal rate, so his account balance after 6 years of RMD’s remains at $500,000. Over 6 years he receives a total of $124,212 in RMD payouts, which we will assume his wife (he’s married) needs and is allowed to receive under the minimum monthly income allowance provision of Medicaid. He also gets Social Security payments in excess of $24,000 a year. Again to keep the math simple (you’ll see where I’m going in a minute) his wife keeps all of what he gets ABOVE $24,000 to satisfy her minimum monthly income need.

    The annual cost of the Nursing Home is $91,250 ($250/day X 365 days). Assume $24,000 of his SSB’s are applied to that cost before Medicaid pays, leaving an annual Medicaid balance of $67,250. Over 6 years Medicaid pays out $403,500 on his behalf (or a bit less, say $322,800 if they reimburse at 80% in this example).

    So when he dies after 6 years, isn’t Medicaid going to seek recovery from his IRA account that’s still worth $500,000, to cover the $403,500 (or $322,800) they paid the Nursing Home on his behalf?

    It’s hard for me to imagine they’re just going to say “Forget about that – you keep the money” to his IRA beneficiary, which we will assume is his surviving wife.

    I’d be interested to hear your, or other folks, thoughts on this issue.

    1. Ritch says:

      Jim,

      This is intended as an addendum to my earlier comment, the gist of which is: “What happens if and/or when the IRA account from which the RMD is being taken is no longer deemed to be in (and thereby protected by) the ‘Payment Status’ mode associated with forced annual distributions being paid out of the account?”

      Let me illustrate with four different scenarios. In all of these scenarios, assume the original account owner’s widow is the same age as him, and survives him by two years. During those two years she takes her annual RMD and (again to keep the math simple) let’s say she manages to earn each year a return on her remaining investment sufficient to end each year with a $500,000 balance. So in those succeeding years she withdraws another $48,216, but when she dies the account is still worth $500,000 (due to wonderfully precise investing, not a Ponzi scheme).

      Scenario 1.
      The widow, against the advice of her crackerjack CPA and Investment Advisor, names her Estate as the IRA beneficiary. Would Medicaid, at that time, seek recovery from her Estate of the hundreds of thousands of dollars they paid out for her late husband’s Nursing Home stay? Any thoughts?

      Scenario 2.
      The widow has one child, a daughter named Jill (age 45), who she names as the IRA beneficiary. Jill, being a prudent and financially savvy lady, establishes an Inherited IRA and continues taking annual RMD’s from the account. She lives 45 more years and dies at age 90, having taken a RMD from the account every year. In this Scenario, if the premise of your article is correct (which I believe may very well be the case), Medicaid likely never recovers against the IRA asset. Would you agree with that conclusion?

      Scenario 3.
      The widow has two children, twins, Jill and Bill, both age 45. She names them as 50/50 beneficiaries. Jill takes her $250,000 and establishes an Inherited IRA, takes RMD’s each year and dies at age 90 as discussed above. Bill, however, is a lifelong spendthrift, so instead of setting up an Inherited IRA, he takes a $250,000 distribution and uses what’s left after paying income taxes to buy a small lake house, motor boat and a Sea-Doo. In Bill’s case the question is, would Medicaid seek partial recovery against the proceeds that were left to him, or would the IRA still be considered to be in ‘Payment Status’ (and thereby protected) when he took the Lump Sum Distribution? Your thoughts?

      Scenario 4.
      The widow, for whatever reason(s), leaves the entire remaining balance in the IRA to her favorite charity (a 501 C-3 organization) and names them as the IRA’s sole beneficiary. Would Medicaid attempt recovery of the money they paid out for the late husband’s Nursing Home care from his widow’s Estate (via this IRA, which for purposes of these examples, we will assume is the bulk of her remaining assets)? I’m not at all sure what the answer is in this case.

      Looking at this from the 40,000 foot level, there’s a HUGE potential value add for the client if a Financial Planner, Investment Advisor and/or Tax Practitioner helps a client to understand the importance of thinking through these kinds of issues when doing their Financial, Tax and Estate Planning. However, as a Tax Practitioner, I would be very reluctant to give specific advice and recommendations relative to some of these matters, as I consider Medicaid Planning “above my pay grade” and outside the scope of my practice. In fact, some would say (correctly in my view) that folks who are doing Medicaid Planning are (or may be) practicing law, and attorneys are the only people who are supposed to do that. So where do you draw the line when you counsel a client about such matters, given that the types of things we’re talking about above are also an important component in a client’s Long Term Care Plan?

      FYI, this issue is very close to my heart. My Mom has been self-pay in a Nursing Home for almost 4 years now. I’m her POA, Primary Beneficiary and handle all of her affairs. Prior to her confinement, we had talked about a LOT of financial and estate planning stuff, including some Nursing Home issues and scenarios. But as I found out when she went into the NH, there was quite a bit we hadn’t discussed. With that having been said, when it became apparent to me six months into her Nursing Home stay that she wasn’t likely to ever be coming home, I spoke with her at length and suggested we engage an Estate Planning Attorney to consider whether we should revise some of her Estate Planning documents to potentially preserve a portion of her assets from eventually having to be spent down if she lived long enough. Had we had that conversation ten years ago, she would have almost certainly been in favor of it. However, once confined, she wanted no part of it, because she adamantly refused to even consider the possibility that she would not, at some point, be able to go back home again. [It should be noted, that except for being unable or unwilling to acknowledge that she needed to remain in the Nursing Home due to her underlying health issues, Mom was {until only very recently} fully mentally competent in ALL other respects.]

      Because I respect and love my Mom, and would not do anything against her wishes as long as she is able to understand and make her own choices, I have not done anything contrary to what she said she wanted (and subsequently reiterated when we revisited the conversation several different times). If Mom lives long enough (and I’d rather have my Mother than her money) she will pay about $700,000 to $750,000 to the Nursing Home before she qualifies for Medicaid. Had she been willing, we could have likely limited that spend down to $450,000 to $500,000 by doing some serious Medicaid Planning within the first year of her admission to the Nursing Home.

      It’s not like I couldn’t use the money, or wouldn’t like to have it, but it’s NOT MY MONEY, and it never will be for as long as Mom is breathing. So it’s hers to use as she chooses to, and it’s my job to carry out her wishes as she expresses them to me. But had we known more, and planned better, for various eventualities we didn’t fully anticipate, she would likely has made some different decisions IF we had known what to ask and answer, and if we had asked the questions BEFORE she was under the duress of having left the home she dearly loved (and where she raised her family) and relocated to an institutional setting that’s so different than what she was used to.

      Before Mom met the Nursing Home “up close and personal” I thought I knew something about Long Term Care. But I didn’t realize how little I knew. Long Term Care Planning is FAR MORE than simply deciding whether or not to by a LTC Insurance Policy (which is what I’ve always told my clients). But now that I know HOW MUCH MORE it entails, I encourage clients to think through LOTS of different scenarios well ahead of when they might need care, and to revisit those conversations and decisions periodically. The issue you raised in this well written Blog Post is one that needs to be understood and worked through.

      Thanks for shedding some light on this matter.

      1. jblankenship says:

        The short answer is that it is dependent upon the way Medicaid is administered in your state.

        Many states do not count IRA assets if the account is in “payment status”, which is when the account is subject to RMD. But some states do not recognize this status and still count IRA assets as resources.

        Upon death, some states count only probate property (for reimbursement), other states choose to have a broader definition of available estate assets, including those that pass to heirs outside of probate (which an IRA would, if the estate is not the beneficiary).

        So – long story short: you’ll need to become familiar with your state’s rules surrounding Medicaid in order to answer the questions you’ve posed. There are many attorneys who work in this environment exclusively that can help with the process.

        1. Ritch says:

          Thanks for your response. I know that each state’s Medicaid Rules are different, and obviously I wasn’t expecting you to know the rules for my state, which is Virginia.

          I was/am interested to know if you know how those various scenarios might be handled in your home state of Illinois. I thought it might add some additional substance to the issues you raised in your excellent article.

  2. Zvi Kedem says:

    When a lawyer was creating a Medicaid protection trust for my relative and I was present the lawyer said that if distributions from a Roth IRA are taken according to the schedule that would apply it were a traditional IRA, then it is considered to be in payment status. I apologized and asked about it repeatedly because I found it hard to believe but I was assured that this was the case. Perhaps this is only true in New York.

    1. jblankenship says:

      That’s very interesting, and good to know. Thanks for sharing!

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