As most know, Medicare provides no real long-term care benefit. Medicare does not cover the cost of any care in a nursing home when a person requires only custodial care. Custodial care includes the following services:
- bathing
- dressing
- eating
- going to the bathroom
Generally, if the care or services that a person requires can be provided by another person without a degree or certification, Medicare does not cover the service. There is no licensing required for one person to assist another to bathe, or to dress themselves. There is, of course, licensing required for dispensing medical care, or providing certain rehabilitative care services such as physical therapy and occupational therapy.
Further, non-custodial care is not fully covered by Medicare. The best Medicare will do is pay for acute or rehabilitative care for a short period of time following a three-day hospitalization. The Medicare benefit provides payment for twenty (20) days of institutional care following hospitalization, and additional payments for necessary care up to a total of one hundred (100) days. After that one hundred (100) days, if a person needs long-term care (in-home assistance, assisted living, or a nursing home), that care is not paid for by private health insurance or by Medicare.
Nursing home care can cost, on average, $8-12,000/month. Most people cannot afford to pay out of pocket such a large amount for long, so many turn to Medicaid to cover these costs.
Medicaid will pay for the cost of a nursing home or assisted living facility, provided that the institution accepts Medicaid reimbursement, but Medicaid benefits are limited to the impoverished. That means that:
- A single person can have no more than $2000 to their name (in addition to a home and a car);
- A married couple is limited to a maximum of $139,000 and often less if the combined estate is less that $278,000 (the Community Spousal Resource Allowance or CSRA is one-half of the estate up to $139,000 but only one-half whatever the estate is valued at if the estate is less than $278,000).
To qualify, Medicaid applicants must "spend down," a euphemism for impoverishing themselves, especially since the person receiving their benefits may have to contribute their income to their cost of care.
Taxes and Retirement Accounts Under The Old Rules
For many people, retirement accounts (IRAs, 401ks, 403bs, deferred compensations, Roths, etc.), have replaced the home as the most valuable asset in their estate. Retirement accounts are owned by human beings (for example, trusts or LLCs cannot own retirement plans), and cannot be transferred between people except by death or divorce. Except for Roth IRAs, the taxes haven’t been paid on the accounts, so if individuals want to cash it out, they’ll incur significant income tax.
Safeguarding the home or after-tax investments from spend-down ahead of time under the Medicaid rules is and has been fairly straightforward. Simply, to protect the retirement accounts, the account would be liquidated and the tax incurred and paid. In addition to the tax consequence, liquidation often meant losing the future benefits of tax deferred growth. The options for safeguarding retirement accounts were limited, complex, expensive, and, for most people and advisors, frustrating.
Many people would simply leave their retirement assets exposed to spend-down risk, choosing to forego the tax incurred and necessary, and protect their home and other assets. Imagine a senior paying the cost and expense necessary to protect their $200,000 home, only to lose their $500,000 IRA left exposed. Those who chose against protecting the IRA in advance would, in crisis situations, end up with a severe tax consequences liquidating their IRA to either pay for care, or to protect other assets.
Under the old rules, if a couple had $500,000 in retirement assets, that amount counted toward their asset limit. They would have to spend their money until they reached $139,000 in total countable assets, incurring taxes along the way. Retirement accounts were not treated any differently than checking or brokerage accounts for eligibility purposes.
Taxes and Retirement Accounts Under The New Rules
Starting in 2016, Ohio changed how it takes Medicaid funding from the federal government. As part of that change, it had to align Medicaid with Social Security disability asset rules. Under Social Security rules, retirement accounts are not counted as assets if they pay out regular, periodic payments – those payments are counted as income instead. In other words, as long as you take your required minimum distribution, or set up a recurring distribution that looks like a required minimum distribution, then Medicaid wasn't supposed to consider how much is in that account, just how much those distributions are.
After four years, the Ohio Department of Medicaid finally started talking about making the change. Some counties adopted these rules consistently, others inconsistently, and some not all. Finally, after more than a year of promising guidance, ODM published Medicaid Eligibility Policy Letter 164 on May 26, 2022. This letter clarified how the Social Security rules applied to Ohio and confirmed that retirement account payouts should be treated as income, and the principal should not be counted.
The change means seniors won't be forced to cash out their retirement accounts in order to qualify for Medicaid. It will save taxes and allow more money for the applicant or the healthy spouse.
Some folks believe, and are being led to believe that the new rules completely protect retirement accounts. That is not true. The income is still countable, but estate planning can provide a solution in the form of a Qualified Income if the income is excessive. Even then, and more fundamentally Medicaid estate recovery still exists. Medicaid estate recovery permits Ohio to recover money paid in benefits from a Medicaid recipient’s estate.
Regardless, the change will make planning much comfortable for people with large retirement accounts.
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