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The question of whether retirement plans, such as IRAs, pensions, and 401(k)s, impact Medicaid eligibility is complicated. Unfortunately, there are no federally set rules on retirement plans and Medicaid eligibility, which means each state sets its own rules. Adding to the complexity are other variables such as the payout status and payout amount of the retirement plan, one’s other income and assets and even one’s marital status.
Having said that, the bad news is that it is likely one’s IRA or 401K will be considered by Medicaid in some fashion (either as income or an asset) when determining eligibility for long term care. The good news is that most candidates can still gain Medicaid eligibility and preserve some or all of their savings for a spouse or other family member who requires it for financial support.
A pension, 401K or IRA or other retirement account will either be considered as an asset or as income. If it is an asset, it will count against Medicaid’s asset limit for eligibility. If it is in payout status and therefore generating income, it is considered as income, and that income will be counted against Medicaid’s income limit for eligibility. Simply counting against Medicaid’s income or asset limits does not automatically mean the candidate will be ineligible. Unfortunately, most of the time this is the case because the income and asset limits for Medicaid eligibility are so low.
Returning to the good news, even though candidates are over the limits, there exist exceptions and eligibility planning strategies that help them become eligible such as allocating income or assets to a spouse, “spending down”, or purchasing certain specifically designed financial products. These strategies are complicated, and it is recommended one work with a Medicaid planning professional.
Importance of Medicaid’s Asset Limit
In order to be eligible for long-term care Medicaid, such as nursing home care or in-home care assistance, there is an asset limit, also called a resource limit. While the asset limit varies across states, many, such as California, Florida, and Texas, set a limit of $2,000 for a single applicant and $3,000 for married applicants. Some exceptions to the rule are New York, which has an asset limit of approximately $15,450 for a single applicant and $22,200 for married applicants, and Minnesota, which allows up to $3,000 in assets for a single applicant and $6,000 in assets for married applicants.
There are many exemptions to the asset limit, meaning many assets are not counted towards the limit. These generally include one’s primary home, household furnishings, a vehicle, and pre-paid funeral/burial arrangements. In some states, an applicant’s retirement account (401(k), IRA or pension) may also be exempt. In other states, it will not be exempt.
Factors Impacting How Retirement Plans Impact Medicaid Eligibility
Whether or not retirement accounts are counted as assets depends on the state in which one lives and the circumstances surrounding the retirement plan. There are also other factors.
In some states, if an IRA or 401(k) is in payout status it is not counted as an asset. At the age of 70 and a half, it is generally required that persons begin withdrawing the Required Minimum Distribution (RMD) from their plan. This is true for all retirement plans that are employer sponsored, as well as traditional IRAs. The RMD is the minimum annual amount that one must withdraw from their retirement plan. The RMD is calculated based on IRS life expectancies charts, and each month an individual will receive the same pre-calculated amount for payment. To calculate your RMD, click here. Please note: Florida uses a different life expectancy chart.
California, New York, Arizona, and Florida are four states that do not count IRAs as an asset for Medicaid eligibility as long as it is in payout status. However, the monthly payments are counted as a source of income. Massachusetts’ Medicaid (MassHealth) is very strict when it comes to IRAs and 401(k)s, as even retirement savings plans in payout status are not exempt.
While an applicant may not have to worry about an IRA or 401(k) counting as an asset, he/she needs to consider that a retirement plan in payout status may put him/her over Medicaid’s income limit. As a general rule of thumb, most states have an income limit of $2,313 / month (as of 2019). More on how Medicaid counts income. If one’s payout plus their other income (such as Social Security) is over this monthly limit, they will likely be ineligible for Medicaid.
Type of Retirement Savings Plan
Roth IRAs do not have a Required Minimum Distribution (RMD). Remember, the RMD is the smallest amount that one must withdraw annually from their retirement savings plan. Since Roth IRAs do not have a RMD, they cannot be put in payout status. In fact, an owner of a Roth IRA does not have to withdraw any money from their account their entire life. Therefore, Roth IRAs are generally counted as assets.
Ability to “Cash Out” the Plan
If one is able to withdraw, or put another way, “cash out” their full retirement plan, it may be counted as an asset. This is because the funds are available to the individual, similar to having cash in a savings or checking account.
Generally liquid assets (assets that are easily converted to cash) owned by either spouse of a married couple are considered jointly owned, regardless of whose name is on the asset. For example, say a long-term care Medicaid applicant is married and his/her non-applicant spouse has a checking account that doesn’t have the applicant’s name on it. For purposes of Medicaid asset calculation, this bank account will still be counted towards the applicant’s asset limit. As far as retirement accounts, some states view them as jointly owned, regardless of whose name is on them. Other states do not.
In Pennsylvania and California, the retirement plan of a community spouse is exempt from being counted as an asset for the applicant spouse. In other states, such as New York, the non-applicant spouse’s retirement account is exempt from being counted as an asset as long as it is in payout status. Yet other states, like Colorado, count the retirement savings plans of both spouses, regardless of if only one spouse is applying for Medicaid.
Planning Strategies to Become Eligible with a Retirement Plan
There are several different planning techniques that can be used when one wants to apply for Medicaid but has a retirement savings account.
Put in Payout Status
A 401(k) or an IRA that is paying out the required minimum distribution may be exempt from Medicaid’s asset limit. With this planning strategy, one must be careful not to exceed Medicaid’s income limit, as the payouts will be counted as income. Again, Roth IRA accounts are not eligible to be put in payout status.
Cash it Out / Spend Down
One can cash out their retirement plan and “spend down” the extra assets on non-countable assets. Said another way, existing assets that are considered non-exempt can be turned into assets that are exempt. Examples include purchasing a pre-paid burial/funeral plan or a life insurance policy (most states allow up to $1,500 face value), making home modifications to allow aging in place, such as the addition of a stair lift, wheelchair ramp, walk-in tub, and grab bars, and purchasing a new vehicle. One could also spend down the excess assets (until Medicaid’s asset limit is met) by paying for long-term care, whether that is in-home personal care assistance, assisted living, or nursing home care.
Allocation to a Spouse
If only one spouse of a married couple is applying for Medicaid, there are spousal impoverishment rules in place to protect the non-applicant spouse from having too little financial resources on which to live. There is what is called a Minimum Monthly Maintenance Needs Allowance (MMMNA). It allows a Medicaid applicant spouse to transfer income to their non-applicant spouse.
Convert to an Annuity
In states and situations when the retirement account is being counted as an asset (such as with Roth IRAs), converting the money into a Medicaid compliant annuity might be a good solution. In simple terms, one can cash out his/her retirement plan and convert a lump sum of cash into a monthly stream of income. While this strategy makes the assets converted into an annuity exempt from Medicaid’s asset limit, the income stream will be counted towards Medicaid’s income limit. Therefore, one must be careful when utilizing this strategy not to exceed the limit or combine this strategy with allocation of income to a spouse.
Can Medicaid Take an Applicant’s Spouse’s Retirement Plan?
Medicaid programs, in most states, count all assets held by either partner of a married couple as jointly held assets and would, therefore, count a spouse’s IRA or 401K against the asset limit. However, there are exceptions and nuances. Both spouses of a married couple do not need to apply for Medicaid, only the spouse that requires care need apply. In these cases, a certain amount of the retirement plan’s value would be exempt and in many states, if the retirement plan is in payout status, it would be exempt. Couples in this situation should consult with a Medicaid planning expert to ensure a healthy spouse is left with enough income and resources on which to live.