401(k)'s, IRAs, Pensions and Long Term Care

Nursing home costs in Ohio are high and continue to rise. Even those families that have saved diligently for retirement often cannot afford to pay for an extended stay in a nursing home or long-term care facility. And Medicare only pays for nursing home care for a limited time in limited circumstances. Medicaid is the insurance program for low-income individual and will pay for nursing home care. As a result most people in long-term care for an extended period come to rely on Medicaid benefits. However, in order to qualify for Medicaid, you can only have a limited amount of assets (resources) and income.

Ohio Treatment of Retirement Plans for Determining Medicaid Eligibility.

Under Ohio law, retirement plans generally are counted as either income or resources for purposes of determining Medicaid eligibility. If you have the legal ability to receive guaranteed lifetime payments from a retirement fund, it is considered income. For example, a pension from your employer which has a defined benefit (you get the same payment every month as long as you live), would be considered income.

Ohio is one of a minority of states that view most retirement plans in the private sector as resources. As a result, these assets, which you may have carefully built up in anticipation of retirement, must be spent down in order to qualify for Medicaid. Retirement accounts that are counted as resources include IRAs, 401(k)s, and SEPs. 

The Use of Annuities to Qualify for Medicaid

In 2006, Congress passed legislation permitting retirement accounts to be converted into annuities. As long as the state Medicaid agency can claim against the asset after the account owner and his or her spouse have died, the couple may convert the account into an annuity—a source of income—and protect it from the nursing home during their lifetimes.

This can help couples avoid a scenario in which they have carefully cultivated retirement savings for decades, only to see them consumed by one spouse’s need for nursing home care. The spouse outside the nursing home, commonly referred to as the “community spouse,” can be left impoverished without proper planning.

Let’s say that Ruth Smith, a woman in her 70s, becomes frail and in need of nursing home care. Her husband, Bill, also in his 70s, remains in their small house nearby, which is paid off. Both receive Social Security. Bill also has an IRA with $200,000 in it. Ruth’s Social Security check goes toward her monthly nursing home bill, but it is not enough. Bill’s IRA is a countable asset belonging to the couple, which means that Ruth will not be eligible for Medicaid until it is spent down.

If Bill converts the IRA into an annuity, it becomes a source of unearned income for him, rather than a resource counted by Medicaid. So long as his income does not exceed that permitted by Medicaid, Ruth will be eligible for Medicaid benefits much sooner, and Bill will be able to use his retirement account for its intended purpose: his living expenses in retirement.

There is one important caveat, however. As mentioned above, in order for Bill to be able to annuitize his IRA so that Ruth can qualify for Medicaid, Medicaid must be able to claim against this asset after both Bill and Ruth’s death. This process is a type of Medicaid estate recovery, in which Medicaid recoups funds it expended on an individual’s nursing home care from their estate.

For many people, this may be an acceptable trade-off: they have the use of their retirement savings for living expenses while alive, rather than having to spend those savings down and perhaps live in poverty. However, some people would prefer to leave their assets to their children and grandchildren, rather than have Medicaid recover from their estate. If this is the goal, annuitizing a retirement account may not be an ideal option.

The bottom line is that you should consult with an attorney who is experienced in estate planning and elder law to discuss all of your estate planning goals and priorities. An experienced attorney will help you plan to protect your assets, and will explain the advantages and disadvantages of various estate planning options. If you are concerned about the possibility of needing to pay for nursing home care and the safety of your retirement savings, we invite you to contact our office.