Congress Tightens Rules For Medicaid Planning

As part of the Deficit Reduction Act of 2005 passed Feb. 1, Congress has tightened up the rules governing Medicaid eligibility, making it much more difficult to qualify for Medicaid after transferring assets or purchasing annuities.

The new rules also include a cap on the maximum amount of home equity allowed as an exemption in determining Medicaid eligibility.

Under the new rules, states will be required to look for any gifts or transfers of assets made by a Medicaid applicant within the previous five years, rather than the current three years.

Even more importantly, the penalty period of ineligibility for those gifts will not begin to run until a person applies for Medicaid and is determined to be otherwise eligible for Medicaid.

Under the old rules, the penalty period–calculated as the number of months of care the gift would have paid for at the average monthly rate for the state–for each gift would begin to run from the month of the transfer. This wiped the slate clean each month for small gifts and allowed the “half-a-loaf” strategy, in which a person gives away roughly half of his assets and retains a sufficient amount to pay for his care during the penalty period.

Now, the half-a-loaf strategy is out, and small gifts over the previous five years will be aggregated in calculating a penalty period. This promises to make the application process much more cumbersome, potentially requiring applicants to document every expenditure in the last five years.