Using the “Name on the Check Rule” to Qualify for Medicaid with an IRA

paper check with fountain pen on top

The intricacies of Medicaid eligibility can make it difficult to formulate a clear-cut plan for your client’s specific situation. Fortunately, we offer a well-rounded set of strategies and solutions for a variety of different cases, including those that involve spending down trouble assets, such as an IRA. We want to explore one unique strategy concerning the “Name on the Check Rule,” which, when used successfully, can give your clients a significant planning advantage over simply cashing out their IRA.

The Basics of Medicaid Eligibility

Before digging too far into the “Name on the Check Rule,” let’s discuss some Medicaid basics. In order to qualify for Medicaid, applicants must meet certain non-financial and financial criteria, including asset and income parameters that vary based on their state of residence and marital status. While applicants are allowed to keep unlimited exempt assets, their countable assets must be under a certain limit.

To accelerate Medicaid eligibility, applicants can spend down their excess countable assets by paying off debts or purchasing or enhancing exempt assets. The problem? IRAs are considered countable assets in most states, so if your client owns an IRA, they would have to liquidate the account in order to spend down using these methods.

What are the Consequences of Liquidating an IRA?

When liquidating an IRA, the entire account becomes immediately taxable, and the account owner may be subject to a higher income tax bracket. Additionally, if the couple’s income exceeds certain amounts, their Social Security benefits may become taxable and/or their Medicare premiums may increase.

The solution? Use a Medicaid Compliant Annuity.

What is an IRA-Funded Medicaid Compliant Annuity?

A Medicaid Compliant Annuity (MCA) is a Single Premium Immediate Annuity (SPIA) that meets the requirements outlined in the Deficit Reduction Act of 2005 (DRA). MCAs are ideal for clients who are in a nursing home indefinitely, are paying out of pocket for care, and have excess countable assets. An MCA can be used as a spend-down tool in crisis Medicaid planning as it converts excess countable assets into an income stream that has zero cash value.

Most importantly, MCAs can be funded using an IRA. IRA funds transferred to an MCA are taxed as payments from the IRA-MCA are made to the payee within each calendar year, allowing your client to spread out any tax consequences over the term of the annuity. The two options for transferring IRA funds to an MCA are:

  1. 60-Day Rollover: The owner of the IRA contacts the IRA custodian directly and requests the liquidation of the account without withholding taxes. After receiving a check, the individual has 60 days to invest the funds into an MCA. This option can only occur once every 365 days.
  2. Trustee-to-Trustee Transfer: The owner of the IRA completes additional paperwork with their annuity application for the insurance company issuing the MCA to obtain the funds from the IRA custodian. There is no limit on the number of transfers an individual can execute.

What is the “Name on the Check Rule?”

The “Name on the Check Rule” is an MCA strategy that involves purchasing an IRA-MCA in the name of the institutionalized spouse but designating the community spouse as the payee and making the income payable only to them. In addition to eliminating the institutionalized spouse’s IRA as a countable asset, this strategy protects the MCA income from being part of the Medicaid co-pay, which consists of any income to the institutionalized spouse. The “Name on the Check Rule” utilizes the Medicaid guideline that income belongs to the individual whose name is on the check. More specifically, according to 42 U.S. Code § 1396r-5(b)(2)(A)(i), “If payment of income is made solely in the name of the institutionalized spouse or the community spouse, the income shall be considered available only to that respective spouse.”

Therefore, since the community spouse’s name is on the check for MCA payments, the income belongs only to them, while the tax liability of annuitizing the IRA still falls on the institutionalized spouse, who is the owner of the contract. Additionally, since the institutionalized spouse is the owner of the MCA, the community spouse may be named the primary beneficiary of the contract ahead of the state Medicaid agency.

Considerations When Using the “Name on the Check Rule”

  • The MCA term should use the full Medicaid life expectancy of the institutionalized spouse. This is the most conservative approach when utilizing this strategy. Plus, since the community spouse is the primary beneficiary, the chance of estate recovery on the annuity is very small.
  • Couples using this strategy should opt for paper checks and forego the electronic payment option offered by many insurance companies. With a physical, paper check, your client has additional evidence of the payee should an issue arise with the caseworker.
  • If the couple brings in a low monthly income and the community spouse is due a shift in income under MMNA rules, the “Name on the Check Rule” strategy is not necessary.
  • If the IRA has a small value, liquidating the account might be the best option, since tax consequences may be offset by medical expense deductions. (Note: Always consult with a tax expert before proceeding with this strategy.)

If you have a client that you think may benefit from using the “Name on the Check Rule,” please contact one of our Benefits Planners to learn more.