Florida Medicaid Planning Strategies for IRA and 401(k) Accounts

Careful Medicaid planning can be the difference between access to quality healthcare and the unfortunate alternatives – insufficient care or none whatsoever. In Florida, Medicaid planning focuses first on getting qualified and a key concern often involves implementing key Florida Medicaid planning strategies for IRA and 401(k) accounts.

It sounds dramatic.  But, with Medicaid’s strict eligibility standards, an overlooked asset or non-compliant transfer is all that’s necessary to disqualify an otherwise eligible applicant. And the potential problem is especially pronounced for seniors in need of costly long-term care.  Even a relatively small income stream or modest assets can put you between a rock and a hard place – unable to either afford much-needed care or qualify for Medicaid.

Eligibility rules for Medicaid vary from state-to-state (and among different programs within the same state), but the common thread is that Medicaid is “means-tested.”  So, if your income is too high, or you have assets worth more than the program’s limit, you cannot qualify for assistance.  The goals of Medicaid planning (the art of efficiently structuring finances to preserve eligibility) include ensuring access to quality healthcare, maintaining elders’ living standards, and safeguarding resources for the support of spouses and children.

Florida Medicaid Eligibility in General

The income cut-off for the Florida Medicaid program covering long-term care like nursing homes is $2,250 per month ($4,500 for spouses), and the asset cut-off is $2,000 ($3,000 for spouses).  For eligible elderly or disabled applicants with a monthly income below $891 ($1,208 for spouses), the asset threshold can be increased to $5,000 ($6,000 for both spouses).  “Income” includes pretty much any funds coming in from any source, whether it’s wages, a pension, alimony, Social Security benefits, or withdrawals from a retirement account.

Importantly, though, not all financial resources are counted toward the Florida Medicaid asset limit.  While cash, most investments and financial accounts, and non-residence real estate are all countable assets, the Medicaid rules exempt a single motor vehicle, a Florida homestead residence (as long as the applicant, spouse, or child under 21 lives there and the home is worth less than $572,000), personal property that is not easily sold, and assets held in certain types of trusts.

Retirement Accounts in Florida Medicaid Eligibility

Retirement accounts like IRA’s and 401k’s are generally considered countable assets when determining Medicaid eligibility.  And this raises a potentially thorny problem for many retired seniors and why we need to carefully consider Florida Medicaid planning strategies for IRA and 401(k) accounts.  A respectable, but by no means enormous, retirement account earned through years of hard work can be enough to disqualify an elder from Medicaid nursing home assistance – even if the account is entirely insufficient to pay for necessary long-term care.  Medicaid-planning attorneys, though, have strategies designed to preserve eligibility even if an applicant has a retirement account nominally over the asset limit.

When considering Florida Medicaid planning strategies for IRA and 401(k) accounts, it is important to remember Florida’s five-year Medicaid “look-back period” intended to curb questionable transfers.  Simply transferring an account into the name of a loved one is not an option due to this strict rule.

If valuable assets, including IRA’s or 401k’s, are given away (or sold for well-below market value) during the five-year window, the applicant can be ruled ineligible for the subsequent five years.  However, the Community Spouse Resource Allowance allows an applicant’s spouse to retain up to $123,600 of joint assets for the spouse’s support.  So, if only one spouse is applying, retirement account assets worth up to $123,600 can be reserved for the support of the other spouse and not counted toward the asset limit.

Of course, if the retirement account has a value higher than the spousal allowance (or if the account also affects the spouse’s eligibility), a more elegant strategy may be in order.

Florida Medicaid Planning Strategies for IRA and 401(k) Retirement Accounts

In a nutshell, Florida Medicaid Planning strategies for IRA and 401(k) accounts involve either converting account funds into exempt assets or changing the status of the account from an asset to an income source.  Along with a vehicle and residence, Medicaid rules also exempt irrevocable funeral trusts and prepaid burial contracts, special needs trusts, and necessary medical equipment.  By using some or all retirement account assets to fund a qualifying irrevocable trust or to purchase medical equipment, an applicant can reduce or eliminate the retirement account’s value from the Medicaid asset count.

Special needs trusts and funeral trusts have their own statutory requirements, which must be met for the strategy to be effective, and special needs trusts are also subject to state Medicaid liens.  A big part of a Medicaid-planning attorney’s job is to make sure that asset transfers comply with all Medicaid rules and other legal requirements while still accomplishing the ultimate goal of eligibility.

Another effective strategy for managing retirement accounts is to designate a special type of irrevocable trust, such as an Irrevocable Income Only Trust in Florida as the payee for withdrawals from the account.  Prior to applying for Medicaid, the IRA or 401k is converted into pay-out status, so that what would have been a countable asset is instead considered a source of income.  Of course, the Medicaid income threshold may still be a problem.  But that is where the trust comes in.

Rather than accepting the distributions him or herself, the applicant names what is known as a “Miller Trust” or a “Qualified Income Trust” in Florida as the beneficiary.  Account distributions are then paid directly into a bank account held in the name of the trust so that the Medicaid applicant does not receive the funds.  When the trust’s bank account receives distributions, the trustee first pays out any applicable personal needs or spousal support allowances.  Additional funds can also be used to pay for qualifying health insurance premiums and medical expenses.  Any remainder goes to the nursing facility, and the state retains a lien on the balance of the trust for Medicaid payments made by the state for the recipient’s long-term care.

If correctly employed, the principal advantages of a Miller Trust strategy are that (1) the retirement account will not disqualify the applicant for Medicaid, and (2) any balance left in the account upon death and after paying off the state Medicaid lien can pass to the applicant’s heirs.

Along similar lines, retirement account funds can be cashed out and used to purchase a Medicaid-compliant annuity for the applicant’s spouse (assuming the spouse is not also applying).  The annuity must be set up to pay out in equal payments within the spouse’s life expectancy, and the state must be named as a beneficiary in the event of the spouse’s death.  This strategy is limited in that it will not work if both spouses need Medicaid, but, under the correct circumstances, it is an effective means of providing for a spouse’s financial needs without putting Medicaid eligibility in jeopardy.

The right approach to implement when considering Florida Medicaid Planning strategies for IRA and 401(k) accounts depends on your specific needs and situation. For some people, a combination of strategies works best.  Effective, compliant planning can be tricky, but an experienced Medicaid-planning attorney can guide you through the process and help in crafting the optimal strategy.

Steve Gibbs, Esq.