New 401(k) Rules May Impact Medicaid Determinations for Couples

On January 1, 2020, new federal rules went into effect relating to hardship distributions from 401(k)s and other ERISA plans.

The new rule —  26 CFR 1.401(k)-1(d)(3)(ii)(B) —  broadens and changes the circumstances under which a 401(k) plan must be made available to employees.       Previously, a company with a 401K plan had the discretion to limit the ability of an active employee under a certain age to obtain release of vested funds from the Plan. These withdrawals are referred to as “in-service distributions.” For example, a Plan could prohibit such distributions altogether, or might require that funds be accessed only by means of a loan with a definite short-term payback, or might restrict access until age 59-1/2, or might prohibit in-service distributions altogether.  Previously, for MLTSS/Medicaid purposes, such Plans may have been inaccessible (unavailable) and would not be treated as countable resources. This was critically important because to be eligible to apply for for such programs, the available resources of both spouses could not exceed a certain limit.

Under the rule changes, the funds will be accessible under the broad language of “need,” and it is expected that they will now be treated as available resources on Medicaid/MLTSS applications in New Jersey.

The new rule says that a hardship distribution:

• may not exceed the amount of an employee’s need (including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution),

• requires that the employee must have obtained other available, non-hardship distributions under the employer’s plans,

• requires that the employee must provide a representation he or she has insufficient cash or other liquid assets available to satisfy the financial need. A hardship distribution is impermissible if the plan administrator’s actual knowledge is contrary to that representation.

Also and most importantly, a hardship exception can be requested even if the employee takes no available loan under the plan first.  This is a very big change from the old rules of 401k’s.

It may seem counter-intuitive that 401k hardship rules which make it easier to obtain funds from a 401k  could be a bad thing, since people need to access funds for a variety of emergencies. For many state Medicaid programs, like New York, retirement accounts of a community spouse are not counted as an available resource, and therefore, hardship provisions in ERISA plans are irrelevant.

However, for States — such as New Jersey –that do consider retirement accounts as assets when processing Medicaid applications for long-term care like nursing home care,  there has typically been a secondary analysis of the Plan’s availability if the community spouse is still an active employee and the retirement account is his or her employer’s ERISA plan. Often, Plans under the older rules did not allow hardship distributions without the employee first borrowing under the plan. Plans requiring an employee to first borrow before allowing a distribution have not been considered available resources under the New Jersey appellate division case of Avery v. Union County Division of Social Services, A-2408-01T2 (May 15 2003), which was argued by Eugene Rosner. Borrowing was seen as a barrier to the spouse’s “right, authority and power” to convert the 401k or ERISA plan to cash.Fred Avery v UCBOSS

Now, companies will no longer be allowed to impose such impediments, including the borrowing requirements, in ERISA plans.

From a Medicaid perspective, these new rules will have punitive effects on working spouses of disabled people who need long-term care Medicaid benefits in states which don’t exclude the ERISA plans of employed community spouses. The employee spouse will be able to access just enough to pay for their ill spouse’s nursing home expenses — which could preclude eligibility for Medicaid — but will not be able to protect the retirement account for his or her own future economic security by accessing it for personal planning (such as annuity planning to achieve Medicaid eligibility).  In cases of catastrophic disability of a younger married person in his 40’s or 50’s whose spouse is employed — I think of all the clients I’ve had over the last 15 years who have had a sudden stroke or a degenerative disability or early-onset dementia —   this could result in the younger, employed spouse’s future financial security being wiped out.

There will always be options and remedies to help clients mitigate the financial liability and losses that could occur in these tragic situations. Each case will be unique. Call us for advice on what options would work best for your case  Everyone needs to be aware of this new rule and how it interacts with a potential applicant’s state’s Medicaid regulations.

This post is derived from Lauren Marinaro’s similar piece in this quarter’s NAELA News.

Call for advice on long-term care planning including crisis Medicaid eligibility planning  …. 732-382-6070

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