Consider this scenario: Grandma is by no means “rich”, but decides to devote a significant portion of her accumulated assets to college savings accounts for her three young grandchildren. She believes strongly in the value of a college education, and knows that the parents of these children will face a financial hardship in paying for college by themselves.

A 529 plan is the way to go, she decides, taking comfort in the fact that it is run by the state, the assets are professionally-managed, and the tax treatment is favorable.

Fast forward ten years. The college savings accounts have performed well, and it looks like they will be the primary source of college funds for the one grandchild who is already in college and for the two that are fast approaching college age. Unfortunately, however, Grandma has suffered an unexpected illness, and has been admitted to a nursing home for long term care. The costs of this care will quickly deplete her financial resources, and her children are looking to Medicaid to pay the bills once her money is gone.

“Hold on,” says the state Medicaid agency. “You need to tap those college savings accounts to pay the nursing home bills before Grandma can become eligible for Medicaid.”

“What?”
“How can that be?”
“Those accounts were for the grandchildren, not for Grandma.”
“How will we pay for college now?”

Do Assets Like 529 Plans Affect Medicaid Eligibility?

This scenario is all too real for many families. One of the most remarkable features of a 529 plan, the owner’s ability to revoke the account, can also be a significant drawback for an individual who requires expensive nursing home care and does not have enough other resources to pay for it. Although the answer is not entirely clear, it appears that a 529 college savings account will be viewed as a “countable resource” in determining an individual’s financial eligibility for Medicaid. As long as the account owner can get her hands on the money by requesting a refund, it must be used before Medicaid kicks in.

And it can get even worse. The state can decide to delay Medicaid payments for withdrawals already taken to pay college bills, if those withdrawals were taken during the 60-month “look-back” period. (The Deficit Reduction Act of 2005 extended the look-back period from 36 months to 60 months.) So, in Grandma’s case, Medicaid is withheld for funds that she can no longer access because they have already been spent on the grandchild’s college education.

Although the Affordable Care Act was supposed to change the rules starting in 2014 to eliminate asset limits for means-tested public assistance, including Medicaid, in practice the impact of 529 plan assets on Medicaid eligibility depends on the state. There are exceptions when a Medicaid recipient needs long-term care in a nursing home or similar facility.

Although the Affordable Care Act was supposed to change the rules starting in 2014 to eliminate asset limits for means-tested public assistance, including Medicaid, in practice the impact of 529 plan assets on Medicaid eligibility depends on the state. There are exceptions when a Medicaid recipient needs long-term care in a nursing home or similar facility.

Also, with lawsuits attempting to overturn the Affordable Care Act, the asset limits might be restored if the court cases are successful in blocking the Affordable Care Act.

Although the Affordable Care Act was supposed to change the rules starting in 2014 to eliminate asset limits for means-tested public assistance, including Medicaid, in practice the impact of 529 plan assets on Medicaid eligibility depends on the state. There are exceptions when a Medicaid recipient needs long-term care in a nursing home or similar facility.

Also, with lawsuits attempting to overturn the Affordable Care Act, the asset limits might be restored if the court cases are successful in blocking the Affordable Care Act.

ABLE Accounts

Section 103 of the Achieving a Better Life Experience Act of 2014 (P.L. 113-295), which established ABLE accounts, excludes ABLE accounts from any determination of eligibility for means-tested federal programs, including Medicaid. ABLE account assets in excess of $100,000 may jeopardize eligibility for Supplemental Security Income (SSI), but there is no similar limit for Medicaid eligibility.

However, the state can seize ABLE account assets if the beneficiary dies to reimburse the state for medical assistance benefits provided by the state to the beneficiary.

Workarounds

If you are thinking about making substantial contributions to a 529 plan (or have already done so), and are concerned about long-term care, you should speak with your attorney (long-term care insurance should be considered) and other financial advisers (Medicaid rules will vary significantly from one state to the next).

You should also look at the specific provisions of the 529 plan that you are considering. Perhaps you will be more interested in a 529 plan that allows you to transfer account ownership to your child prior to any look-back date. Maybe you will decide to contribute to a 529 plan account owned by your child as opposed to a grandparent-owned 529 plan. Much will depend on your own particular situation. But your options should be explored.

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.

You may wish to purchase long-term care insurance instead of trying to qualify for public assistance programs like Medicaid by giving away your assets.

[Editor’s note: This article was originally published on May 17, 2001 and updated on October 16, 2020 by Mark Kantrowitz.]