The Effect of a Spouse's 401(k) on Medicaid Eligibility and Recovery

By Ronald A. Fatoullah, Esq.

{4:00 minutes to read} Medicaid is a jointly funded, Federal and New York State program which offers broad medical services to individuals who are blind, aged (over 65), or disabled. Medicaid also has a program for low-income individuals, but this article will focus on Medicaid for the blind, aged, and disabled. In New York, an applicant can own up to $15,150 in non-exempt assets to qualify for Medicaid. An applicant's spouse can own up to $74,820 in non-exempt assets, or one-half of the couple's assets, up to a maximum of $123,600 (called the Community Spouse Resource Allowance). Any amount in excess of the Community Spouse Resource Allowance may be subject to recovery by Medicaid for the applicant's care. A question that often arises in connection with Medicaid planning for one spouse is whether a non-applicant spouse's 401(k) account is considered an asset for purposes of determining an applicant's eligibility for Medicaid and whether the non-applicant's 401(k) is subject to recovery by Medicaid. The answer, as will be seen, is that it depends on the status of the 401(k).

A 401(k) account is a type of employer-sponsored retirement account. It is similar to a traditional retirement account (IRA) in that individuals can invest pre-tax dollars to promote the growth of the retirement account faster since individuals are able to contribute more of their income. The taxes are paid at the time the retiree withdraws funds from the retirement account. Also, similar to a traditional retirement account, a retiree may begin withdrawing from the 401(k) at the age of 59 without penalty but must start withdrawing at the age of 70 ½ (with few exceptions). When a retiree starts taking withdrawals from a 401(k) account, the account converts to what is called "payout status," and it is this conversion that determines whether or not Medicaid considers the retirement account as an asset for purposes of qualifying. In other words, if a non-applicant spouse's 401(k) account is in payout status, the account is not considered as an available asset for the applicant's eligibility for Medicaid. It is exempt. In addition, when the 401(k) account is in payout status, the amount in excess of the Community Spouse Resource Allowance ($123,600) is not subject to recovery by Medicaid to pay for the applicant's medical expenses.

An example may help illustrate the difference of a non-applicant spouse's 401(k) on the applicant's eligibility for Medicaid and the possibility of recovery by Medicaid against the 401(k) when it is in non-payout status versus payout status. If, for example, an applicant's spouse has a 401(k) in the amount of $500,000 that is in non-payout status, the 401(k) may be considered an asset and the amount in excess of the Community Spouse Resource Allowance may be subject to recovery by Medicaid. In contrast, if the same applicant's spouse has a 401(k) in the amount of $500,000 that is in payout status, the 401(k) is not considered an asset for determining an applicant's eligibility for Medicaid. Further, in the latter example, the 401(k) is not subject to recovery by Medicaid.

As shown, the status of a non-applicant's 401(k) - payout versus non-payout status - can have a tremendous impact on an individual's Medicaid plan. It should also be noted that even though a non-applicant spouse's 401(k) may be in payout status, and thereby protected, the income derived from the 401(k) also plays a critical role in an applicant's Medicaid plan. The rules governing Medicaid are highly complex. The failure to implement a proper Medicaid plan may have an effect on an applicant's eligibility for Medicaid and potentially expose assets to a Medicaid recovery. It is therefore important to consult an experienced elder law attorney when planning for Medicaid.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. The author would like to thank Jeffrey P. Gorak, Esq. for his contribution to this article. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Advice Period, a wealth management firm, and he can be reached at 424-256-7273.