• The Unequal Treatment of Retirement Plans under Connecticut's Medicaid Program
  • July 6, 2011 | Authors: Joseph A. Cipparone; David Slepian
  • Law Firm: Cipparone & Zaccaro, P.C. - New London Office
  • Connecticut treats IRAs, 401(k)s, 403(b)s and other defined contribution retirement plans differently than defined-benefit pension plans under its Medicaid program. This article explores Connecticut’s treatment of retirement plans in Medicaid, compares Connecticut’s treatment of those plans with the treatment of such plans by other states, and proposes legislation to address this inequality.

    1.Connecticut’s Treatment of Retirement Accounts

    Connecticut currently counts defined contribution retirement plans as countable assets for Medicaid. See UPM sec. 4030.65 (non-home property required to be sold). They are considered available assets because they can be liquidated. See UPM sec. 4000.01, 4005.05. By contrast, Connecticut excludes monthly pension payments from the Medicaid eligibility calculation; they are only considered income. UPM sec. 5050.09. Unlike Medicaid, under the Food Stamp program, defined contribution retirement accounts are not countable assets in Connecticut. See UPM sec.4030.66.

    Defined contribution retirement plans like IRA, 401(k), and 403(b) plans have replaced traditional defined benefit pension plans as the predominant way that employees save for retirement. Janice Kay McClendon, The Death Knell Of Traditional Defined Benefit Plans: Avoiding A Race To The 401(K) Bottom, 80 Temple Law Review 809, 814 (2007) [http://www.temple.edu/law/tlawrev/content/issues/80.3/80.3&under;mcclendon.pdf].

    It also hurts small business because small business owners are the least likely to have defined benefit plans. Treating defined contribution retirement plans as countable assets discourages employees from saving for retirement and places small business at a competitive disadvantage vis-a-vis larger employers who have monthly pensions. Connecticut’s policy discriminates against individuals who did not work for a large company or a government agency with a monthly pension.

    Let’s compare John and Bill, two buddies living in a nursing home at the age of 75. At age 65, John began receiving a civil service pension of $3,000 per month. Assume John lives 20 years and his pension increases in value 2% per year. John will receive $594,000 over that time from his defined benefit pension. If John applies for Medicaid, his pension will be completely excluded from the Medicaid asset calculation. His pension payment will be regarded as income and applied to the cost of his care. By contrast, Bill worked for a small business. At age 75, he had a $300,000 IRA that he had accumulated from saving part of his paycheck. Bill’s IRA has less value than John’s pension. Because Bill has an IRA instead of a pension, however, his retirement plan is not excluded from the Medicaid asset calculation. Unlike John who had a more generous pension, Bill does not qualify for Medicaid. He will have to spend down and pay income taxes on his IRA until he reaches $1,600 in countable assets.

    Many clients incur substantial income tax to liquidate retirement accounts at a time when they are most in need. If the participant did not pay income tax on the contribution to the retirement account, any amount distributed from the account will incur income tax at ordinary income tax rates. IRC sec. 402(a). Ordinary income tax rates range from 10% to 35%.

    Federal law governs the Medicaid program. In general, a state that provides benefits to the medically needy cannot have a Medicaid Plan which treats resources in a more restrictive manner than the Supplemental Security Income (SSI) program. 42 USC sec. 1396a(a)(10)(C)(i), (r)(2)(B);

    Ross v. Giardi, 237 Conn. 550, 572, 680 A2d 113 (1996). Connecticut has a medically needy component to its Medicaid state plan. Ross v. Giardi, supra, at 572. Connecticut’s Medicaid Plan predates the SSI program which was adopted in 1972. Connecticut is a 209(b) state. Even if the above federal statutes regarding medically needy benefits did not apply, IRAs, 401(k)s, 403(b)s and other defined contribution retirement plans did not exist in 1972. Therefore, Connecticut cannot treat these retirement plans differently than the SSI program treats them. The SSI program exempts all retirement plans in periodic payment status from countable assets. POMS sec. SI 01120.210. The SSI program excludes retirement accounts held by a community spouse from its definition of countable assets. 20 C.F.R. sec. 416.1202(a); POMS sec. SI 01330.120.

    In Lopes v. Starkowski, Docket No. 3:10-CV-00307(JCH)(D.Conn. 8/12/10), the U.S. District Court ruled that Connecticut’s treatment of an immediate annuity owned by a community spouse as a countable asset violates federal law because it is more restrictive than SSI treatment of such annuities. Judge Hall relied on 42 USC sec. 1396a(a)(10)(C)(i) and (r)(2)(b), just like in Ross v. Giardi. The State of Connecticut did not argue that because Connecticut is a 209(b) state, it can treat annuities more restrictively than SSI. This case is on appeal to the Second Circuit of the US Court of Appeals. Unless the Second Circuit overturns the portion of Judge Hall’s decision related to SSI, Connecticut will continue to have to count assets in a way that is not more restrictive than the way assets are counted in the SSI program. To reward employees who save for retirement, federal law protects retirement plans from creditors.

    29 USC sec. 1056(d)(1); IRC sec.401(a)(13); 11 USC sec. 522(d)(12). In Connecticut, retirement plans qualified under Section 401, 403, 404, 408, 408A or 409 of the Internal Revenue Code are also exempt from claims of creditors. CGS sec. 52-321a. Yet, Connecticut does not recognize this exemption when determining eligibility for Medicaid.

    Because an annuity in a qualified retirement plan cannot be sold, immediate annuities or annuitized deferred annuities are not available assets if held inside an IRA or qualified retirement plan. See, Memorandum to Individuals Who Commented on Regulation 06-14/RA Medicaid Eligibility from Michael P. Starkowski, DSS Commissioner, entitled "Response to Comments on the Proposed Regulation", dated February 11, 2009, at 24. Consequently, a community spouse with an IRA can use IRA assets to purchase an immediate annuity and avoid having the IRA counted as an asset.

    Yet, why should community spouses have to jump through such hoops? Furthermore, this strategy provides no protection for applicants without spouses who have IRAs or other defined contribution retirement plans.

    The federal Medicaid statute contains provisions intended to prevent the impoverishment of spouses when one member of a couple is institutionalized and applies for Medicaid. The assets of an individual’s spouse count toward the asset limit. Conn. UPM sec. 4025.67. Prior to May, 2010, in Connecticut, on the date of institutionalization, the state took a snapshot of the couples’ assets and attributed one-half of those assets to each spouse. Conn. UPM sections 1507.05; 1500.01. The date of institutionalization ("DOI") is the date the individual began receiving at least 30 days of care in a hospital or nursing home or through a Medicaid waiver (like CHCPE). Conn. UPM sec. 1500.01. The spouse living in the community ("the community spouse") could keep assets that equal at least the minimum community spouse resource allowance but no more than the maximum community spouse resource allowance (CSRA). 42 USCA sec. 1396r-5(f)(2). Connecticut law refers to the CSRA as the Community Spouse Protected Amount (CSPA). Conn. UPM sec. 4022.05. As of January 1, 2011, the minimum CSPA is $21,912 and the maximum CSPA is $109,560. Conn. UPM Policy Transmittal No. UP-09-18. The CSPA usually changes every January, but in 2011 it remained the same as in 2010. Prior to May, 2010, a couple could keep $1,600 for the institutionalized spouse and the lesser of the community spouse’s one-half share or the maximum CSPA.

    With the passage of Connecticut Public Act 10-73, the couple can keep up to the maximum CSPA ($109,560 in 2011) plus the Medicaid asset limit ($1,600). This short Public Act reads as follows:

    Notwithstanding any provision of subsection (g) of section 17b-261 of the general statutes, the Commissioner of Social Services shall amend the Medicaid state plan to require that the spouse of an institutionalized person who is applying for Medicaid receives the maximum community spouse protected amount, as determined pursuant to 42 USC 1396r-5. The commissioner shall adopt regulations, in accordance with chapter 54 of the general statutes, to implement the provisions of this section.

    This change is effective for eligibility determinations for May, 2010 and thereafter. Governor Malloy has proposed the repeal of this provision of Public Act 10-73. See Senate Bill 1013, Connecticut General Assembly.

    Fortunately, the CSPA protects many defined contribution retirement plans held by the community spouse. Nevertheless, a community spouse with a monthly pension does not have to consume the CSPA with his or her retirement plan and the CSPA provides no protection for an applicant without a spouse.

    If a community spouse’s income does not reach the minimum monthly maintenance needs allowance, the spouse is entitled to a community spouse allowance. UPM sec. 5035.30. If Connecticut treated IRAs and 401(k)s like monthly pension plans, the applicant’s minimum required distributions under his or her IRA, 401(k) or 403(b) plan could be paid to the community spouse if the community spouse’s income does not reach the minimum monthly maintenance needs allowance.

    2. Other States’ Treatment of Retirement Accounts

    Currently, IRAs are not countable assets for Medicaid purposes in a number of states with some differences:

    Rhode Island

    New York

    Pennsylvania

    Florida

    Vermont

    New Jersey

    Rhode Island

    In Rhode Island, retirement funds that are eligible for periodic retirement benefits (monthly, quarterly, etc.) are not a resource but unearned income. Thus, they are not counted for purposes of their resource limit. RI Reg. 0382.15.30. The applicant does not have to terminate employment to make the retirement fund available. In that instance, it is not a countable resource.

    If the applicant has a retirement account that is not eligible for periodic payment, then the retirement account is counted as a resource. An applicant must apply for the benefits of the account or liquidate it. If the applicant is over 70, the applicant must take required minimum distributions (RMDs) to avoid the retirement account being counted as a resource.

    New York

    In 1998, the New York State Office of Medicaid management issued an internal Medicaid policy notice, GIS 98 MA/024, which instructed local district Medicaid Commissioners and Medicaid Directors to treat qualified retirement accounts as countable resource if the individual (Medicaid applicant or recipient) is not entitled to periodic payments, but is allowed to withdraw any of the funds.

    However GIS 98 MA/24 treats the retirement account principal as unavailable if the individual (Medicaid applicant or recipient) applies for and receives periodic payments from the retirement account. The individual (Medicaid applicant or recipient) must select the maximum income payment that could be made available over the individual’s lifetime. Once the individual (Medicaid applicant or recipient) is eligible for the maximum periodic payment and receives them, the periodic payments are counted as the Medicaid applicant or recipient’s income. The retirement account undistributed principal is not counted as a resource.

    Further, GIS 98 MA/024 confirms 98 ADM-36 that for Medicaid financial eligibility purposes retirement accounts owned by the community spouse are available to the spouse applying for or receiving Medicaid. The retirement account is applied to the $109,560.00 maximum community spouse protection amount. Example: A community spouse who has a $50,000.00 IRA and qualifies for the Maximum Community Spouse Resource Amount may keep an additional $59,560.00.

    In 2002, In the Appeal of Arnold S. May 28, 2002, NYS Fair Hearing No. 3701203H upheld the Medicaid applicants recipients rights to count a retirement account in payout status as an income stream pursuant to GIS 98 MA/024.

    Pennsylvania and New Jersey

    Pennsylvania and New Jersey take a different approach. They exclude any retirement account held by a community spouse whether or not the retirement account is in periodic payment status. These states rely on case law interpretation of federal statutes to exempt retirement accounts of community spouses.

    In Mistrick v. Division of Medical Assistance and Health Services, 299 NJ Super. 76, 690 A2d 651 (NJ Super.AD 1997), Sophie Mistrick was institutionalized at Wayne View Convalescent Center. At that time, she had been married to Joseph Mistrick for forty-two years. The couple’s income and resources exceeded Medicaid resource limitations. Joseph Mistrick was still employed by his long-time employer, International Specialty Products, which, since it did not offer a company pension plan, had designated his 401(k) program as his retirement account. The employer had made regular contributions to the 401(k) which had a face value of $118,800 in October 1994. In addition, at that time the couple owned their marital residence; Joseph had an additional Vanguard IRA account with a balance of some $23,783, savings accounts totalling some $42,800, and life insurance having a cash surrender value of some $15,500; Sophie had a savings account in her own name with a balance of some $34,000. Joseph retired in April 1995. As a condition of his retirement, he was required to roll the 401(k) plan over into an IRA account, which he did. His monthly income then totalled about $2,400, consisting of social security, payments from the IRA, and a small monthly pension payment of $178 from an unidentified source. In April, 1995, Sophie and Joseph applied for Medicaid after they had "spent down" their available assets for Spohie’s medical expenses. At that time, Joseph had remaining only the marital residence, his IRAs, and the community spouse’s resource allowance which was $23,800 at that time. The application was denied on the ground that Joseph’s IRAs were an includable resource, bringing the total remaining resources over the eligibility level. Sophie appealed to the Appellate Division of the New Jersey Superior Court.

    The Court noted that pension plans and IRAs of the spouse of the person requiring medical assistance are not countable resources under the SSI program. 20 CFR sec. 416.1202(a). When a state provides medically-needy benefits, it must comply with 42 USC sec. 1396(a)(10)(C)(i)(III) which requires that the state’s Medicaid plan include a description of the single standard for determining income and resource eligibility and a methodology to be employed in determining eligibility that is no more restrictive than the methodology employed under the SSI program. Id. at 80-81. The Court found that if Sophie applied for Medicaid as an SSI recipient Joseph Mistrick’s IRAs would not be includable resources in determining eligibility. Id. at 82. Because of the "no more restrictive" proviso of sec. 1396(a)(10)(C)(i)(III), the Court held IRAs are not includable for determining resource eligibility. Id.

    Vermont

    In Vermont, state regulations exclude retirement funds owned by a member of the financial responsibility group requesting Medicaid when:

    1. The individual must terminate employment in order to obtain any payment; or

    2. The individual does not have the option of withdrawing a lump sum from the fund; or

    3. The individual is not eligible for periodic payments; or

    4. The individual has reached retirement age and the individual is drawing on retirement funds at a rate consistent with the individuals life expectancy.

    Vermont Department for Children & Families, Reg. sec. 4248.5.B.

    If the individual is eligible for lump sum or periodic benefits, the individual must choose the periodic benefits. If the individual receives a denial on a claim for periodic retirement benefits but can withdraw the funds in a lump sum, the Department counts the lump sum value in the resources determination for the month following that in which the individual receives the denial notice. When a member of the financial responsibility group who is seeking long-term care Medicaid services holds pension funds held in an individual retirement account (IRA) or in work-related pension plans (including Keogh plans) as defined by the Internal Revenue Code, no change in title of ownership to these funds is required in order for them to be treated as an excluded resource for the benefit of the community spouse.

    Florida

    In Florida, if an individual is eligible to receive regular payments from a retirement fund, the payments are considered unearned income and the fund is not considered a countable asset to the individual. If the individual is eligible to receive payments but elects not to, he is ineligible due to failure to file for other benefits to which he is entitled. Florida Reg. sec. 1640.0505.04 Retirement Funds.

    If an individual is not eligible to receive payments from the retirement fund, the value of funds currently available is considered a countable asset. Any penalty imposed due to early withdrawal can be deducted when computing the value of the retirement fund, but any taxes due are not deductible. A retirement fund is not an asset if an individual must terminate employment in order to obtain any payment. Retirement funds that are unavailable due to legal restrictions are not counted. The eligibility specialist must obtain a written opinion from legal counsel on availability. An example could be a divorce decree.

    Once regular payments begin, the payment is considered unearned income. The value of the retirement fund continues to be an excluded asset as long as regular payments continue. Id.

    Pension funds owned by a community spouse are excluded from assets for deeming purposes; however, any income received is deemed to the applicant.

    Florida Reg.1640.0505.05 Retirement Funds of Spouses.

    When the applicant has a community spouse:

    1. At the time of application, if the community spouse receives regular payments from their retirement funds, the funds are not considered an asset when computing the couple’s total countable assets. The payment is considered unearned income to the community spouse when computing the community spouse income allowance.

    2. At the time of application, if the community spouse does not receive regular payments from a retirement fund he owns, but he has the option of withdrawing a lump sum, the total value of the funds must be considered an asset when computing the couple’s total assets and the community spouse’s asset eligibility. Early withdrawal penalties are excluded from the value of the funds, but any imposed taxes cannot be deducted. Id.

    3. Proposed Legislation

    What would Connecticut legislation creating equality between defined contribution and defined benefit retirement plans look like? It should reflect similar laws in other states and be commensurate with the treatment of retirement plans under SSI. The authors proposed the following legislation:

    Be it enacted by the Senate and House of Representatives in General Assembly convened:

    The Commissioner of Social Services shall amend the Medicaid state plan to provide that if an individual or the individual’s spouse receives periodic payments from a defined contribution retirement plan, the retirement fund shall be treated in the same manner as a defined benefit retirement plan making a periodic payment. Such periodic payments shall be considered unearned income and the retirement fund shall not be considered a countable asset for Medicaid eligibility purposes. Defined contribution retirement plans include, but are not limited to: (1) 457 plans (plans for state and local governments and other tax-exempt organizations); (2) 401(k) plans; (3) federal employee thrift savings plans; (4) Section 403(b) plans (tax-sheltered annuities provided for employees of tax-exempt organizations and state and local educational organizations); (5) Section 501(c)(18) plans (retirement plans for union members consisting of employee contributions to certain trusts that must have been established before June 25, 1959); (6) individual retirement accounts (IRAs), both Roth and Traditional IRAs; (7) simplified employee pension plans or SEP-IRAs; (8) individual retirement annuities under Internal Revenue Code sec. 408(b); (9) Keogh plans; (10) SIMPLE retirement accounts; (11) money purchase plans; and (12) profit sharing plans. The Commissioner shall adopt regulations, in accordance with chapter 54 of the general statutes, to implement the provisions of this section.

    This language clarifies the equal treatment of all retirement plans as long as they are in periodic payment status. If an IRA owner refuses to take required minimum distributions, then Connecticut could treat the retirement plan as a countable asset. Connecticut would treat the periodic payments as income. If the applicant owns the retirement plan, the income would be applied to the cost of care unless the community spouse has insufficient income to cover the monthly maintenance needs allowance. If the community spouse owns the retirement plan, the income will support the community spouse.

    CT-NAELA floated a proposed bill in the Connecticut General Assembly in January 2011, that would accomplish what the authors have proposed. Unfortunately, certain legislators believed the legislation will cost the state money because some people spend down their IRA on the cost of nursing home care before they become Medicaid eligible. Of course, most clients with an elder law attorney who do not have any remaining CSPA to protect their IRA spend their IRAs on items other than nursing home care. They use their IRA to purchase exempt items like cars, home improvements, prepaid funerals, etc. Legislators also expressed concern that when the applicant with an IRA dies, the remaining balance may go to the family. Yet, federal law under the SSI program does not require state recovery of retirement plan balances at the death of the applicant. In this period of large budget deficits, achieving fairness apparently takes less priority than equality or compliance with federal law. It may take litigation to implement what the authors have proposed.

    4. Conclusion

    In conclusion, treating defined contribution retirement plans in periodic payment status like monthly pension plans will help:

    • Ensure the community spouse does not become impoverished.
    • Apply an applicant’s required minimum distributions to the cost of the applicant’s long-term care just like monthly corporate and civil service pension payments are applied to long-term care.
    • Protect both parties while reflecting the policy of Connecticut to keep people living independently rather than in an institution.
    • Ensure that if the community spouse becomes disabled and needs long-term care, those regular retirement checks will be applied toward their long-term care.
    • Reverse discrimination against small business and the disincentive the current law imposes on saving for retirement.

    Eligibility for Title 19 should not rest on what type of retirement plan the applicant or the community spouse received for years of work. It is time Connecticut created parity between defined contribution retirement plans and monthly pension plans.

    Attorney Joseph A. Cipparone is a Principal of Kepple, Cole-Chu, Cipparone Avena & Zaccaro, P.C.in New London.

    Attorney David C. Slepian is a Principal of Garson & Slepian in Fairfield.