IRA's, Qualified Retirement Plans (QRPs) and Medicaid Planning

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April 30, 2014
Author: David Dorfman and Sujenie Badia
Organization: Law Office of David Dorfman


As you have no doubt learned by now, Medicaid planning (i.e., qualifying for eligibility) and protecting retirement assets are goals that often conflict. The first goal is to obtain financial assistance for necessary health care, while the second goal is to accumulate and protect wealth intended for retirement spending or to benefit heirs.

Medicaid Eligibility and Estate Recovery: Estate Planning Techniques

When considering Medicaid planning and preservation of retirement assets, counsel must familiarize itself with the several different series of applicable regulations and statutes that address and govern both goals. Among them are the federal [1], state  [2]and local Medicaid regulations [3], the Tax Reform Act of 1986, as amended, the Internal Revenue Code and the Employee Retirement Income Security Act. Due to the fact that the rules and regulations do not address these goals in the same context it can be difficult to achieve all of the client's needs. The rules and regulations do not simultaneously address the polar issues and moreover are spread throughout many jurisdictions which forces counsel to dissect each regulation in order to extract the pertinent and applicable sections. Counsel has to categorize separate sections from different regulations in order to form an option that will assist its client with the goals of Medicaid planning and protection of assets.

The Medicaid program is designed to ensure heath care for those who can not afford medical care. It is akin to welfare for health care and is essential to most elderly persons requiring long-term care or extensive medical treatment. One determining factor for Medicaid eligibility is the amount of resources (meaning income and assets) available to both the applicant and his or her spouse (if any).  Medicaid planning therefore requires taking into account all assets and their treatment by various government administrative bodies. An applicant can fail to qualify for Medicaid if it is determined that he or she possesses excess resources.

Under New York Medicaid laws and regulations, “resources” include all assets held in the name of the applicant and his or her spouse, whether personal or real property. [4]  Assets to which the applicant or the spouses are entitled to, although not collected, are also counted as resources. [5] Note however that not all property is considered a resource. Ownership of certain property will not jeopardize the applicant’s receipt of Medicaid assistance, even if the value of such assets exceed $3,600 (the current amount an individual applicant may possess). Exempt resources also include essential property such as cars and pre-paid burial expenses. [6]

The issue of understanding New York Medicaid exempt rules is vital in the protection of assets, which is in the long run the want and need of our individual clients. All income and resources that are not specified as exempt under the law, must be applied toward the payment of the applicant’s medical care, which will eventually deplete the clients assets. [7] This is one of the main issues that commonly arise in Medicaid planning, and this is the issue that will be addressed.

Often the deciding factor in whether an applicant is eligible for Medicaid benefits is based upon the amount of retirement assets that the applicant holds. In order to be eligible the applicant may have no more than approximately $3,600 in assets, and if applicable, the spouse may have no more than approximately $84,120.00 in assets, which is referred to as the “community spouse resources allowance.” [8] These figures are based upon the allowable assets under the Medicaid guidelines. If a retirement account (such as an IRA or pension) is owned by the Medicaid applicant/recipient, it is more likely to be counted as excess resources than if the spouse owns it. However, there are many instances, that the assets most scrutinized by Medicaid are the spousal allowances.  [9] 

There are three possibilities regarding treatment of a retirement plan in calculating asset allowances.  The applicable method depends upon the particular jurisdiction.  “Complete inclusion” of the retirement plan in the applicant’s resources counts the plan towards the $3,600 applicant limit — the worst result. Alternatively, a so-called hybrid position counts a spouse’s retirement plan as part of the CSRA, the $80K that the community spouse can own, and still qualify the spouse for Medicaid. This seems beneficial at first glance — but by including the retirement plan in the CSRA, other assets, like a checking account, may cause the family to exceed the asset limit.  Therefore, they may have to deplete the checking account balance if the value of the retirement plan exceeds the $80K CSRA limit.

There is however support in federal law for a version of the hybrid rule, the strongest case being the Code of Federal Regulations 20 C.F.R., ch. 111 416.1202 which states that "in the case of an individual . . . who is . . . the husband or wife of the [Medicaid applicant], the [spouse's] pension funds are excluded [as available resources to his or her spouse for consideration by Medicaid]." [10] This regulation indicates that if a spouse exceeds the $80K limit and owns an IRA or other pension, it is not counted in determining whether an applicant is eligible for Medicaid. Additionally, this regulation exempts QRP/IRA’s from consideration by SSI and of course, qualification for SSI creates automatic eligibility for Medicaid.[inline-promo}

Finally, and most beneficial to the applicant, is a total disregard of retirement assets towards the applicant and the spousal allowance.  Medicaid caseworkers may choose to exempt retirement benefits from both. There are several federal regulations that call for the total inclusion of all retirement assets, however those caseworkers that choose to exclude retirement assets are supported by the 18 NYCRR 360-4.6(b)(2)(iii) regulation. It states that "on or after September 1, 1987, pension funds belonging to an ineligible or nonpaying legally responsible relative which are held in individual retirements accounts or in work related pension plans, including plans for self-employed individuals such as Keogh plans.  However, amounts disbursed from a pension fund to a pensioner are income to the pensioner, which will be considered in the deeming [qualification] process." [11]

It is impossible to know before hand the caseworker that will review the Medicaid application, thus it is virtually impossible to foresee the treatment of the retirement benefits by that particular caseworker. Therefore, we must always presume that an application will be reviewed with excess resources and thus we as elder law attorneys must help out clients protect their assets from being completely depleted either by the spend down regulations of Medicaid of paying off medical bills. Unfortunately, there are many situations when a client is forced, with limited resources, to choose between health care and savings. Advanced planning may reduce and alleviate some of these problems.

When considering advanced planning for our clients, counsel and clients must understand that a myriad of ethical considerations must be incorporated in any decision to divest an individual of their assets or lifetime savings. Individuals spend most of their lives setting up a nest egg to live their retirement years comfortably and to leave their families with financial stability after their demise. If they solely make payments of medical bills and nursing homes, their funds most likely will be depleted prior to their life expectancy, and potentially leaving them in their later years of lives without sufficient assets to preserve dignity and security. Furthermore, the client’s wants of protecting its family after death will also become a mute point if they have spent all of their assets. Thus, counsel, is to assist their clients acquire the medical assistance that they require without having to become destitute in the later years.

Medicaid eligibility by definition requires a significant health care crisis, so the planning is most likely to include liquidation (i.e., sell it) or preservation (i.e., keep it) of assets. This conflicts with the client’s desire of multigenerational distribution. A balance must be struck considering the client’s life expectancy (both actual and projected). These are difficult choices, and there is a dearth of current guidelines that effectively assist the practitioner.

Before submitting an application the client and the attorney must first understand whether and how a particular retirement plan will impact Medicaid eligibility. A thorough review of the documents delineating retirement plans (or other retirement assets) is necessary. Due to the fact that retirement plans come in a myriad of shapes and sizes, it is critical for a client and his or her counsel to examine the entire plan, i.e. the fine print, before applying for Medicaid benefits. 

Medicaid administrators are also bound by the same rules that bind the client, that is, the rules of the QPR or IRA. Medicaid caseworkers are trained to contact the administrator of the retirement plan and inquire as to the options available to the participant for receipt of the benefits — such as taking all the money in a lump sum, or over one’s lifetime, or for a fixed term of years. Many plans have various "grandfather" clauses that cross-reference tax provisions and other changes in the law thus the Medicaid applicant (or his/her counsel) must prove to the satisfaction of the Medicaid caseworker that the unique rule of a particular qualified plan governs the client's options.

Furthermore, applicability of the retirement issues differs in many forums, thus before familiarizing oneself with the fine print of the IRA or QPR documents, counsel must first familiarize itself with the jurisdictional regulations of the clients location.

If retirement assets are expected to cause disqualification for Medicaid, one planning opportunity is to purchase a Joint Survivor Annuity within the retirement plan. [12] This may provide the best benefits to both the applicants with failing health and the healthy spouse. During the lifetime of the institutionalized spouse, only the income from the annuity is at risk. At the death of the institutionalized spouse the community spouse continues to receive annuity payments throughout his/her lifetime without having to worry about Medicaid Estate Recovery. [13]

For the single client, another annuity option would be an IRA. A transfer of funds into an insurance company’s IRA plan may be made without incurring any income tax liability. Some insurance companies offer annuities that qualify as individual retirement account vehicles. A client may also opt to create multiple accounts. A single IRA account may be split or converted into multiple accounts without tax penalty. Each account will designate a separate beneficiary. This can facilitate the distribution of the applicants estate upon the client’s demise. When such an account is earmarked for an individual, he or she will be less likely to feel entitled to other assets not specifically designated to them. Furthermore, if the client is married and the beneficiary is the surviving spouse, he or she should be able to rollover the proceeds to his/her own IRA without tax consequences and free of Medicaid Estate Recovery.

If a client opts to purchase an annuity, counsel and client must make sure that the annuity payments meet the minimum distribution requirements under the Internal Revenue Code, as well as the Health Care Finance Administration life expectancy table (HCFA 64). [14]
The annuity payments may remain level or start at one level and then increase annually. Some annuities may provide the beneficiary, upon the purchaser’s demise, the amount paid for the annuity less the total of all payments made to the purchaser.

An option other than an annuity is to redeem the plan benefits, pay the taxes, and transfer the balance of the assets to the healthy spouse. Note that Medicaid penalizes uncompensated asset transfers made for the purpose of achieving Medicaid benefits.  If the transfer is to someone other than a spouse, counsel should look for legitimate reasons other than Medicaid qualification to transfer assets. For instance, a personal service care contract can be executed. One of the most important considerations to keep in mind is that inter-spousal transfers are not penalized. [15]

When trying to assess what option is best for the client, counsel must explain to the client all of the taxation issues. In a scenario where an IRA account is renamed into an annuity, a client is not liable to pay off any taxes. Furthermore, assets rolled over to a spouse at the death of an institutionalized spouse are not taxed. A family will be considerably better off if assets can be preserved in a tax-deferred vehicle such as an IRA or an annuity, as opposed to paying the tax and investing the balance without the tax benefits as happens when assets are redeemed. 

Besides the two options that I have mentioned, there is another option to the Medicaid eligibility issue that on the advantageous side is considered a nontaxed option. It includes using the guardianship or family courts to obtain a qualified domestic relations order [16]. A QDRO is a court order that allows an applicant beneficiary to switch the name on a retirement account from the applicant to the spouse. To constitute a QDRO, the order must contain specific information about the participant, the alternate payee, the plan, and the benefits assigned to the alternate payee. In addition, the order must be presented to the administrator of the plan and must be determined to be a qualified order by the administrator. [17] Without court order, the IRA rules will not permit the renaming if the IRA account.

In using the guardianship of family courts, the community spouse would petition for a guardianship order to achieve a change of equitable ownership of the plan benefits. In accomplishing this one must be careful to maintain IRS qualification of the tax-deferred status of the plan.

In certain instances a QDRO is requested within the context of a divorce or legal separation proceeding. However, in either the family court or guardianship proceedings a judge may issue a QDRO outside those contexts. Both family court and guardianship judges may be sympathetic to families requiring access to the Medicaid program to finance long-term health care.

Among considerations of QDRO’s are the tax implications outlined in the Internal Revenue Code, Section 408(d)(6) Transfer of accounts incident to divorce.  “The transfer of an individual's interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of section 71(b)(2) is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse. Therefore, transfers of an IRA to a spouse, pursuant to a decree of divorce or separate maintenance are not a taxable distribution.”

IRC section 414(p)(1) addresses the alternate payee regulations which indicates that although an individual may be entitled to benefits under a qualified plan, all or a portion of the participant's benefit may be payable to the participant's spouse, former spouse, or children pursuant to a QDRO. It is a judgment that relates to marital property rights, the right of support for a child or other dependent that assigns to an alternate payee the right to receive all, or a portion of the benefits. An alternate payee includes a participant's spouse, former spouse, child or other dependent.

Again, a balance must be struck between the above tax consequences and Medicaid qualification. Presently, the Medicaid rate for nursing home care is less than $10,000 per month even in Manhattan or on Long Island therefore, you must run the numbers, estimate the life expectancy of the Medicaid applicant and allow clients to make an informed choice.  

Aside from taxation issues counsel has to also take into consideration the applicants capacity. Many Medicaid applicants loose capacity or suffer from fluctuating capacity.  Even the best tax plan will fail if it cannot be implemented and a participant’s signature will be needed. This is why substitute decision making is a subject that affects almost every Medicaid applicant. Because they are sick, they need help with things like powers of attorney, trusts and transfers of retirement benefits to designees. 

There is little guidance in the field of retirement benefits and its affect on Medicaid eligibility. Natalie Choate addresses substitute decision-making in her book Life and Death Planning for Retirement Benefits (Ataxplan Publication: 1999), in reference to financial control issues. She addresses the issue of power designation and offers an approach in which one spouse becomes disabled and cannot request required minimum distributions: the designation of a trust or use of a power of attorney.

She writes, “retirement plan documents should (but many do not) permit the participant to direct the payment of lifetime benefits (disability and retirement) to [the clients] revocable living trust. Section 401(a)(13) prohibits "assignment" of QRP benefits.  Regulations provide that a voluntary, revocable assignment is not an "assignment" for purposes of section 401(a)(13).  Section 72(p)(1)(B) treats all "assignments" of plan benefits as loans from the plan, apparently taxable as distributions, and neither section 72(p) nor regulations thereunder suggests an exception for voluntary revocable assignment of benefits.  However, an "assignment" to a revocable trust should not be treated as an assignment for purposes of section 72(p) or section 401(a)(13) because [the participant] and his revocable trust are essentially treated as "one person" for income tax purposes under the grantor trust rules. (emphasis original) (section 671-677).

She continues by asserting that: “the client's power of attorney should at a minimum enable the power holder to receive benefit checks and endorse them.  It can go further and give the holder the power to make elections as to the form and timing of benefits (subject to the rights of client's spouse) but this would necessarily involve the power holder in making choices between the client and the beneficiary of death benefits under the plan.  Giving the power to designate a beneficiary of plan death benefits gives even greater responsibility to the power holder." (Choate, 488).

Ms. Choate poses a situation where a client is incapable of making firm decisions regarding his or her finances, a power of attorney allows the power holder to control the finances. Of course with a power of attorney there does exist ethical questions of trust, therefore a client must be absolutely sure of whom he is giving its trust to. The suggestions addressed by Natalie invoke the important issues of surrogate decision making and they also may in the future avoid guardianship proceedings because the client would’ve have chosen its guardian during his time of capacity. Obviously, transfer of assets, maintenance of trusts, and issue of finances come into play when a spouse or a family has to plan for Medicaid, however, Natalie Choate does not consider this important aspect in her book. It is not recognized that a power of attorney or trust can also be useful if it is utilized in a Medicaid estate planning situation.

There are no texts, no regulations and no rules that combine these two important, polar yet simultaneous issues in one context. This forces counsel to become creative and zealous in its determination of helping its client obtain much needed Medicaid benefits and protect their hard earned assets. With proper planning Medicaid will pay for the major medical expenses and long-term care preserving retirement funds for your client. In this way a client’s desires may focus on his or her choice of how to use funds.


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