COLLEGE SAVINGS 101

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Medicaid and 529s
by Joe Hurley, founder, Savingforcollege.com
Monday, April 23rd 2007

[Updated March 13, 2008]

Over six years ago I wrote an article (click HERE to read it) about 529 plans and Medicaid. The problem, in a nutshell, is that the revocability of a 529 plan makes it a countable asset in determining Medicaid eligibility. This can be an unpleasant surprise for grandparents, and their families, who with all good intentions may have put some money into grandparent-owned 529 plans many years ago only to now discover that the grandchildren's college funds must be used to pay nursing home bills or other catastrophic health care costs.

Medicaid is a federal program that gives considerable leeway to the states in developing their own rules and policies. In my article, I called on the states to enact exemptions for 529 accounts. One state has done just that. On March 29, 2007, Arkansas Governor Mike Beebe signed Senate Bill 822 into law, which provides, among other things, that accounts in the Arkansas 529 savings plan "shall be exempt for purposes of determining eligibility for Transitional Employment Assistance, Medicaid, and food stamps, provided that the federal rules for these programs permit such an exemption."

I can't say with certainty that federal rules permit such an exemption (the Arkansas legislators apparently are not sure, either), but I do know that the Arkansas amendment is a big step forward and in the best case will end up helping Arkansas families protect their college funds for their intended purpose. Other states should step up to the plate and enact similar legislation.

Until your state joins Arkansas in exempting 529 plans from the Medicaid eligibility formula, you should consider keeping the 529 account out of your name if there is a reasonable chance you will be applying for Medicaid in the future. The better approach might be for you - presuming you are the grandparent - to make contributions to a 529 account owned by one of the parents. Another alternative is to establish the 529 account as a "custodial" plan that transfers direct ownership to the beneficiary at the age of 18 or 21. A custodian cannot use the funds for his or her own benefit. Or you might even make your 529 irrevocable by installing an appropriately-drafted trust as account owner.

The Deficit Reduction Act of 2005 made Medicaid less available to gift-giving seniors by extending the "look-back" period from 36 months to 60 months. Even if you are not the owner of the 529 account, each contribution you make to it remains countable in the Medicaid determination for another 60 months. That's assuming, of course, that you do not live in Arkansas.

If you've already established 529 accounts in your own name, and seek to have those accounts excluded from Medicaid calculations down the road, consider transferring the account ownership to your children or grandchildren. You'll still have the 60-month look-back from the date of the ownership change, but at least you can get the clock ticking.

Finally, remember that making yourself eligible for public assistance programs like Medicaid may not be your goal. Under the new Medicaid rules, more seniors should be purchasing long-term care insurance instead of trying to give away their assets. Speak to your attorney and insurance professional about this issue.

» Claiming a state income tax deduction - 12/20/16
» Understanding 529 Investment Options - 12/13/16
» Should you open an UGMA/UTMA 529? - 02/06/08
» Understanding your state's slice of 529 fees - 12/13/07
» Planning for the new "kiddie tax" - 10/30/07
» Show All Archives

 

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