VA Benefits and the Medicaid Divestment Penalty Period

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Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

Note:  This blog was written prior to the publication of the Net Worth, Asset Transfers, and Income Exclusions for Needs-Based Benefits rule by the Veterans Affairs Department effective October 18, 2018.  As such, any strategies outlined in this blog post may no longer be advisable.  For more information, read our recent blog post on the subject, or read the full Federal Register document text here.

It’s common for Medicaid planners to coordinate VA and Medicaid benefits. While most applicants receive VA benefits prior to needing Medicaid, once they start receiving Medicaid benefits, they only collect $90 per month from the VA. While this is common knowledge for most, what you may not know is the way VA benefits are handled when a person receives a divestment penalty before they receive Medicaid benefits. While not covered in the M21, the Krause Agency believes, from our experience, that the VA benefits won’t have to be reduced throughout the penalty period.

The VA claimant would qualify for full VA benefits during the divestment penalty period due to the fact that his/her unreimbursed medical expenses (UME) would surpass their income. Medicaid won’t pay for the bill, however, until the expiration of the penalty period after the claimant applies for Medicaid. Because of this, the person may collect 100 percent of the VA benefit during the penalty period and, as such, this must be accounted for when Medicaid planning. The whole VA benefit counts toward figuring out the person’s total income when managing an Individual Gifting / MCA plan. That figure is used to calculate the plan.

The VA claimant could suffer a penalty at their annual review if the VA benefit is not considered when making the aforementioned calculations. If this amount isn’t counted for, the individual will receive too much income from the MCA which will critically affect the Income for VA Purposes (IVAP). If this occurs, one of two things will happen: either the claimant will have to either pay back all funds expended to them or they may lose their VA benefits altogether. It’s best to just count those benefits right away to avoid being subject to financial penalties.

Before assuming this process is as straightforward as it looks, there are a few challenges individuals should be prepared to anticipate. For example, trying to qualify for both VA and Medicaid benefits at the same time could lead to complications. This is due to the six- to eight-month average period after applying for VA benefits before the applicant begins receiving them. If the individual is expecting the benefit to come this must be taken into account when they conduct the Individual Gifting/MCA plan. Failing to do this will result in being over-resourced, which will have obvious negative effects on their benefits.

To negate this possible issue, the applicant will need to enter into a promissory note with the giftee or giftees, who will then need to advance the VA benefit amount every month until the individual starts receiving benefits from the A&A Program. The individual will then pay off the remaining balance on the promissory note after the receipt of the lump sum benefits.

The receipt of a large lump sum of assets can be another obstacle VA and Medicaid planners may encounter. Receipts from these large lump sums is an aspect of Medicaid planning. Let’s take a look at an example. If a Medicaid planner cures a previous gift, the individual’s VA eligibility will be disrupted if they’re already collecting VA benefits. Both the individual’s total resources and total income will be affected by the receipt of the asset. If this were to occur, VA benefits would probably purposely end. This way, the client may go forward with Medicaid planning and not have to worry about penalties affecting qualification for VA benefits.