INSIGHT: Protecting Retirement Accounts When Long-Term Nursing Home Care Is Required

Preserving retirement accounts is essential for allowing middle-class families to protect the well spouse/surviving spouse in old age. Making the right plan can avoid not only impoverishment but the potential for divorce. Many couples have to make a hard choices regarding these issues to ensure their resources are below a certain threshold in order to qualify for Medicaid to pay for nursing home care.

Medicaid policies are a loose compilation of federal law and 50 different state schemes. From the mid-1990s until 2012, many state governments effectively raided the retirement plans of the elderly to offset the costs for their states’ Medicaid long-term nursing home care program. These efforts represent the most significant risk to retirees, and started primarily with court cases (Houghton v. Reinertson; Mistrick v. Div. of Med. Assistance & Health Servs.), where state governments attacked retirement funds of the well spouse. This article refers to the spouse who is institutionalized in the nursing home as the “institutionalized spouse” and refers to the spouse who continues to live independently as the “well spouse” or the “community spouse.”

State budget pressures have led to written and unwritten policy changes in many states, as well as legislative discussions relating to estate recoveries, liening of real estate, and overall reform of the Medicaid program. However, when considered in the context of demographic shifts of the U.S. population, such funding cuts reflect the contradictory nature of the nation’s retirement and healthcare policies.

Changes in pension law, the tax code, and the movement of many employers away from traditional pension plans have led to several undesirable results. Tax code Section 401 has been amended on many occasions, generally liberalizing terms and access to retirement accounts in an effort to entice Americans to save for their retirement. One undesirable consequence of employers’ utilization of alternative retirement vehicles, such as 401(k)s, individual retirement accounts (IRAs), and simplified employee pensions (SEPs), is the potential for creditors to attack individual’s IRAs. Some states have enacted legislation to protect IRAs from creditor attacks, while the Employee Retirement Income Security Act of 1974 (ERISA) protects 401(k)s and similar retirement plans.

The second unintended result is that many Americans, either during their working years or upon retirement, are required to competently invest their own funds when a 401(k) or SEP is rolled into an IRA. Some workers have lost a significant portion of their retirement savings due to poor investment decisions or reliance upon poor advice. Others have been victimized simply by getting into the market at the wrong time.

This article will focus on the planning options that are available to protect families’ resources. The options are dependent upon state law and the trends relating to each state’s healthcare policies. One option that will not be discussed at length, but which is viable, is the purchase of long-term care insurance or hybrid life insurance policies.

SPOUSAL IMPOVERISHMENT

Medicaid has traditionally been a needs-based program—applicants must meet certain criteria relating to assets and income. In general, the applicant must have countable assets of less than $2,000. The asset test usually excludes one motor vehicle; a residence (if the applicant or spouse is residing in that residence); a prepaid burial; and in some states, income-producing real estate, retirement plans, and some annuities. Based upon changes in Wisconsin, Kentucky, Washington, and a variety of other states, the exemptions, which are generous in some states, are likely to be reduced. Many midwestern and southern states maintain the most minimal list of exempt assets permitted by federal law.

The spousal impoverishment rules are applied on a state-by-state basis. In 1988, Congress passed the Medicare Catastrophe Coverage Act (MCCA) (42 U.S.C. Section 1396r-5), which included spousal impoverishment protections. These protections granted the states flexibility relating to the financial security granted to the spouse of a nursing home resident (the community spouse). Prior to this enactment, impoverishment and divorce were common themes, particularly if the husband required nursing home care, and the wife was able to continue residing in their home.

The Centers for Medicare and Medicaid Services (CMS) were to promulgate regulations regarding the MCCA; however, they failed to propose regulations until the Supreme Court accepted a challenge to a state policy concerning spousal impoverishment (Wisconsin Dept. of Health & Family Servs. v. Blumer). While the case was pending, CMS issued proposed regulations, but withdrew them after the case was decided. Based upon the dismal effort of this agency, regulations protecting beneficiaries will likely not be implemented. This failure to produce regulations has led to very diverse implementation of the MCCA and has allowed the states to effectively take any action that is not specifically prohibited by the statute.

States such as California, Illinois, and New York have been the most generous in their spousal impoverishment protections. In those states, an allowance is granted to the community spouse so that he or she will retain the residence, a car, and the first $126,420. This allowance is the maximum amount permitted as a community spouse resource allowance by the MCCA (42 U.S.C. Section 1396r-5(d)). Many other states follow the lead of Ohio, Oklahoma, and more regressive states that provide only minimal protection. The minimum community spouse resource allowance in Ohio and other states that adopted the minimum amount required by federal law is $25,284. In these less generous states, the community spouse may be left with insufficient savings to maintain his or her independence.

For example, in Ohio if the total countable assets are $50,000, then the community spouse would be permitted to keep $25,284 as the allowance. In the more generous states, the community spouse would be permitted to keep the entire $50,000 and the spouse in the nursing home would be eligible for Medicaid immediately. Likewise, the generous states do not include IRAs as countable, while the less generous states seek to impoverish the community spouse by also requiring a spend-down of IRAs.

The income component in spousal circumstances is more complicated. Because many elderly women have insufficient income to support themselves, the federal statutory scheme (42 U.S.C. Section 1396r-5(b)) provides that the community spouse is permitted to retain all of his or her fixed income, and is permitted to receive a portion of the institutionalized spouse’s income if the community spouse’s fixed income is inadequate (42 U.S.C. Section 1396r-5(e)(2)).

California, New York, and Illinois have adopted a more generous approach whereby the maximum amount permitted by the MCCA is considered the allowed amount. The 2019 maximum allowance is $3,160 per month. In the more regressive states, such as Ohio, the minimum standard income is $2,057.50 per month. Based upon the Supreme Court decision in Blumer, the community spouse’s fixed income, after the death of the institutionalized spouse, is not a factor.

As states like California, and particularly Illinois, face difficult budgetary decisions, it is likely that they will consider reducing their spousal protections in order to enhance their budget position. The result, on a large scale, will be an increase in divorces amongst the elderly, and more aggressive planning to protect the community spouse. For purposes of protecting retirement plans, the inclusion or exclusion of retirement plans as a “countable resource” becomes a key issue in determining Medicaid eligibility and the financial security for the well spouse.

There are effectively four factual circumstances where these issues arise, and where planning is most important. The key differences in these examples involve which spouse happens to be in the nursing home, and the type of retirement system in place. The retirement plans with the state or federal pension plan systems, or traditional target benefit type plans, are favored in all states. The “spend-down” for those in the private sector without advanced planning is shockingly greater than the “spend-down” for those in the public sector.

Example 1:

Husband, age 66, recently retired from his employment as an insurance agent, has $250,000 rolled out of the company 401(k) into his IRA. Six weeks after his retirement, his wife, age 61, suffered a severe stroke, and for the past six months has required nursing home care. Nursing home costs are approximately $10,000 per month, she has not been employed in many years, and she has no fixed income. Her husband has a fixed income of $1,800 per month (Social Security). The family has a home worth $200,000, which is paid for, and other savings in the amount of $200,000.

Example 2:

Husband, age 63, has recently retired from his long-time profession as a state employee. He has $950,000 in his public employees retirement plan, and has elected to take monthly payments from that pension plan. Six weeks after his retirement, his wife, age 61, suffered a severe stroke, and for the past six months has required nursing home care. Nursing home costs are approximately $10,000 per month, and as she has not been employed in many years, she has no fixed income. Her husband has a fixed income of $5,300 per month (public employees pension).

The family has a home worth $200,000, which is paid for, and other savings in the amount of $50,000.

Example 3:

Husband, age 66, who worked in an ad agency for his entire career, saved approximately $250,000 in his 401(k), which was rolled into an IRA soon after taking retirement. Wife, age 66, recently retired from her job. The husband suffered a head trauma and will require nursing home care for the rest of his life. His cost of care is approximately $10,000 per month, and they had savings of $120,000 when he entered the nursing home. The wife has social security of $1,700 per month, while the husband has social security of $1,800 per month and a $300 per month distribution from his IRA.

Example 4:

Husband, age 63, who worked as a teacher for his entire career, saved approximately $1.1 million in his state teachers retirement system. Wife, age 65, retired from her job. The husband suffered a head trauma and will require nursing home care for the rest of his life. His cost of care is approximately $10,000 per month, and they have savings of $120,000. The wife has social security of $1,700 per month, while the husband has a state teacher’s pension of $5,600 per month.

RELEVANT CASE LAW

The U.S. Court of Appeals for the Tenth Circuit in Houghton v. Reinertson, addressed multiple issues for retirement planning, particularly issues involving the retirement fund of the well spouse. Mrs. Houghton required nursing home care in 1996 and was granted Medicaid eligibility almost immediately after application. At the time of the original application, her husband was employed, and based upon the prior Colorado regulation, his 401(k) and pension plan were not counted as resources for Medicaid eligibility purposes. In 2000, Mr. Houghton, at age 70, retired and rolled his 401(k) and pension plan into an IRA. In 2001, while performing its annual review, the Colorado Medicaid Agency determined that the 401(k) and pension plan became countable assets when rolled into the IRA, recalculated the resource assessment, and determined that due to this new calculation, Mrs. Houghton was ineligible for Medicaid.

The Houghton court opined:

“In the fall of 2001, Colorado revised the eligibility guidelines used to calculate a married couple’s resources when a spouse enters a nursing home and changed the way it classified self-funded retirement accounts such as IRAs, 401(k)s or 403(b)s. Prior to that revision, Colorado did not classify self-funded retirement accounts held by the community spouse as “resources” available to support the institutionalized spouse. As a result, self-funded retirement accounts were not included as resources in calculating the CSRA and did not affect the institutionalized spouse’s Medicaid eligibility. On September 1, 2001, however, Colorado began including self-funded retirement accounts held by a community spouse as countable ‘resources’ for the purpose of determining an institutionalized spouse’s Medicaid eligibility. See 10 Colo. Code Reg. 2505-10, §8.110.51C. Colorado has applied this new rule both to initial applications for Medicaid benefits and, as is the case here, to annual eligibility redeterminations.”

The Colorado Department of Health Care Policy and Financing then terminated Mrs. Houghton’s Medicaid eligibility, and her husband filed a federal court action against the State of Colorado. There were multiple plaintiffs, two of whom passed away prior to the case being pursued. The district court ruled on behalf of the state, and the Tenth Circuit reversed on one issue. The Tenth Circuit found, based upon the MCCA and the holding in Blumer, that there can only be one resource assessment at the time of application, and subsequent events, including savings or conversion of an asset based upon retirement, did not allow the state to redetermine eligibility by making revisions to the resource assessment. The Tenth Circuit noted, as did the Supreme Court in Blumer, that the CMS had not issued regulations for the MCCA since 1988. This court, also like the Blumer court, did not admonish the Medicaid agency, but rather, granted the agency a level of deference for an “opinion letter,” which generally supports the state’s actions.

On the primary issue, however, the plaintiffs asked the court to strike down the implementation of the regulation, and the appeals court found that Colorado’s actions were not prohibited by federal law. As the court said:

“Not until 2001 did Colorado, in the absence of any changes to the MCAA or other applicable federal law, revise its policy and promulgate several regulations explicitly including self-funded retirement accounts in its calculation of resources. See 10 Colo. Code Reg. 2505-10, §8.110.51C. In light of these differing yet reasonable interpretations, we conclude the MCCA is ambiguous and does not address clearly how retirement accounts should factor into Medicaid eligibility … By definition, an institutionalized spouse and a community spouse in the Medicaid context do not live together. We therefore conclude that neither the SSI, nor its corresponding guidelines, address the eligibility requirements where one spouse is institutionalized.”

Accordingly, the Houghton court further opined, “We are equally unpersuaded by Colorado’s contention that reading the MCCA as a whole mandates including retirement accounts in the calculation of a married couple’s resources.” The appeals court further found that section would apply only in circumstances where husband and wife are still residing together, and by definition, the spousal impoverishment rules within MCCA only apply if one of the spouses requires institutionalization. In the end, the court in Houghton concluded, “We reach the same conclusion based on MCCA’s failure to explicitly require or prohibit inclusion or retirement accounts in calculating a couple’s total resources. By not taking a clear position on the status of retirement accounts, Congress intended, through cooperative federalism, to leave resolution of this complicated matter to the states.”

There are seven appeals court decisions in place that allow for the annuitization of savings and specifically retirement accounts without them being considered resources:

• Hughes v. McCarthy, 734 F.3d 473 (6th Circuit 2013), cert. denied 572 U.S. 1034 (2014)
• Morris v. Okla. Dept. of Human Servs., 685 F.3d 925, 938 (10th Cir. 2012)
• James v. Richman, 547 F.3d 214 (3rd Cir 2008)
• Lopes v. Dept. of Social Servs., 696 F.3d 180 (2nd Cir. 2012)
• Hutcherson v. Ariz. Health Care Cost Containment Sys. Admin., 667 F.3d 1066 (9th Cir. 2012)
• Geston v. Anderson, 729 F.3d 1077 (8th Cir. 2013)
• Zahner v. Sec’y Pa. Dept. of Human Servs., 802 F.3d 497 (3d Cir. 2015)

See also:

• Jackson v. Selig, No. 3:10-cv-00276, 2010 BL 303827 (E.D. Ark. 12/22/10)

These cases all rely on 42 U.S.C. Section 1396p(c)(1)(F), which allows assets to be annuitized. The appeals court decisions that are in place control approximately 32 states.

The Sixth Circuit in Hughes stated in part:

“Our reading of the statute is supported by HHS’s guidance. In its amicus brief, HHS explains that §1396r-5(f)(1) ‘has nothing to say about the inter-spousal transfers that are permissible before a determination of eligibility.’ The federal agency’s State Medicaid Manual confirms that §1396r-5(f)(1) applies to post-eligibility reallocation of resources and that §1396p(c)(2)(B)(i) permits transfers to a third party for the sole benefit of the individual’s spouse. See State Medicaid Manual §3258.11, 3262.4. HHS has taken the same position in a series of opinion letters issued to state plan administrators and to the public, reasoning that §1396r-5(f)(1) does not conflict with, and thus does not supersede, §1396p(c)(2)(B), as the two provisions apply to different situations, before and after eligibility is established; and that permitting inter-spousal transfers under §1396p(c)(2)(B) does not render §1396r-5(f)(1) a nullity, as the latter provision still has meaning with respect to resource allocation after eligibility is established. We agree with amici curiae, the National Academy of Elder Law Attorneys and the Ohio State Bar Association (who appear in support of the Hugheses), that HHS’s view on this issue represents a ‘well thought out explanation of the differences between these two statutes’ and thus is due respect under Skidmore.”

Beneficiaries of these annuities may be the community spouse, the incapacitated spouse, or a disabled child but thereafter, the state must be a beneficiary to the extent of the Medicaid benefits paid.

The failure of CMS to implement regulations for over 30 years has resulted in uncertainty, spousal impoverishment, and litigation. Despite the agency’s “gaming” of Justice Ruth Bader Ginsburg and the Supreme Court in Blumer, courts still grant CMS nearly unfettered deference.

PLANNING OPTIONS

Stay in the Company Plan

Those who are employed with companies that still have a traditional retirement plan should consider staying in the company pension plan. Likewise, continued enrollment in the company 401(k) plan, even with part-time employment, is distinctly advantageous.

Rollover to Target Benefit Type Plan

Federal law permits rollovers from IRAs, 401(k)s, SEPs, and various retirement plans back into a traditional pension plan. If, for example, an individual at age 65 retires from his long-term employment and rolls all of his 401(k) funds into a rollover IRA, and one year later becomes employed with a new company with a target benefit type plan in place, federal tax law permits a rollover from his IRA into that target benefit plan. The key elements for this individual are locating employment and finding an employer who offers a pension plan that will accept the rollover funds. In nearly all states, this may be an appropriate vehicle for purposes of shielding the community spouse’s retirement funds. Difficulties in locating employment and an employer with an appropriate traditional pension plan are the most daunting.

Annuitizing Retirement Accounts and Savings

The community spouse has an opportunity for planning through 42 U.S.C. Section 1396p(C)(1)(F). In states that include IRAs or other retirement plans as assets, further planning is permitted. In Examples 1 and 3, the community spouse may face impoverishment, not when her husband requires nursing home care, but rather at his passing, when much of the fixed income may disappear. Particularly in circumstances where the family relies on social security, the community spouse is often left with $1,200 to $1,800 per month of income. Annuitizing part of the savings or annuitizing part of a retirement account would ensure significant monthly funding for the community spouse.

Most SPIA (Single Premium Immediate Annuity) contracts are not entirely consistent with the federal law. There are some companies that boast that they offer “Medicaid approved annuities.” State agencies have not actually endorsed those products. Those companies that claim to have approved products are often lower-rated companies and perhaps should be avoided for that reason. Products from more reputable companies such as New York Life, Pacific Life, Nationwide, and other companies, are better choices. A thorough review of the policy itself is necessary to identify any offending terms. Declarations can be drafted to ensure that the policy is Medicaid compliant. The MCCA requires that the annuity term cannot exceed the actuarial life expectancy of the annuitant. The tax code further requires that the state must be named as a contingent beneficiary, after the spouse or disabled child.

There is an argument that when using annuities for IRAs and other deferred compensation plans, the state does not need to be named as beneficiary. There is validity to that argument, however, not including the state as a beneficiary increases the chance of litigation. Due to the extent of litigation that has already been suffered, the concept of going through the same juggernaut that will not assist, and may in fact hurt the community spouse, would seem to be overly aggressive.

In New York, Massachusetts, Florida, Georgia, and California, IRAs that are in pay status are not considered as a countable resource. While these current policies may be short-lived, most middle-class citizens in those states should consider monthly or annual withdrawals based upon the Required Minimum Distribution tables at age 65, or upon the diagnosis of an illness likely to cause a stay in a nursing facility. The primary negative aspect to an immediate annuity is the relatively poor investment realization and the underlying costs and risk factors. In those circumstances, where the owner of the retirement plan is the likely institutional spouse, a joint and survivor annuity would be appropriate, but must conform to the Social Security Life Expectancy Table that dictates the accepted duration of any guaranteed term to the annuity.

For example, if the husband is age 85, and the wife is age 65, a joint and survivor annuity may be considered an improper transfer, if the guaranteed term for the annuity is based upon the wife’s age. The Social Security Life Expectancy Table limits the guaranteed term of the annuity for a 65-year-old female to 18.96 years, while for an 85-year-old male the term is 6.63 years. In circumstances where the spouses are approximately the same age, a joint and survivor fixed annuity would be appropriate. It is also important to consult any new state annuity regulations that may be implemented that may conflict with the rules relating to pension plans.

For a single individual, the use of an immediate annuity is also considered appropriate, again considering the Social Security Life Expectancy Table or choosing a guaranteed term for purposes of the annuity. For individuals that have suffered a stroke or other ailment where a recovery is possible, the annuity ensures an income stream to support them when they are discharged.

Annuitizing retirement accounts is an effective mechanism for minimizing “spend-down” and simultaneously increasing the income for the surviving spouse. This step avoids impoverishment, but also could reduce the likelihood of a child or grandchild inheriting funds. Further, it has led to the unexpected consequence of the “seminar lawyer,” who gives presentations and offers meals to prospective clients. Seminar lawyers often derive much of their income from the sale of low-grade annuity products. The public should generally avoid these programs or at least avoid employing these individuals. Rather, they are better served by working with their traditional financial planner, insurance professional, or family attorney, in conjunction with an experienced elder law attorney.

CONCLUSION

Preserving retirement accounts is essential for allowing middle-class families to protect the well spouse/surviving spouse in old age. These plans avoid not only impoverishment but the potential for divorce. Providing income in the $3,000 to $5,000 per month range may allow a surviving/well spouse to utilize assisted living or independent living and forestall nursing home care.

William J. “Bill” Browning is a partner at Isaac Wiles in Columbus, Ohio, where his practice focuses on the areas of elder law and special needs planning. Browning is a certified elder law attorney with extensive experience advising families facing a health care crisis, guiding them through complexities to obtain the proper health care required.