1. Exclusion v. Deductibility. Retirement plans are generally deductible or excluded from the income of the worker for federal income tax purposes. Subject to restrictions for each type of plan, contributions by workers to retirement plans are deductible/excludible and contributions by employers are excluded from the income of the worker until distributed. If it is deductible/excludible, the worker reduces their reported income by the amount of contribution to the account. If it is excluded from income, it is treated for tax purposes as though the worker did not receive the contribution.
2. 401(k) Plans. 401(k) plans permit an employee to elect a tax-free deferral of salary up to $11,000 (2002) with annual increases in $1,000 increments until the limit of $15,000 in 2006. If the employee is aged 50 and over, an additional "catch-up" contribution is allowed. The additional contribution amount is: 2002 - $1,000; 2003 - $2,000; 2004 - $3,000; 2005 - $4,000; and 2006 - $5,000. The employer can match contributions up to the lesser of (a) 25% of compensation or (b) $40,000. Amounts held in a 401(k) cannot be distributed until the employee reaches age 59 ½ or upon retirement, death, disability, separation from service or other documented and established hardship. With a 401(k) plan, you may have other retirement plans and can have any size business. The business must annually file Form 5500. Participants are always 100% vested in their salary deferrals. Employer contributions may be vested on a graduated vesting schedule. Participant loans are permitted. Any in-service withdrawals are subject to a 10% penalty if the participant is under age 59 ½.
Pros: a. Optional participant loans and hardship withdrawals add flexibility for employees.
b. Can make a 401(k) plan as simple or as complex as you want.
c. Employees may contribute more to this plan than under IRA plans.
Cons: a. Complicated testing to make certain that benefits do not discriminate in favor of the highly compensated employees.
b. Additional withdrawal and loan flexibility adds administrative burden for the employer.
3. SIMPLE Plans. Acronym for Savings Incentive Match Plans for Employees. This type of plan may be offered by an employer with 100 or fewer employees. The employees may elect a tax-free deferral of salary up to $7,000 (2002) with annual increases in $1,000 increments until the limit is $10,000 in 2005. If the employee is aged 50 and over, an additional "catch-up" contribution is allowed. The additional contribution amount is: 2002 - $500; 2003 - $1,000; 2004 - $1,500; 2005 - $2,000; and 2006 - $2,500. Employer contributions may vary and are not subject to the discrimination rules found in other plans. The employer may make a dollar-for dollar match up to 3% of pay or a 2% non-elective contribution for each eligible employee. Participant loans are not permitted. If a participant makes an in-service withdrawal, the withdrawal is subject to income taxes and 10% penalty if under age 59 ½. Also, if withdrawals are made within the first two years of participation, there is an additional 25% penalty if the employee is under age 59 ½.
Pros: a. Easy and low-cost to set up and operate.
b. Plan has flexible contribution requirements.
c. Good plan if you want employees to help share responsibility for their retirement.
Cons: a. Inflexible contribution limits.
b. Cannot have any other retirement plan.
4. IRA. Acronym for Individual Retirement Account which is an account established by a worker which allows the worker to exclude from income the annual contributions made to the account. Employers may assist workers by coordinating the establishment of accounts or making automatic withdrawals from paychecks to the plan. The current contribution schedule is $3,000 for 2002 – 2004; $4,000 for 2005 – 2007; $5,000 for 2008. Additional contributions can be made by participants age 50 or over by an additional $500 for tax years 2002 through 2005 and $1,000 from 2006 and later.
Pros: a. Easy and no/low-cost to set up and maintain.
b. No minimum contribution requirements.
c. Good plan if you want employees to have responsibility for their retirement.
d. Ownership for worker vests immediately.
Cons: a. Low and inflexible contribution limits.
b. Cannot have any other retirement plan.
5. SEPS. Acronym for Simplified Employee Pension which is an IRA or annuity that an employer may make deductible employer contributions to of up to twenty-five (25) percent of the employee's salary of the first $200,000 of compensation (or up to $50,000). Employees may make contributions to these plans of up to $11,000, provided that the employer's plan was established prior to January 1, 1997. Participation must be open to all employees over the age of twenty-one (21), performed service for the employer for at least three (3) of the preceding five (5) years, and has received at least $450 in compensation from the employer for the year of contribution. The employer's contributions vest when made and cannot be restricted.
Pros: a. Easy and low-cost to set up and operate.
b. Good for self-employed individuals due to larger contribution limits.
Cons: a. Limited to employer contributions if not established prior to 1997.
b. Must be available to all long term employees.
c. Cannot restrict withdrawals.
A. Theory for Inclusion.
Medicaid like SSI is a "needs based" program. The ability of the owner to liquidate or access those funds is paramount. Simply put, if you can access those monies they are countable, and conversely, if you cannot access the monies they are not countable. This approach could be called the "availability doctrine."
The SSI rule states as follows:
Social Security Regulations. 20 C.F.R. § 416.1201 states as follows:
(a) Resources; defined. For purposes of this subpart L, resources means cash or other liquid assets or any real or personal property that an individual (or spouse, if any) owns and could convert to cash to be used for his or her support and maintenance.
(1) If the individual has the right, authority or power to liquidate the property or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual (or spouse).
(2) Support and maintenance assistance not counted as income under § 416.1157 (c) will not be considered a resource.
(3) Except for cash reimbursement of medical or social services expenses already paid for by the individual, cash received for medical or social services that is not income under §416.1103 (a) or (b), or a retroactive cash payment which is income that is excluded from deeming under §416.1161 (a)(16), is not a resource for the calendar month following the month of its receipt. However, cash retained until the first moment of the second calendar month following its receipt is a resource at that time.
(i) For purposes of this provision, a retroactive cash payment is one that is paid after the month in which it was due.
(ii) This provision applies only to the unspent portion of those cash payments identified in this paragraph (a)(3). Once the cash from such payments is spent, this provision does not apply to items purchased with the money, even if the period described above has not expired.
(iii) Unspent money from those cash payments identified in this paragraph (a)(3) must be identifiable from other resources for this provision to apply. The money may be commingled with other funds, but if this is done in such a fashion that an amount from such payments can no longer be separately identified, that amount will count toward the resource limit.
(4) Death benefits, including gifts and inheritances, received by an individual, to the extent that they are not income in accordance with paragraphs (e) and (g) of §416.1121 because they are to be spent on costs resulting from the last illness and burial of the deceased, are not resources for the calendar month following the month of receipt. However, such death benefits retained until the first moment of the second calendar month following their receipt are resources at that time.
(b) Liquid resources. Liquid resources are cash or other property which can be converted to cash within 20 days, excluding certain nonwork days as explained in § 416.120(d). Examples or resources that are ordinarily liquid are stocks, bonds, mutual fund shares, promissory notes, mortgages, life insurance policies, bank accounts (savings and checking), certificates of resources, other than cash, are evaluated according to the individual's equity in the resources.
Section 416.1201 establishes the guidelines after which most states pattern their individual regulatory schemes. Most state regulatory schemes, however, stay relatively close to this section, whether those states are 209(b) states or 1364 states.
Section 416.1202 however, in pertinent part states as follows:
(a) Married individual. In the case of an individual who is living with a person not eligible under this part and who is considered to be the husband or wife of such individual under the criteria in § 416.1806 and 416.1811, such individual's resources shall be deemed to include any resources, not otherwise excluded under this subpart, of such spouse whether or not such resources are available to such individual. In addition to the exclusions listed in § 416.1210, pension funds which the ineligible spouse may have are also excluded. Pension funds are defined as funds held in individual retirement accounts (IRA), as described by the Internal Revenue Code, or in work-related pension plans (including such plans for self-employed individuals, sometimes referred to as Keogh plans).
Section 416.1202(a) further provides that the pension funds of an ineligible spouse are to be excluded as defined including with pension funds IRAs, 401ks, and other work-related pension plans. Based upon these definitions, it would appear that IRAs, 401ks, SEPs, ESOPs, defined benefit plans, defined contribution plans, and government pensions which are "in pay" status should be unavailable
While an ownership interest in an IRA, 401k, or other work-related pension plan for a non-institutionalized spouse, based upon 416.1202(a), should be treated as excluded, many states are rejecting this position.
The distinctions between the 1634 states and 209(b) states, while pronounced in other areas, are becoming blurred in this area. While it would appear that 209(b) states are, in general, allowed to employ more restrictive eligibility criteria, and although the case of Mowbray v. Kozlowski, 914 F. 2d 593 (4 th Circuit, 1990), confirmed that distinction, 209(b) states in some instances are taking a more balanced approach. This is due in part to the 209/1634 distinction and not ERISA.
With the focus of the SSI regulatory scheme on availability as opposed to financial security of the individuals, or even as to the long-term financial requirements, it is surprising that more federal case law has not arisen.
B. Related Case Law.
While there is little available case law, two SSI related cases set forth below are interesting both in terms of the underlying policy issues being decided and upon the stark contrast with the state regulatory schemes both in terms of drafting and in terms of implementation where in government retirement benefits generally receive a more favorable treatment for purposes of required liquidations.
It is important to distinguish the litigation relating to retirement plans from the litigation involving immediate annuities. In most states, the regulations relating to the annuities are either based from or deviate from CMS transmittal number sixty-four (64). The better litigation approach in these cases is to focus upon the regulations relating to retirement plans, avoiding CMS Transmittal 64.
Blaylock v. Harris, 531 Fed. Supp. 24 (1981), deals with the SSI regulations regarding monies that have been deposited on behalf of the beneficiary during his employment. The monies were located in a civil service retirement plan, and due to the termination of his employment, he had the opportunity to withdraw those monies. The court reviewed 42 U.S.C. § 1382a, as well as 20 CFR § 416, and found that the monies, as they were available for withdrawal, were considered resources for SSI eligibility purposes. The court stated in its decision:
The regulations, therefore, provide that the retirement account may not be excluded as property essential to self-support of the claimant, if the account is a liquid resource.
The test therefore becomes where the plaintiff's civil service retirement account was a liquid resource. The plaintiff initially argues that the retirement account was not a liquid resource because it is not specifically mentioned in the series of examples listed in the regulations. See 20 CFR 416.1201(b).
The court considered a retirement account to be property similar to a savings account; the $4,250 credited to the plaintiff's civil service retirement account was treated as a liquid resource. 20 CFR 416.1201(a) and (b). As the plaintiff was presently entitled to a full refund of the amount credited to his retirement account, he could convert the $4,250 credit to cash and use the cash for his support and maintenance.
In SSR No. 8136, again, and SSI beneficiary had monies retained in the civil service retirement account. Again, this beneficiary had monies retained in the civil service retirement account. Again, this beneficiary was no longer employed by the federal government and had the opportunity to withdraw the monies. The administrative law judge ruled that pursuant to the regulations, "[t]he amount in the claimant's retirement fund, which he may withdraw at any time, constitutes a liquid resource."
What if the beneficiaries in either of these cases had made an irrevocable election to take the payments contained in these funds in equal payments over ten years? If that election had been made, would the state agency have attempted to treat the election as a transfer for less than fair market value?
More recent cases also rely upon the ability of the applicant to withdraw the monies from these accounts. These decisions fail to address the issues of withdrawal or elections that may be made at the time of retirement or the impact of the MCCA spousal impoverishment sections. Based upon these cases and regulations, if the individual had just retired and still had the option to take either a lump sum or an annuity payout scheme, the Social Security Administration under SSI or the state agency under the Medicaid regulations could deny Medicaid and require that those monies from the retirement plan be withdrawn. It is the goal in this litigation to have the retirement plan of the community spouse excluded so as to preserve his or her ability to retire either at some later date or to utilize those funds to enhance their current retirement.
The lower court decision in Mistrick v. Division of Medical Assistance and Health Services, 690 A.2d 651 (1997) follows that premise. The Mistrick case at the trial court level, relied upon the SSI rules in excluding the retirement plan of the community spouse under nearly all circumstances. On June 8, 1998, the New Jersey Supreme Court reversed the lower court decision in Mistrick (see 1998 N.J. Lexus 562) and made some astonishing findings. The court first and foremost found that MCCA superseded any other provisions of the Medicaid law which could be viewed as contradictory. The court went on to find that MCCA did not specifically exclude retirement plans of the community spouse and thus they must be included as an asset. It must be noted, however, that the facts and circumstances in front of the court will permit that court as well as other courts to again create two separate and distinct classes of citizens for purposes of retirement savings.
The best example of those two separate classes is clearly set forth in three Ohio cases, Routzong v. Ohio Dept. Of Human Services, Franklin County Common Pleas Court Case No. 97CVF-01-2598, and Martin v. Ohio Department of Human Services, 720 N.E. 2d 576 (1998). The current Ohio regulation (See Exhibit F-1) reflects a very aggressive approach which threatens all retirement plans of either the community spouse of institutionalized spouse. In Routzong, the husband was in his early 60's and had Alzheimer's, while his wife (slightly younger) was still employed by a governmental entity. While she had some monies situated in her Public Employees Retirement System fund as a government employee, the State agency did not attempt to include those funds as an asset, but did attempt to include her Ohio "deferred compensation" plan as an asset. While the deferred compensation plan did not have a large amount of assets (approximately $22,000), those funds represented approximately 70 percent of the couple's purported countable resources. The state of Ohio chose not to appeal this decision which was favorable to Mrs. Routzong.
Mrs. Martin represents the second class of citizens in that she is not a government employee and did not have a governmental retirement plan. Rather, one portion of her appeal considered the inclusion of her small IRA as a countable asset. The State agency included her IRA. That decision was reversed by the County Common Pleas Court. The state of Ohio successfully appealed that decision.
In the case of Mannix v. Ohio Department of Human Services, 134Ohio App. 3 rd 594, (1994), the Court rejected the "Just Say No" approach regarding the CS retirement plan which totaled $45,000. The monies were retained in an IRA. The Court properly found that as the monies were retained in an IRA, ERISA arguments were not appropriate.
C. National Retirement Policy.
It is the policy of the United States government and most state governments to encourage savings for retirement. This is the basis for Internal Revenue Code Sections 401-403 and ERISA. The federal government encourages us to save for retirement by deferring taxation on the monies if they are placed in one of these retirement plans. These accounts include everything from Simple IRAs to defined benefit plans and include both government pensions and private pensions.
Congress has recently liberalized many of the planning rules which make it possible to reconstitute a retirement plan when monies were rolled out of a 401k or pension or defined benefit plan. These new rules provide the ability to set aside a significantly larger fund for retirement.
This governmental policy is inconsistent with the Medicaid policy of forcing impoverishment prior to Medicaid eligibility. The government policy encouraging us to save is at the very best an admission that the Social Security system was not intended to supply 100% of our retirement income. This government policy discourages us from withdrawing monies until age fifty-nine and a half (59½) and penalizes the withdrawal of monies prior to fifty-nine and a half (59½), with certain exceptions.
D. State By State.
Requiring that a single individual utilize all of his or her funds for purposes of paying for their care, is logical and consistent with the national welfare and Medicaid policies. If there is virtually no opportunity for the individual to live independently, the arguments supporting the public policy are perhaps stronger. In those circumstances where one spouse is in the nursing home and one spouse is and will continue to live independently, the logic of this policy becomes inconsistent with the MCCA and ERISA.
Consider the following fact scenario:
Husband, age 51, has been diagnosed with Lou Gehrig's disease and will soon require nursing care. He has a 401k with $50,000, while his wife, also 51 and still employed, has a 401k with $175,000. They have a $200,000 residence with a $100,000 mortgage and miscellaneous savings of $10,000.
Various states have adopted policies that range from mean spirited and short sighted to consistent with MCCA. New regulations for the state of Wisconsin provide a policy which permits the community spouse to preserve his or her retirement account without divorce and without spend down. This new Wisconsin regulation further permits the retention of the institutionalized spouse's retirement account simply by making regular withdrawals. This Wisconsin regulation is entirely consistent with the national policy of promoting savings for retirement. Whether Wisconsin ultimately pursues estate recoveries against these accounts at second death is an entirely different subject.
Pennsylvania regulation and policy on these issues might best be described as "bi-polar". Based upon the Medicaid handbook in section 440.4, the retirement fund of the community spouse is exempt. This manual section is similar to the Wisconsin regulation. Will such an informal policy (no regulation or statute) be applied in the case of a very large 401k or IRA of the community spouse? For example, will the regulation be reconsidered if Pennsylvania Medicaid Agency receives several applications where the retirement plan of the community spouse exceeds $175,000. A copy of the Pennsylvania manual section is attached as Exhibit A.
In general, for the institutionalized spouse or for a single person, if the IRA, 401k, or 403b is accessible, the account is treated as available. Pennsylvania like many other states provides for a set-off for any penalty which must be paid for early withdrawal. (See Exhibit A). Pursuant to the Pennsylvania regulations, the institutionalized spouse may be able to annuitize his or her retirement plan prior to being placed in a nursing home. The risk of litigation (in any state) increases if the purchase of an annuity occurs after institutionalization and involves the definition of the "snap-shot". Clearly, if the annuitization occurs several years prior to placement in a nursing home, the issue is not likely to arise. However, should the annuitization occur weeks prior to institutionalization or after institutionalization, greater scrutiny is likely. In some counties in Pennsylvania, case workers are also not counting IRA's, 401(k)s, or 403(b)s where regular withdrawals are being made pursuant to the Required Minimum Distribution Rules. Ohio has had a similar history, although one cannot rely upon such an application of the rules.
Pennsylvania's rules are also complicated by a series of cases relating to annuities.
These annuity cases did not involve IRA's or similar retirement funds. The Pennsylvania Medicaid Agency has proven willing to litigate on a regular basis. In the case of Bird v. Department of Public Welfare, 731 A.2d 660 (Pa. Cmwlth. 1999), the State Medicaid agency ruled that purchase of an immediate annuity, after institutionalization was an improper transfer. The State was successful in that litigation. The more recent case of Mertz v. Houston, 155 F. Supp. 2d 415 (E.D. Pa. 2001), allowed the spouse of the Medicaid applicant to purchase an immediate annuity, so long as it was "actuarially sound," within the limitations of CMS Transmittal No. 64.
The Pennsylvania Medicaid Retirement Plan policy is treacherous, particularly in those circumstances where one of the spouses suffers a debilitating illness at a relatively young age, and planning will continue to be difficult and the outcome potentially disastrous.
The Massachusetts regulation (attached as Exhibit B) is an example of a muddled approach which clearly excludes governmental pensions, excludes 401k plans for those in larger companies, but targets 401k plans for small family run businesses. This policy also contains an escape clause which would allow, in most circumstances, the owner of the retirement plan to annuitize for their life and the life of their spouse. Based upon my discussions of several Massachusetts practitioners, it appears that the actual implementation of the policy is less stringent than the regulation.
The Michigan rule as set forth in PEM 400 (attached as Exhibit C) is very similar to the Ohio rule, although it may be very different in application. Based upon discussions with practitioners, the retirement plan of the community spouse is not considered as a resource.
The Tennessee law generally excludes the retirement plan of the community spouse. It does not appear to distinguish between plans that are "in pay" status versus plans that are still accumulating. Also, it does not seem to distinguish between IRAs, 401(k)s, or company qualified plans. However, the retirement plan of the institutionalized spouse is counted, and therefore, planning relating to that retirement plan is vitally important. In the example cited below, planning for the spouse is vitally important. In some circumstances, divorce and the use of QDRO may be advisable. The Tennessee Code Sections are attached as Exhibit D.
The administrative rules in Alabama simply do not address retirement plans. In Alabama if the account can be liquidated, it is countable. The Alabama Code Sections are attached as Exhibit E.
The final example for purposes of comparison is the proposed Ohio regulation (attached as Exhibit F-2) and the current Ohio regulation (attached as Exhibit F-1). Both regulations severally limit the planning options of the community spouse and will either encourage divorce or result in impoverishment. Under the current regulations, the criteria for 401k plans which provide that the plans are either countable or not countable have always been absent and create ambiguities. Unlike the Massachusetts regulation which appears to target only the retirement plans of small businesses, the Ohio regulation and unwritten policy is ambiguous that there is no distinction between loans and withdrawals and further no distinction between monies supplied by the employer and monies supplied by the employee. The implementation in Ohio has been dependent upon whether the underlying plan is a government plan.
The Florida regulations regarding retirement plans are somewhat more specific. In Florida Administrative Code § 1640.0505.05 (see Exhibit G), retirement funds of the community spouse are excluded, if they are "in pay" status. Assuming that the community spouse is withdrawing monies from the retirement plan, those monies withdrawn are counted as unearned income and as such, would affect the CSMIA. Thus, if monies are being withdrawn based upon the life expectancy of the community spouse, then based upon the Required Minimum Distribution rules, the retirement plan is not included. In other words, in Florida these retirement plans, whether they be an IRA, 401k, ESOP, SEP, or any other type of retirement plan, will not be counted as a resource so long as the spouse is receiving a monthly distribution under the Required Minimum Distribution rules. As opposed to other states, where a community spouse may be required to actually purchase an IRA immediate annuity, in Florida no such purchase is required.
Pursuant to Florida Administrative Code § 1640.0505.04, the retirement plan of the institutionalized spouse will be counted. The major exception to this rule involves a statement in the regulations that says if there are "legal restrictions", the retirement fund is not available. If for any reason or under any circumstance the institutionalized spouse is eligible for payments from the plan, which would likely include payments under a hardship provision within the plan, the plan would be included based upon the amount which can be withdrawn. This is consistent with the regulations of many states. The example set forth in the Administrative Code Section seems confused, misleading and is somewhat at odds with the actual drafting of the regulation itself. Further, portions of the regulations seem to be confused with the annuity regulations. In short, the Florida regulations protect the retirement plan of the community spouse and do not unnecessarily restrict the planning for the retirement plan of the institutionalized spouse.
E. Strategies.
When planning for disabilities, our strategies should include avoidance of the issue, as well as attempts to address the issue with pre-planning where possible without violating ERISA, and ultimately planning for those who are already at risk.
1. Stay in the Employer Sponsored Retirement Plan. Where the employer has offered a defined contribution plan, a defined benefit plan, or a government pension, the employee may consider leaving the retirement monies in the plan. In circumstances where one of the spouses has a family history of longevity or nursing home care appears to be in the offing, rolling the monies from the employer pension plan into an IRA clearly converts the money from being "unavailable" in many states to being entirely available for purposes of determining eligibility. Thus, where both individuals are in good health and where the company pension plan has under performed or where there are concerns regarding the management of the employer pension plan, those concerns may override any consideration regarding Medicaid benefits in the future. For those with significant assets in the pension plan, the purchase of long-term care insurance may be advisable to reduce the risks, without unduly restricting investment strategies. If the spread between likely investment return more than pays for the insurance, why not roll out and pay for the insurance?
2. Rollout and Annuitize. In most circumstances where the employee decides to rollout of the person's plan, or in an ESOP or SEP where the plan may require that the employee withdraw from the plan at a date certain, if the employee rolls those monies into an IRA without annuitizing those funds at the date of rollover, it would appear that those monies became available. If an immediate annuity is purchased at the time of retirement, the result is very similar to that of a government employee who, upon termination of employment, may have a window period to withdraw. The election to annuitize would be appropriate and would reduce the risks of having those funds counted as available. Elections to annuitize based upon joint lives would also be appropriate, while choosing guaranteed terms which far exceed the life expectancy of the retiree or the retiree and retiree's spouse will likely lead to increased scrutiny and may be treated as a transfer. If said transfer has taken place within three years of the date of Medicaid application, that transfer may render the Medicaid applicant ineligible. Under any circumstance, a rollover into an IRA immediate annuity will likely get preferential treatment to the purchase of an immediate annuity outside of the retirement planning perspective. However, it should be noted that there is no support in the Medicaid codes for this preference.
3. Qualified and Non-Qualified Plans. In the state regulatory schemes referenced herein, a planning option exists for those who are self-employed or those who have not made retirement planning a priority. Through the sale of a business or the sale of income producing property, it may be possible to establish a non-qualified pension plan which is unavailable for Medicaid purposes. It is important to note that the Medicaid sections attached hereto do not make reference to the Internal Revenue Code or ERISA and therefore fail to properly define qualified and non-qualified pension plans. Thus, for an individual who has been engaged in private business and who has not established a pension plan, he or she could establish a non-qualified pension plan which is in actuality an installment sale of the business or underlying business property.
4. Termination of Marriage. Based upon the aggressive approach utilized in some states, and dependent upon the factual circumstances, divorce may be an appropriate planning tool. Particularly for those circumstances where the community spouse has little by way of savings and the institutionalized spouse has a large IRA, there are both tax and Medicaid issues which may lead the family to utilize divorce in order to preserve sufficient assets for the community spouse. This obviously is not a favored approach, but will become more prevalent, based upon the negative ruling in Wisconsin v. Blumer, 534 US 473 (2002).