Medicaid and Assets in 'Pay Status'

After you start taking required minimum distributions (RMD) from your IRA, the IRA principal is no longer considered a resource that you must spend down before qualifying for Medicaid benefits, although the RMD must be contributed to the cost of your nursing home care. Even after you die, Medicaid can't claim the IRA to recoup benefits paid for your care unless you named yourself as its beneficiary.

In other words, if all your assets are in an IRA that's "in pay status," you don't have to spend your kids' inheritance to qualify for Medicaid.

This Medicaid rule was confirmed in May 2002, in the matter of Arnold S. A 77-year-old Monroe County Medicaid applicant, he was denied benefits on the ground that his IRA was available to pay for his nursing home care. He appealed that decision, and it was reversed by state administrative law judge Katherine Volk. In her decision, which applies only to New York, she ruled his IRA distributions were available to pay for his nursing home expenses, but the IRA principal was not because the account was "in pay status."

Volk's ruling applies to IRAs and defined contribution plans - 401(k), 403(b), 457 and Keoghs - in pay status. It also applies to immediate-pay annuities - i.e., those paying income. But it doesn't apply to interest-paying federal, state or corporate bonds held outside retirement plans.

Nevertheless, he adds, investing in an immediate-pay annuity isn't a no-brainer. Let's say you have $100,000 and you must go into a nursing home. As things stand, the $100,000 must be spent on your care. To shield it, let’s say you buy an immediate-pay annuity that pays you $10,000 a year. The $10,000 annual annuity payment must go to the nursing home, but you've protected $90,000 of the principal.

We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!

Fred and Gloria Pollard

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That sounds like a good idea, but it only works well if you die quite soon. If you die in one year, the nursing home gets $10,000 and your kids get $90,000. But if you live for 10 years, the nursing home has received the entire $100,000 and you've saved nothing. If you expect to live the "rule of halves" is a better strategy: You give $50,000 to your kids before entering the nursing home. You spend the $50,000 balance on your nursing home care, and when it's gone, you'll qualify for Medicaid benefits.