IRAs are an incredible common asset amongst seniors. However, they can cause trouble when seeking Medicaid eligibility due to liquidation penalties and the inability to transfer the account to a different owner. If you have a married couple client where the institutionalized spouse owns a countable IRA, here’s how the “Name on the Check Rule” strategy can help them protect their IRA while still qualifying for Medicaid benefits.
Read More: How Medicaid Compliant Annuities Help Prevent Spousal Impoverishment When One Spouse Needs Nursing Home Care
How Medicaid Treats IRAs
When applying for Medicaid, the applicant and their spouse must meet specific asset limitations in order to qualify for benefits. Assets that count toward this limitation include bank accounts, CDs, stocks, additional real estate and vehicles beyond the primary, among others. You may notice a very common type of asset missing from this list: retirement accounts. That’s because the classification of an IRA as an exempt or countable resource varies by state. Some states count IRAs belonging to either spouse, while others only count IRAs belonging to the community spouse.
Note: A handful of states exempt IRAs belonging to either spouse—some only if the account owner is taking their RMDs. For clients in these states, using the “Name on the Check Rule” is not necessary.
Transferring an IRA to a Medicaid Compliant Annuity
Fortunately, if your client owns a countable IRA, they can transfer the account to a tax-qualified Medicaid Compliant Annuity (MCA). This allows them to spend down the account for Medicaid purposes while avoiding the tax consequences of liquidation. The transfer is not a taxable event. Rather, the funds are taxed as payments are made from the MCA within each calendar year, allowing the client to spread any tax liability over the MCA term.
What If the Institutionalized Spouse Owns a Countable IRA?
A simple IRA to MCA transfer is ideal for a community spouse who owns a countable IRA. However, if the institutionalized spouse owns a countable IRA, the MCA payments count towards their income, which is subject to pay their Medicaid co-pay to the nursing home each month. In that case, the couple will never see the funds from the IRA. That’s where the “Name on the Check Rule” strategy comes in.
The “Name on the Check Rule” MCA Strategy
The “Name on the Check Rule” is an MCA strategy that involves a guideline used by Medicaid to determine who income belongs to. If the income is payable to a particular spouse, it is considered available only to that spouse. In other words, the income belongs to the person whose name is on the check. With this strategy, the institutionalized spouse transfers their IRA to an MCA that is still owned by them but is made payable to the community spouse. Therefore, the MCA payments go to the community spouse and are protected from Medicaid.
In addition to preserving the funds, this strategy allows the institutionalized spouse to avoid the immediate tax consequences of liquidating their IRA. It also allows the couple to name the community spouse as primary beneficiary ahead of the state Medicaid agency.
When using the “Name on the Check Rule” MCA strategy, keep the following considerations in mind:
- Structure the IRA-MCA term over the full Medicaid life expectancy in order to spread out the tax liability.
- If the Monthly Maintenance Needs Allowance rules trigger an income shift, this strategy may not be necessary.
- Opt to receive paper checks to serve as additional evidence to the Medicaid caseworker that the income is for the community spouse only.
- When dealing with a small-value IRA, liquidating the account may be more practical.
- Be sure to consult a tax expert before liquidating an IRA or transferring to a Medicaid Compliant Annuity.
While the “Name on the Check Rule” is a great option for most clients, its success varies by state. For the latest information on the viability of this or any MCA strategy in your state, book a call with our team.