WASHINGTON - A little-noticed provision in the Deficit Reduction Act, signed by President Bush on Feb. 8, will prohibit people from getting Medicaid coverage if they give money away to qualify for the coverage within five years of incurring nursing home expenses.
The provision received so little publicity during the act's passage that the Financial Planning Association is taking steps to make its members aware of it.
"[The government is] doing this because [it wants] to make sure that those with substantial assets have a more difficult time qualifying for long-term Medicaid coverage in nursing homes," said Mary Bell, government relations manager who handles tax issues in the Washington office of the Denver-based FPA. Previously, the so-called "look back" period was only three years.
The change will affect many estate planners.
"The people who I feel sorry for are the people who are healthy and don't anticipate finding themselves in that situation, and they want to help their kids. All of a sudden, I have an auto accident and can't get a job, and the government says, 'You have to go back five years,'" said Afolabi Odejimi, a certified financial planner who is managing member of The ODYSSEY Group LLC, a registered investment adviser in Phoenix.
"I don't know how you plan for that," he said. "Some people will fall within that window despite the best of intentions."
But Mr. Odejimi agrees that people who have the means should pay their own nursing home expenses without shifting the burden to the government through the Medicaid program. "We have enough people who do need help. Trying to spend down your estate to qualify for government support or subsidy - I don't think it's right," he said.
Most clients of financial planners probably have enough assets and insurance that it will not be an issue, Mr. Odejimi said. Further, the new provision tends to heighten the need for financial planning services.
The Congressional Budget Office estimates that the lengthened look-back period will reduce Medicaid spending by $1.5 billion from fiscal 2006 through 2010 and by $4 billion from fiscal 2006 through 2015.
In addition, another provision of the legislation makes people ineligible for Medicaid if they have more than $500,000 in home equity, a threshold that states will be allowed to raise to as high as $750,000 if they so choose.
The figure is to be adjusted annually for inflation, starting in 2011, and it will not apply if the person's spouse, minor or disabled child lives in the house. Exemptions will be allowed in the case of hardship. That change is expected to reduce Medicaid spending by $298 million over five years and by $878 million over 10 years.
Further, Medicaid recipients who have annuities must name the state as a remainder beneficiary to cover Medicaid's expenses, and other asset transfer rules and use of certain financial instruments would be tightened in order to qualify for government help.
A plus for the life insurance industry is a provision that lifts
a moratorium on the number
of states that can choose to
offer Long-Term Care Partnership Programs.
Such programs allow people who buy long-term-care insurance and who later need nursing-home care under Medicaid to protect their assets up to the amount of their long-term-care policies (InvestmentNews, Aug. 8). The CBO estimates that that provision will save taxpayers $26 million over five years and $86 million over 10 years. "We are celebrating" the lifting of the moratorium, commented Greg Jenner, executive vice president of the American Council of Life Insurers in Washington.
In all, the new Medicaid asset transfer rules in the act are expected to reduce Medicaid spending by an estimated $2.4 billion over five years and by $6.3 billion over 10 years, the CBO reported.
Another provision financial planners are studying in the Deficit Reduction Act changes the rules for Section 529 college savings plans so that assets in prepaid-tuition plans are treated the same way in awarding financial aid as savings plans.
Assets in prepaid-tuition plans have been treated as student assets that are counted on a dollar-for-dollar basis against financial-aid awards. In contrast, 529 savings plans are considered assets of the account owner, typically parents, and only 6% of the assets in those plans are used in calculating financial aid.
The new rules, which were called for by the College Savings Plans Network in Lexington, Ky., will help students get more financial aid. The network has not made any forecasts on what the effect will be on prepaid plans, said Chris Hunter, program manager at the affiliated National Association of State Treasurers in Lexington. As of last September, $63.6 billion was invested in 6 million savings accounts, and $13.7 billion was in nearly 2 million prepaid plans.