STATE POLICY ON EXCLUDING IRAs AS A RESOURCE FOR MEDICAID CLARIFIED (BUT FURTHER CLARITY IS NEEDED)

12 Feb STATE POLICY ON EXCLUDING IRAs AS A RESOURCE FOR MEDICAID CLARIFIED (BUT FURTHER CLARITY IS NEEDED)

Although there are many still unanswered questions and there has been no written policy since changes were initially announced last August, the Texas Health and Human Services Commission (HHSC) on February 7, 2019 attempted to clarify its new policy regarding treatment of retirement accounts (traditional IRAs, SEPs, 401(k)s, etc.). This is often critical for any potential long-term care Medicaid applicant. Long-term care Medicaid (which helps pay for long-term care costs such as nursing home care) is “means-tested”. However, certain resources (i.e., a homestead in most circumstances, one car, pre-need funeral, everyday living personal property items, etc.). are non-countable and thus not subject to “spenddown”. 

Although a written policy is not anticipated until August 2019 at the earliest and there are many unanswered questions leaving many applicants and their advisors in legal limbo, here are the highlights of what was clarified:

1. If the Medicaid applicant is over 70½ and receiving the Required Minimum Distribution, the value of the IRA will be excluded from counting as a resource. The policy applies to their spouse as well. However, what if the applicant received a distribution one year but forgot to take their RMD the next? What if the applicant requested a distribution at 70½ and didn’t receive it until the next month? Would a ROTH IRA count since there are no distributions?
2. If the Medicaid applicant (or their spouse) has an annuity within their retirement account, it will be excluded regardless of age. This is a planning opportunity for some. If the applicant had invested otherwise, the applicant could simply invest their retirement account in any type of annuity and it would not count as a resource. Thus, if the applicant is single, “spenddown” to the resource limit (only $2,000 if single) on their retirement account could be accomplished merely by purchasing an annuity as their retirement account investment. If the applicant is married and one spouse has a retirement account, then timing of the annuity purchase could be used in planning since HHSC takes a “snapshot” of the countable resources as of the first day of the first month of continuous institutionalization of the Medicaid applicant. So, sometimes it will be best to have a higher countable resource amount at the snapshot date and then purchase the annuity within the IRA to accomplish a spenddown by merely changing the resource from being countable (no annuity invested in the retirement account if under 70½) to being excluded (buying the annuity within the retirement account). Furthermore, since ROTH IRAs do not have required minimum distributions, this would encourage the owner of ROTH IRAs to purchase some type of deferred annuities as their investment plan.

1. Although subject to change in the final written policy, HHSC is proposing that the RMD income received annually be divided by 12 to determine monthly income for eligibility and co-payment calculation. The present income cap for Medicaid eligibility in Texas is $2,313 per month (Texas follows the “name on the check rule” so only the Medicaid applicant’s income is used for cap purposes). So, if this becomes the policy, calculations will need to be made prior to applying to see if a qualified income trust (which generally solves the income cap eligibility issue) will be needed. The question of whether the applicant or their spouse makes distributions that are greater than the RMD creates a larger co-payment amount to the facility was not answered. This could be a can of worms for many since usually a retirement account is one of an applicant’s largest assets and may have been needed to pay for care costs prior to applying for Medicaid. HHSC did indicate that it doesn’t matter if the applicant already received the RMD earlier in the year (prior to application) as the treatment of income will be the same (divided by 12 for the determination of monthly income and co-payment amount).
2. Inherited IRAs and other retirement accounts inherited from the deceased spouse (subject to the RMD requirements) are also exempt so long as the surviving spouse elects to receive RMDs. A surviving spouse usually is not required to take a RMD until the year they reach 70½. So, does this mean if they are under 70½ that they are mandated to take a distribution for an inherited IRA to be exempt for Medicaid eligibility or can they simply purchase an annuity? It appears that in the case of inherited IRAs for a surviving spouse that RMDs will be required.
3. Inherited IRAs (other than from a spouse) are exempt as long as the RMDs are being taken. Other than in a case where there is a surviving spouse, an inherited IRA owner is required to make distributions based on their age (if an inherited IRA owner is younger, there would be a smaller RMD since there would be a longer life expectancy).

There are many other questions that have been left unanswered which we hope will be answered sometime this year. Of course, the Texas Elder Law E-Letter will keep you advised when the rules are finalized.

If you are interested in learning more please sign up to attend our free “Estate Planning Essentials” workshops either on Thursday, February 28, 2019 at 1:00 p.m. or Saturday, March 16, 2019 at 10:00 a.m. by calling (214) 720-0102 or signing up online at www.dallaselderlawyer.com.