Like many parts of the Medicaid Long Term Care application process, the answer to the question about retirement savings counting against Medicaid eligibility depends on where you live. The rules regarding IRAs, 401Ks and pensions and how they affect Medicaid Long Term Care eligibility vary by state. The rules also vary by savings plan, payout status of the plan, payout amount, marital status of the applicant and other assets and incomes that you, and/or your spouse, may possess.
Even if your state counts your type of retirement savings as an asset or as income when considering Medicaid Long Term Care applications, chances are you can still become eligible for Medicaid Long Term Care and protect part or all of that retirement savings for your family. However, since the methods used to implement that kind of protection and the rules regarding the impact of retirement savings on Medicaid Long Term Care eligibility are all complicated, working with a Medicaid planning professional to help you with the entire process is advisable. To schedule a free consultation with a Certified Medicaid Planner, start here.
Understanding Medicaid’s Asset and Income Limits
Before we dive into what kind of retirement savings are countable or exempt, let’s be clear about what they are counting against – the asset and income limits for Medicaid Long Term Care eligibility.
Medicaid is intended for financially needy people, but with the rising cost of health care and the increase in life expectancy, many of us may be financially needy when it comes to long term care. Applicants for Medicaid Long Term Care, either through Nursing Home Medicaid or Home and Community Based Medicaid waivers, must demonstrate their financial need by being below two financial thresholds – the asset limit and the income limit.
In most states, the 2022 asset limit is $2,000 for a single applicant and $3,000 for a couple. There are some exceptions, like New York, which has a $16,800 asset limit for individuals and a $24,600 asset limit for couples. Assets that count against this limit include cash, savings accounts, checking accounts, stocks, bonds, vacation homes and, in some cases, IRAs and 401(k)s. Some assets are not counted against the limit, like irrevocable funeral trusts, the primary home of the applicant if the non-applicant spouse still lives there, household furniture, an automobile, and, in other cases, IRAs and 401(k)s.
The 2022 income limit for Medicaid Long Term Care eligibility for a single individual is $2,523 / month. For a married couple with both spouses applying, the income limit is a combined $5,046 / month. When only spouse in a married couple is applying, the income limit for the applicant spouse is $2,523 / month, but the income of the non-applicant spouse does not count against the limit. Plus, the applicant spouse is legally allowed to transfer some or all of their income to the non-applicant spouse as part of the Minimum Monthly Maintenance Needs Allowance, which is detailed below.
These limits are important because this is where retirement savings like IRAs, 401(k)s and pensions could count against you when it comes to Medicaid Long Term Care eligibility. For example, if you have $50,000 in an IRA and live in a state where IRAs and 401Ks are counted against the asset limit, that IRA would put you well over the asset limit and make you ineligible for Medicaid. Or, if you had a pension that paid $4,000 a month, that would put you over the Medicaid Long Term Care income limit, since pensions are considered income for Medicaid purposes. If either of these scenarios might be true for you, there are still ways to get under the asset limit and income limit and become financially eligible for Medicaid Long Term Care. These strategies are discussed below, and they can be further explained in a free consultation with a Certified Medicaid Planner.
Relevance of Payout Status
Like knowing about asset and income limits, knowing the payout status of IRAs and 401(k)s is essential to understanding how your retirement savings will impact your Medicaid Long Term Care eligibility.
As soon as you begin withdrawing monthly payments from your IRA or 401(k), they go into “payout status.” Before that time, Medicaid considers IRAs and 401(k)s assets, and 48 states count pre-payout status IRAs and 401(k)s against the asset limit for eligibility. Once an IRA or 401(k) enters payout status, 40 states count them against the asset limit for eligibility. However, it is important to note that the monthly payments received from the IRA or 401(k) in payout status will count against the income limit for Medicaid Long Term Care eligibility.
Anyone over the age of 72, or anyone who was 70.5 years of age in 2019 or before, is legally obligated to begin withdrawing the Required Minimum Distribution (RMD) from all employer sponsored retirement plans and traditional IRAs, which would put them into payout status. The dollar amount of the RMD is calculated using IRS life expectancy charts. Roth IRAs are not obligated to begin making RMD withdrawals at any time.
You can put your IRA in payout status as young as age 59.5 by choosing to make regular withdrawals.
IRA and 401(k) Impact on Eligibility by State and Payout Status
• If you live in Kentucky, North Dakota or Washington, D.C., your IRA and/or 401(k) is exempt and will not be counted against the asset limit for Medicaid Long Term Care Eligibility regardless of payout status.
• If you live in California, Florida, Georgia, Idaho, Mississippi, New York, Rhode Island, South Carolina, Vermont or some Ohio counties, your IRA and/or 401(k) will not be counted against the Medicaid asset limit if it IS IN payout status.
• For residents of all other states, your IRA and/or 401(k) will be counted against the Medicaid asset limit regardless of payout status.
Impact of Marital Status
In general, assets belonging to either spouse in a married couple are considered by Medicaid to be jointly owned. This means that all assets will count against the Medicaid Long Term Care eligibility asset limit for either spouse, even if only one of them is applying. For example, a savings account in the name of a non-applicant spouse will count against the asset limit of the applicant spouse.
However, there are exceptions when it comes to IRAs and 401(k)s.
• In Alaska, California, Delaware, Georgia, Idaho, Indiana, Kansas, Kentucky, North Dakota, Pennsylvania, Utah, West Virginia, Wisconsin, Wyoming or Washington, D.C., the IRA and/or 401(k) for the non-applicant spouse will not be counted against the applicant spouse’s asset limit for Medicaid Long Term Care eligibility regardless of payout status.
• In Florida, Mississippi, New York, Rhode Island, South Carolina, Vermont and some Ohio counties, the IRA and/or 401(k) for the non-applicant spouse will not be counted against the applicant spouse’s Medicaid asset limit if it IS IN payout status.
• For residents of all other states, the IRA and/or 401(k) for the non-applicant spouse will be counted against the applicant spouse’s Medicaid asset limit regardless of payout status.
Even when the non-applicant spouse receives income from their IRA or 401(k) that is in payout status, that money will not be counted against the applicant spouse’s income limit for Medicaid Long Term care. That’s because all income, regardless of source, from a non-applicant spouse is exempt from the applicant spouse’s income limit for Medicaid Long Term Care.
How Pensions Affect Medicaid Long Term Care Eligibility
Pensions are not considered an asset because, to put it in the terms used above, they are always in “payout status” by providing monthly payments to the pension holder. Plus, the holder cannot access the principal amount or “cash out” the entire value of the pension. Instead, monthly pension payments are considered income and count against the Medicaid Long Term Care eligibility income limit for the pension holder.
As mentioned above, spousal income is not counted against the income limit for Medicaid eligibility, so the pension of a non-applicant spouse would not impact the applicant’s Medicaid’s eligibility.
Approaches to Become Eligible for Medicaid Long Term Care with Retirement Savings
Even if your income or assets are over the Medicaid eligibility limits now, they don’t have to stay that way. There are strategies to re-allocate your resources and become financially eligible for Medicaid.
Transferring income or assets to a spouse is a common, an often necessary, strategy for protecting your retirement savings and supporting your spouse while maintaining or gaining eligibility for Medicaid Long Term Care, yet it can also be complex.
The Monthly Maintenance Needs Allowance rules allow an applicant spouse to transfer some or all of their income to non-applicant spouse with a low income up to a certain amount. Using guidelines set by the federal governments, states set the Medicaid Long Term Care income limit for non-applicant spouse’s between $2,177.50 and $3,435 / month. That monthly income figure includes all of the non-applicant spouse’s income and whatever the applicant spouse transfers. This can be helpful if, for example, the applicant spouse has an IRA in payout status that pushes them over the income limit, but transferring some of the monthly payment from the IRA to the non-applicant spouse gets the applicant spouse below their income limit and doesn’t push the non-applicant over their income limit.
Like the Monthly Maintenance Needs Allowance, the Community Spousal Resource Allowance is a federal spousal impoverishment rule that protects the non-applicant spouse from having too few resources. Under the CSRA rules, the non-applicant spouse can retain 100% of a couple’s assets up to a set amount ($137,400 in most states) in the “100% states.” In the “50% states,” the non-applicant spouse can retain 50% of the set amount ($68,700, or half of $137,400, in most states). This rule allows the applicant spouse to transfer some or all of their IRAs or 401(k)s to the non-applicant spouse and still be financially eligible for Medicaid Long Term Care.
The 100% states are Alaska, California, Colorado, Florida, Georgia, Hawaii, Illinois, Louisiana, Maine, Minnesota, Mississippi, South Carolina, Vermont and Wyoming. The rest are 50% states.
You might have to pay a penalty when cashing out, but you could cash out your IRA and/or 401(k) and “spend down” that money on non-countable assets in order to get under the Medicaid Long Term Care eligibility asset limit. Some examples of exempt or non-countable assets are medically necessary home modifications (like wheelchair ramps, stair lifts, walk-in-tubs, grab-bars, etc.), handicap-accessible or operable vehicles, or irrevocable and pre-paid funeral/burial plans. Medicaid applicants can also spend down extra assets on long-term care services (living in a nursing home or assisted living home, in-home personal care) in order to meet the Medicaid asset limit.
If you’re over the asset limit but have flexibility with the income limit, converting your retirement savings to an annuity might be a worthwhile option. Annuities “pay” their holders a certain dollar amount each month and are considered income. Again, cashing out your IRA or 401(k) will likely come with a penalty, but it could get you under the asset limit.
If you live in a state where IRAs and 401(k)s are exempt from the asset limit when in payout status but not before (California, Florida, Georgia, Idaho, Mississippi, New York, Rhode Island, South Carolina, Vermont and some Ohio counties), putting that IRA or 401(k) into payout status by activating the monthly Required Minimum Distribution can help you get under the Medicaid eligibility asset limit. Again, it’s important to remember that the monthly payments will then count toward your Medicaid eligibility income limit.
In certain circumstances, perhaps when the adult children live in a different state, that state may be more lenient with IRAs and 401(k)s, relocating may be an option. Moving from one state to another for the purposes of Medicaid eligibility can both bring adult children and aging parents closer together and as well be financially beneficial. It is recommended to discuss this strategy with a Medicaid Planning expert prior to beginning the process as there are state-specific nuances that must be considered.