How to Use the “Name on the Check Rule” for Medicaid Planning with IRAs

When Medicaid planning, it can be difficult to develop a clear-cut plan that works for your client’s specific situation. Fortunately, we provide multiple different strategies and solutions designed for unique cases, even those involving the spend-down of trouble assets, such as an IRA. One of these strategies involves the “Name on the Check Rule,” which can provide a significant planning advantage for your clients who own IRAs.

Understanding Medicaid Eligibility

Before getting into the details of the “Name on the Check Rule,” let’s dig into some of the basics of Medicaid eligibility. To qualify for Medicaid, applicants must meet certain non-financial and financial requirements, including asset and income restrictions that differ based on their state of residence and marital status. While applicants are permitted to keep as many exempt assets as they want, their countable assets must be below a specific amount.

When looking to accelerate their Medicaid eligibility, applicants can spend down their excess countable assets by purchasing or enhancing exempt assets or paying off debts. Unfortunately, IRAs are considered countable assets in most states, and these spend-down methods would require your client to liquidate their IRA.

Consequences of IRA Liquidation

The problem with fully liquidating an IRA is the account immediately becomes taxable upon liquidation. The owner of the account may also be subject to a higher income tax bracket. Additionally, if a married couple’s income exceeds certain amounts, their Medicare premiums may increase and/or their Social Security benefits may become taxable. Rather than liquidating their IRA, your clients may utilize a Medicaid Compliant Annuity.

How to Fund a Medicaid Compliant Annuity with an IRA

A Medicaid Compliant Annuity (MCA) consists of a Single Premium Immediate Annuity (SPIA) that meets the requirements outlined in the Deficit Reduction Act of 2005 (DRA). An MCA is a great option for clients who are staying in a nursing home indefinitely, have excess countable assets, and are paying out of pocket for care. They can use this crisis planning tool to spend down excess assets and turn them into an income stream that has no cash value.

The best part? MCAs can be funded using an IRA. Plus, since IRA funds transferred to an MCA are taxed as payments are made from the annuity within each calendar year, your client can spread out the tax consequences over the term of the annuity. The options for transferring IRA funds to an MCA include:

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

The “Name on the Check Rule”

Once the IRA funds are transferred to the MCA, your client may benefit from utilizing the “Name on the Check Rule,” a strategy that involves purchasing an IRA-MCA in the name of the institutionalized spouse but designating the community spouse as the payee. Since the income is payable only to the community spouse, this strategy eliminates the IRA as a countable asset while also protecting the MCA income from being part of the Medicaid co-pay. The “Name on the Check Rule” involves the Medicaid guideline that specifies the income belongs to the individual whose name is on the check. 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.”

As the payee, the community spouse’s name is on the check for MCA payments, so that income belongs only to them. The tax liability of annuitizing the IRA remains with the institutionalized spouse since they are the owner of the account. Another benefit of purchasing an MCA with the institutionalized spouse’s IRA is the community spouse may be listed as the primary beneficiary of the contract ahead of the state Medicaid agency.

Advice for Using the “Name on the Check Rule”

• The IRA-MCA term should use the institutionalized spouse’s full Medicaid life expectancy. In addition to being the most conservative approach, this means the tax consequences are spread out as much as possible. Additionally, the chance of estate recovery on the annuity is small since the community spouse is the primary beneficiary.
• Rather than getting electronic payments, couples should opt for paper checks. A physical, paper check can serve as additional evidence of who the payee is should an issue arise with the caseworker.
• The “Name on the Check Rule” may not be necessary for couples who bring in a low monthly income, where the community spouse is due a shift in income under MMNA rules.
• Liquidating the account might be a better option for small-value IRAs. In these cases, tax consequences may be offset by medical expense deductions. (Note: Always consult with a tax expert before moving forward with this strategy.)

Do you have a client that you think might benefit from using the “Name on the Check Rule?” If so, please get in touch with one of our Benefits Planners to learn more.