How Retirement Savings (IRAs, 401Ks or Pensions) Impact Medicaid Long Term Care Eligibility

Last updated: August 24, 2020

 

Summary

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 an applicant’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.

In most states, a Medicaid applicant’s pension, 401K, 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 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 if candidates are over the limits, there exist exceptions and eligibility planning strategies that help them become Medicaid eligible. Examples include allocating income or assets to a non-applicant 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.

 Spend Down Calculator
Determine if a Medicaid candidate’s (or their spouse’s) IRAs will be countable assets when applying as well as what other assets they must “spend down” to be eligible. Start here

 

Table: 50 State Policies on Counting IRAs, 401Ks or Pensions for Medicaid

States that Count IRAs, 401Ks & Pensions When Applying for Medicaid (updated Aug. 2020)
Applicant’s IRA, 401k, etc. Must Be in Payout (RMD) Status Applicant’s Spouse’s IRA, 401k, etc. Must Be in Payout (RMD) Status
Alabama Countable N/A Countable N/A
Alaska Countable N/A Exempt No
Arizona Countable N/A Countable N/A
Arkansas Countable N/A Countable N/A
California Exempt Yes Exempt No
Colorado Countable N/A Countable N/A
Connecticut Countable N/A Countable N/A
Delaware Countable N/A Exempt No
District of Columbia Exempt No Exempt No
Florida Exempt Yes Exempt Yes
Georgia Exempt Yes Exempt No
Hawaii Countable N/A Countable N/A
Idaho Exempt Yes Exempt No
Illinois Countable N/A Countable N/A
Indiana Countable N/A Exempt No
Iowa Countable N/A Countable N/A
Kansas Countable N/A Exempt No
Kentucky Exempt No Exempt No
Louisiana Countable N/A Countable N/A
Maine Countable N/A Countable N/A
Maryland Countable N/A Countable N/A
Massachusetts Countable N/A Countable N/A
Michigan Countable N/A Countable N/A
Minnesota Countable N/A Countable N/A
Mississippi Exempt Yes Exempt Yes
Missouri Countable N/A Countable N/A
Montana Countable N/A Countable N/A
Nebraska Countable N/A Countable N/A
Nevada Countable N/A Countable N/A
New Hampshire Countable N/A Countable N/A
New Jersey Countable N/A Countable N/A
New Mexico Countable N/A Countable N/A
New York Exempt Yes Exempt Yes
North Carolina Countable N/A Countable N/A
North Dakota Exempt No Exempt No
Ohio Countable N/A Countable N/A
Oklahoma Countable N/A Countable N/A
Oregon Countable N/A Countable N/A
Pennyslvania Countable N/A Exempt No
Rhode Island Exempt Yes Exempt Yes
South Carolina Exempt Yes Exempt Yes
South Dakota Countable N/A Countable N/A
Tennessee Countable N/A Countable N/A
Texas Exempt Yes Exempt Yes
Utah Countable N/A Exempt No
Vermont Exempt Yes Exempt Yes
Virginia Countable N/A Countable N/A
Washington Countable N/A Countable N/A
West Virginia Countable N/A Exempt No
Wisconsin Countable N/A Exempt No
Wyoming Countable N/A Exempt No

 

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 via a HCBS (home and community based services) Medicaid waiver, there is an asset limit, also called a resource limit.

While the 2020 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 $15,750 for a single applicant and $23,100 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.

Payout Status
In some states, if an IRA or 401(k) is in payout status, it is not counted as an asset. Prior to the passing of the SECURE (Setting Every Community Up for Retirement Enhancement) Act in December of 2019, it was generally required that at the age of 70.5, elderly persons had to begin withdrawing the Required Minimum Distribution (RMD) from their plans. (The RMD is the minimum amount that one must withdraw from their retirement plan in any given year. RMDs are required for all retirement plans that are employer sponsored, as well as traditional IRAs). However, with the SECURE Act, the required age of withdrawing the RMD was pushed back to 72. 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 (Medicaid in CA is called Medi-Cal), New York, Texas, and Florida are four states that do not count an applicant’s IRA 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. Many states are very strict when it comes to IRAs and 401(k)s, as even retirement savings plans in payout status are not exempt. Some of these states include Massachusetts (MassHealth), Arizona (Arizona Health Care Cost Containment System), and Missouri.

Payout Amount
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 $2,349 / month (as of 2020). 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.

Marital Status
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.

Please note that the income of a non-applicant spouse applying for nursing home Medicaid or a HCBS Medicaid waiver is not counted towards the income eligibility of his / her applicant spouse. (Income is counted jointly for the regular state Medicaid program). This means that in this case, if a non-applicant spouse’s IRA is in payout status, the monthly payments are disregarded and are not used when calculating an applicant spouse’s monthly income. Learn more about how Medicaid counts income here.

 

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 nursing home Medicaid or home and community based services via a Medicaid waiver, there are spousal impoverishment rules in place to protect the non-applicant spouse (also called a community spouse) from having too little financial resources on which to live. There is what is called a Minimum Monthly Maintenance Needs Allowance (MMMNA), which allows a Medicaid applicant spouse to transfer monthly income to their non-applicant spouse. There is also a Community Spouse Resource Allowance, which allows a greater portion of the couple’s joint assets to be allocated to the 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, an applicant must be careful when utilizing this strategy not to exceed the income limit or must combine this strategy with allocation of income to a non-applicant spouse.

 Proceed with Caution: If you or a loved one has a retirement savings account and are planning to apply for Medicaid, it is imperative that one contact a Medicaid professional planner for advisement. Incorrectly utilizing planning techniques can result in Medicaid disqualification by violating Medicaid’s look back rule. This is a period of time in which Medicaid looks at all past transfers to ensure assets were not sold for less than they were worth or given away in order to meet Medicaid’s asset limit. If one has violated this rule, there will be a period of time in which he/she is ineligible for Medicaid.

 

Can Medicaid Take an Applicant’s Spouse’s Retirement Plan?

Medicaid programs, for the most part, count all assets held by either partner of a married couple as jointly held assets. However, there are exceptions and nuances, and while some states do count a non-applicant spouse’s IRA or 401K against the asset limit, approximately half of the states do not count it. (In a handful of states, the non-applicant spouse’s IRA must be in pay out status for it to be exempt). Even if a non-applicant spouse’s IRA is not exempt, if his / her spouse is applying for nursing home Medicaid or a HCBS Medicaid waiver, the non-applicant spouse is entitled to a greater amount of the couple’s assets. 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.

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