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Our Articles
Review of Current Medicaid Rules by Joel M. Sachs, CPA, Principal
May 2009
The rules governing Medicaid eligibility for nursing home coverage have been relatively stable, with no changes since 1993. All of that changed on February 8, 2006 when President Bush signed into law the Deficit Reduction Act of 2005. This article will discuss the impact on Medicaid eligibility due to changes to the “look-back” and penalty periods, consideration of home equity as an asset, and how Annuities are treated.
Designed to cut the federal deficit, the Deficit Reduction Act of 2005 (the Act) makes fundamental changes to Medicaid eligibility, including the “look-back” period and the start of the penalty period. These new rules will significantly impact both estate plans, where preservation of assets is the objective, and gift planning, where Medicaid eligibility is crucial.
Under prior law, each state was allowed to “look back” at an applicant’s financial records for 36 months to determine if a transfer of assets for less than fair market value (a gift) was made. Appropriately, this is referred to as the “look-back” period. (The “look-back” period was 60 months only if the assets were transferred to a trust.) If such a transfer was discovered, the applicant became ineligible for medical assistance from Medicaid for a certain period of time, called the penalty period.
The penalty period is determined by dividing the amount of the gift by the average cost of long-term care in their state. This average cost is determined in Connecticut each July 1. As of the date of this article, the average cost of long-term care in Connecticut is $9,464 per month.
The following example illustrates the prior 36-month rule.
• John, who lives in Connecticut, becomes ill and is in need of skilled nursing care. He applies for Medicaid on June 1, 2006 and is otherwise qualified for coverage.
• On his application, John discloses that he made a gift of $94,640 to his daughter, Mary, the previous year on June 1, 2005. Because the gift was made within the 36-month “look-back” period, a penalty must be imposed on John.
• John’s penalty is calculated as follows:
$94,640 (the gift) ÷ $9,464 (avg. monthly cost of care) = 10 (penalty months)
The penalty period starts on June 1, 2005, (the date the gift was made) and ends 10 months later on April 1, 2006. Since
•John’s penalty period has already expired he is eligible for Medicaid assistance when he applies on June 1, 2006.
A critical change in the Act extends the “look-back” period to 60 months for such transfers (gifts) to both individuals and trusts. In addition, the penalty period begins on the date when the individual has applied and is otherwise qualified for Medicaid – not on the date the gift was made. In other words, the penalty period does not begin until the nursing home resident is out of funds. So, the question becomes, who pays for the nursing home care during the penalty period?
Let’s look at another example to see the dramatic effect this can have on someone needing long-term care.
• Helen, who lives in Connecticut, becomes ill and is in need of skilled nursing care. She applies for Medicaid on May 1, 2009 and is otherwise qualified for coverage.
• On her application, Helen discloses that she made a gift of $94,640 to her son, Jeff, four years ago on June 1, 2005. Because the gift was made within the 60-month “look-back” period, a penalty must be imposed on Helen.
• Helen’s penalty is calculated as follows:
o $94,640 (the gift) ÷ $9,464 (avg. monthly cost of care) = 10 (penalty months)
The penalty period starts on May 1, 2009 (the date Helen applied for Medicaid) and ends 10 months later on March 1, 2010. The calculation of the penalty period is the same. However, Mary will be denied Medicaid coverage until March 1, 2010 – quite a different result. She will have to pay for her own nursing care for the next 10 months – about $94,640!
This new law certainly discourages people from making gifts if there is the slightest chance of needing long-term care within 5 years. Anyone could face this situation. Consider this sobering data from the National Center for Health Statistics. Of those who are admitted and discharged from a long term skilled nursing facility, the average stay is 272 days (about 9 months). For those who are admitted and not discharged, the average stay is 892 days (about 30 months). Using Connecticut’s average monthly cost of care of $9,460, the tally is $85,000 to nearly $284,000 for these average lengths of stay. Therefore, early, careful planning with the advice of qualified, trusted advisors is a good idea.
HOME EQUITY CAP
Home equity was not an available asset under the old law. Now, the Act prohibits Medicaid eligibility for an applicant with home equity in excess of $500,000. States may choose to increase the threshold to $750,000. An exception would apply if a spouse, a dependent child under 21, or a dependent blind or disabled child resides in the home.
ANNUITIES
The purchase of an annuity will now be treated like an uncompensated transfer (a gift), and thereby be subject to the penalty period – unless the state is named as the remainder beneficiary in the first position for at least the total amount of medical assistance paid for on behalf of the Medicaid applicant.
Perspective
The Deficit Reduction Act of 2005, as it pertains to Medicaid, certainly encourages seniors to purchase long-term care insurance. If the premiums prove to be too expensive during a lifetime, perhaps enough insurance to cover the penalty period would be affordable. Children can pay the premiums as well in order to preserve their parent’s assets and their inheritance.
Planning for the future is important at every phase of life. Ensuring a secure retirement and planning for the costs of care later in life have important tax and quality of life consequences. Always seek the advice of qualified advisors – accountants and tax planning advisors, long term care insurance specialists, and eldercare attorneys – when making these important decisions.
Resources
U.S. Department of Health & Human Resources www.HHS.gov/aging/index.html
U.S. Department of Health & Human Resources Administration on Aging www.aoa.gov
National Institute on Aging www.nia.nih.gov/
Connecticut Department of Social Services Aging Services Division State Unit on Aging http://www.ct.gov/agingservices
Connecticut Association of Area Agencies on Aging http://www.ctagenciesonaging.org
Joel Sachs is a Certified Public Accountant (CPA) and Certified Senior Advisor (CSA). He is a principal of Konowitz, Kahn & Company, P.C. and a member of the American Institute of Certified Public Accountants (AICPA) and Connecticut Society of Certified Public Accountants (CSCPA).
Joel also specializes in tax planning and works with businesses in a variety of industries. As a CSA, his advisory services also encompass the area of elder care financial planning and accounting services to address the complexities of Medicaid, Medicare, and Social Security.
Joel is a graduate of both American University and the University of New Haven, where he earned a Bachelor of Science degree in Accounting and a Master's Degree in Taxation, respectively.
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