Medicaid Mysteries –Must A Client Deplete Their Retirement Account for Long Term Care?

The Medicaid system is a minefield of unique rules, exceptions to the rules, and different interpretations of the rules between the 88 counties in Ohio. It’s a lot for even the seasoned elder law practitioner to keep up with—and it’s enough to send many estate planners running for the hills if they aren’t focusing their practice on elder law matters.

There is also a huge amount of misinformation about the Medicaid system. Attorneys, professional advisors, and the general public often have preconceived notions about what Medicaid eligibility involves. Many clients come through the door at our office with the idea that they will be forced to spend everything they have before Medicaid starts picking up the tab. While the general rule of thumb is that a person must spend down their assets to less than $2,000 before Medicaid benefits will kick in, it’s not quite so cut and dry.

Ohio’s Medicaid laws allow a single person to keep $2,000 and any exempt assets. For a married couple, the Institutionalized Spouse can keep $2,000 and any exempt assets, while the Community Spouse is assigned a Community Spouse Resource Allowance (CSRA) that is calculated based on the value of the couple’s countable resources as of a particular moment in time, known as the snapshot date. While the details of how to calculate the CSRA are outside the scope of this article, it’s worth understanding that the maximum is $148,620 in 2023.

The question then becomes: what is considered an exempt asset? Historically, the most common exempt assets have been the primary residence1, one automobile, life insurance policies with a cash value less than $1,500, pre-paid irrevocable funeral contracts, burial spaces, and personal effects. One notable exception to the list of exempt assets was previously retirement accounts. Clients were frequently and understandably frustrated when they learned that Medicaid would require them to spend down the funds in their retirement accounts, even when it meant paying taxes, or even early withdrawal penalties, for taking out the money.

In recent years, elder law practitioners across the state began to see a shift in the Ohio Department of Medicaid’s treatment of retirement accounts. While the rule had always been that retirements accounts were considered countable resources, attorneys were beginning to be told that was no longer the case. Elder law attorneys across the state quickly began discussing this issue and sharing their experiences across various Ohio counties. This created a great deal of uncertainty and confusion statewide.

Eventually, after internal employee trainings by the Ohio Department of Medicaid (“ODM”) and several State Hearing and Administrative Appeal decisions related to treatment of retirement funds, ODM issued Medicaid Eligibility Procedure Letter No. 164 (“the MEPL”), which clarified their stance regarding the treatment of retirement assets and provided formal guidance for attorneys. The MEPL provides guidance as to how caseworkers should evaluate and treat retirement funds when determining an individual’s eligibility for Medicaid. The primary takeaway from the MEPL is confirmation from ODM that retirement funds should first be evaluated as sources of unearned income2 before potentially considering them as countable resources.

The MEPL further clarifies that for a retirement account to be treated as unearned income, rather than a resource, the account owner must have the “legal ability to receive regular guaranteed lifetime payments.” Additionally, it states that an account owner is “required to obtain the maximum available amount of payment from his/ her retirement plan.” Finally, the MEPL requires that “if an individual is eligible for either periodic payments or a lump-sum, the individual must choose to receive periodic payments.”

Interestingly, the MEPL goes on to provide that when an account owner is taking the required minimum distribution (“RMD”) from a retirement account, the RMD payment is considered the “maximum benefit available” to the individual, therefore satisfying the requirement that the individual must obtain the maximum amount for the account to be treated as unearned income. If an account owner is not old enough to qualify for RMDs, or if he or she is not required to take an RMD, then “regular, period payments” of any amount will be sufficient to satisfy the maximum benefit criteria. In determining the amount of regular, periodic payments, an account owner may (but is not required to) use the IRS or Social Security Administration life expectancy tables.

While regular periodic payments will be treated as unearned income only, if an account owner takes non-periodic distributions or irregular withdrawals from an IRA, those non-periodic distributions will always be considered a resource and treated like a lump-sum payment. Lumpsum payments are counted as unearned income

By Kim C. Estess, Esq. O'Diam & Estess Law Group, Inc. kim@oedayton.com

in the month of receipt and then as a countable resource in the following month. At the Medicaid eligibility phase, account owners must be prepared to demonstrate that they received fair market value for any lump-sum withdrawals taken during the five-year lookback period prior to filing a Medicaid application.

What if an individual owns a retirement account but is not yet taking RMDs or other regular, periodic payments? In this situation, the retirement account is still considered a countable resource. In some cases, especially when there is a married couple and a snapshot date has not yet occurred, this can work to the client’s advantage, as it could help the couple to maximize the CSRA. After the CSRA has been calculated, it may be advisable for the client to begin taking regular, periodic payments, even if he or she is not yet at the required beginning age. These issues, of course, are highly case specific.

With new rules come new planning opportunities—and a chance for practitioners to educate others in the community about these extensive changes. While the specific details of new planning strategies are not covered in this article, it’s helpful for practitioners who work with retirement-age clients to be able to issue spot on this topic. Even a basic understanding that it’s no longer required to exhaust a retirement account as part of a long-term care strategy could be hugely beneficial information to share with a client. In many cases, timing is everything, and the attorney who can provide this information before a client has begun an unnecessary spenddown could be providing a substantial savings to the client.

Do you want to learn more about these complex rules? The MEPL is available for review online through the ODM website (Medicaid. ohio.gov) under the Resources for Providers heading.

ENDNOTES:

1.

2. Pursuant to Ohio Adm. Code 5160:1-3-03.10

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