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If you are over 65 years of age, need health care or long-term care, and hope to receive Medicaid benefits, Medicaid will determine your financial eligibility by first calculating the amount of your total “resources,” as defined by them. Your resources include real estate and monetary assets that are titled in your name, such as savings accounts, checking accounts, and investment accounts, plus any insurance that has a cash value.
In 2014, only if you have $14,550 or less in total resources are you financially eligible for Medicaid. Medicaid usually increases this amount slightly every year. But what about retirement accounts? How are IRAs, Keoghs, 401(k)s and other qualified retirement plans treated? They are monetary assets, and therefore countable resources, aren’t they? Under certain circumstances, the answer can be “no,” and the principal amount in the retirement account will not be considered a resource for determining Medicaid eligibility. For a qualified retirement account NOT to be counted as a resource, it must be in “payout status.”
What does “payout status” mean?
The laws governing retirement accounts require that you start taking periodic payments from your qualified retirement account the year you turn age 70 ½. However, you can begin withdrawals without a penalty as early as age 59 ½. For a retirement account to be considered in payout status for Medicaid purposes, you must be withdrawing at least the Required Minimum Distribution amount according to Medicaid’s rules each year.
What is the Required Minimum Distribution (RMD)?
The concept of a retirement account is to provide financial support for you for the rest of your life. Your Medicaid RMD for the current year is calculated by taking the amount in your account on December 31st of the previous year, and dividing it by the number of additional years you are expected to live at that point, based on a life expectancy table. The life expectancy table you are required to use can differ, based on your geographic location and marital status. The calculation itself is not difficult, but you must be sure to use the correct life expectancy table, and finding the correct one can be confusing.
The life expectancy table Medicaid requires you to use is published by Medicaid, if you live anywhere in New York State except for the five boroughs of New York City. Within New York City, Medicaid permits you to use a different life expectancy table, one published by the IRS, to calculate your required distributions. When using the Medicaid tables the distributions will be greater than the RMD as determined using the IRS table. The Medicaid table provides for substantially shorter life expectancies and therefore higher annual distributions. Be aware that tax and estate planning strategies for retirement accounts are different from Medicaid planning. Medicaid is a world unto itself, and is not concerned with harmonizing its rules with IRS laws and regulations.
While Medicaid will not count the underlying retirement asset as a countable resource if the account is in payout status, it WILL count the periodic distributions as additional income. An individual applying for Medicaid home care services can protect this income by contributing it to a Pooled Income Trust. An individual applying for Institutional Medicaid in a nursing home must contribute this income to the nursing home each month. Because of Medicaid’s strict income requirements, there may instances when taking a lump sum distribution in excess of the required distribution may be beneficial, despite the income tax consequences of such a distribution. In other instances it may not make sense to take any distributions greater than what is required.
Examples of how to calculate the distribution amounts from retirement accounts for Medicaid purposes are given below, one for New York City and one for outside the five boroughs.
First example: you are a 70 year old woman who lives in Queens and you are applying for Medicaid. You need to start making distributions from your IRA, which totaled $120,000 on December 31st of the previous year. TheNew York City Human Resources Administration allows the use of the IRS life expectancy table, which provides a life expectancy of 27.4 years. For that year only, your RMD is $120,000 divided by 27.4, or $4,380. Let’s say the next year your IRA has grown by 4%, from $115,620 to $120,250. Now you are 71 years old and the IRS table provides a life expectancy of 26.5 years. So your annual RMD is $120,250 divided by 26.5, or $4,538. Medicaid will divide the annual RMD into 12 monthly installments of $378.17, which they will include in your monthly income computation along with your other sources of income.
Second example: your twin sister lives in Westchester County, is also applying for Medicaid, and has an identical amount in her IRA, $120,000. The life expectancy table that is required by the Departments of Social Services throughout most of New York State estimates that she will live another 16.05 years (She may want to move to New York City, where somehow magically she is expected to live much longer!). For that year, the amount that must be distributed to her as a Westchester County resident for her retirement account to be considered in “payout status” is $120,000 divided by 16.05, or $7,477. Assume the next year her IRA has grown by 4%, like yours did; now it is $112,523. Now that she is 71, the Medicaid table shows a life expectancy of 15.3 more years. Medicaid will require that her distribution for that year is $112,523 divided by 15.3, or $7,354. When divided into 12 monthly installments she will have an additional $612.83 of monthly income. You can see that the IRA will be depleted at a significantly faster rate when using the Medicaid table.
Each year you and your twin sister must continue to withdraw from your accounts at least the RMD, as calculated under the life expectancy table that is used in your county. The distribution will be added to your monthly income, but if you do not take these periodic payments, the entire underlying amount in your retirement accounts will be counted as a “resource,” and you will likely not be eligible for Medicaid.
But the bottom line is that you CAN have a significant amount of assets in a retirement account, and still be eligible for Medicaid, as long as you are withdrawing from your retirement account in the right way and in the right amounts. If you are intending to apply for Medicaid, you will want to consult with your Elder Law attorney to make sure that your retirement accounts are handled properly and in the most advantageous way.