Trustees: Don’t Give a Debit Card to a Beneficiary of a Medicaid Pay-back Trust!

On July 27, 2015, a Federal District Court in Pennsylvania (Elias v. Colvin, 2015 WL 4529877, M.D. Pa July 27, 2015) ruled that if an individual can direct the use of a trust’s corpus (i.e., principal) the trust should be deemed an available or countable resource to the individual for purposes of SSI (Supplemental Security Income) purposes.

 

In this case, the individual beneficiary was provided a debit card allowing her direct access to her first party Special Needs Trust (SNT) (i.e., a Medicaid Payback Trust).  This direct access ended when the trusteeship changed, perhaps indicating that a more enlightened Trustee took over management of the Trust.  The Social Security Administration (SSA) ruled that the debit card granted the beneficiary access to her trust and, therefore, caused the trust to be deemed an available resource to her, thus, causing a loss of her SSI, and a demand for repayment by the SSA for over $18,000 was asserted against the beneficiary.  The decision of the SSA was upheld on an appeal to the Federal District Court.  This case once again warns the Trustees of the major error caused when a beneficiary of a first party Medicaid payback trust is given a debit card tied to the trust account, allowing access to trust assets by the beneficiary. 

Curtis J. Shacklett, Esq.
Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com

Early Termination of Medicaid "Pay Back" Special Needs Trust Prior to the Death of the Beneficiary

The Social Security Administration has recently amended its “Program Operating Manual System” (POMS) to allow for the early termination of a (first party) special needs trust prior to the death of the beneficiary (a “first party” special needs trust is one established for a disabled person, funded with assets belonging to the disabled person). Prior rules only permitted the termination upon the death of the beneficiary. This change is a logical approach to handling situations where keeping the trust in place no longer makes sense. For example: (1) the trust has diminished in size to such an extent that keeping the trust active is not practical or is too expensive; (2) the beneficiary has overcome his/her disabling condition, and continued receipt of Medicaid benefits are no longer needed or desired; or (3) the trust is large enough and Medicaid benefits needed are minimal so that the strict rules of the trust along with Medicaid compliance creates too many constraints on the freedom of use of the trust assets. These types of situations might suggest the early termination of the SNT.

The POMS specific rules which must be included in the language of the trust in order to allow for early termination are as follows:

1. Upon early termination, (i.e., termination prior to the death of the beneficiary), the State(s), as primary assignee, receive all amounts remaining in the trust at the time of termination up to an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State Medicaid plan(s); and



2. Other than payment for those expenses listed in SI 01120.199F.3. [specifically, (i) taxes due from the trust to the State(s) or Federal government due to the termination of the trust and (ii) reasonable fees and administrative expenses associated with the termination of the trust], no entity other than the trust beneficiary may benefit from the early termination (i.e., after reimbursement to the State(s), all remaining funds are disbursed to the trust beneficiary; and
   


3. The early termination clause gives the power to terminate to someone other than the trust beneficiary.

Existing trusts might be amended with the consent of the Oklahoma Department of Human Services to include “early termination” language, if deemed appropriate.

Curtis J. Shacklett, Esq.
Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com

ARE RETIREMENT ACCOUNTS OF A SPECIAL NEEDS PERSON IGNORED BY SSA AND MEDICAID?

On several occasions I have been consulted by parents of adult disabled children who have worked and accumulated a retirement account via a 401k or 403b (provided by a non-profit employer) and have run afoul of SSA (Social Security Administration) or OKDHS (Oklahoma Department of Human Services-the state agency that determines Medicaid qualification) rules resulting in a disqualification of the receipt of continued benefits.

This is a trap for the unwary, since the rules allow for a person receiving SSI or Medicaid, to have a retirement account provided by his/her employer without the account’s existence, or the funds held therein (regardless of the amount), being deemed a “resource” to the worker. If deemed a “resource,” the retirement account might otherwise disqualify the worker from continued receipt of public benefits such as SSI and/or Medicaid. Parents, or guardians, or trustees assume that since the account was allowed and not deemed a resource for those years of employment, then such retirement accounts will always be deemed not a resource. Though this sounds logical, unfortunately, that is not the rule. There is some guidance (not as clear as we would like, sometimes) in the POMS (“Program Operating Manual System,” the SSA policy/rules providing guidance to the Social Security worker) as well as in the Oklahoma Administrative Code (“OAC”), the latter being promulgated by the Oklahoma Health Care Authority (the state’s Medicaid paying agency), dealing with retirement accounts and how they should be treated by those agencies when seeking to determine whether or not such retirement funds are no longer protected, i.e., no longer deemed a non-resource. The SSA rules (POMS) provide the following instructions:

“A retirement fund is not a resource if an individual must terminate employment in order to obtain any payment” (POMS-SI-01120.210 subsection C-1). However the same section in the POMS makes clear that if the individual worker could withdraw funds from the retirement account, that the value of the retirement fund is the amount of money that an individual can currently withdraw from the fund. This value is the amount left after the penalty deduction if any, but is not further reduced by any taxes that are then due based upon the withdrawal.

Similarly, the OAC contains the following “policy” provisions relevant to this issue:

“A retirement fund is not a countable resource if the applicant is currently working and must terminate employment in order to receive benefits” (OAC 317:35-5-41.7) [Emphasis added]

The policy for Medicaid benefits is worded very similarly to the SSI rule in the POMS. Thus the key appears to be that the retirement funds ARE treated as a resource for both SSI and Medicaid IF the individual, while working, has the right to withdraw funds from the retirement account for any reason permitted by the plan. Since many retirement plans do grant the employee the right to withdraw funds for certain reasons while remaining employed, it might go unnoticed to the employee or guardian, or trustee that such funds might be an excess “resource” to the individual thus hindering the continued receipt of either or both SSI and/or Medicaid.

CONCLUSION: It is thus important to remember for the benefit of a disabled worker who is receiving either or both, SSI and Medicaid, that upon termination of employment, steps should immediately be taken to withdraw and/or transfer the retirement account into a d4A special needs trust (sometimes called a Medicaid payback trust) OR withdraw the funds and find appropriate ways to spend down the funds to keep the child’s total funds and non-exempt assets at $2,000 or below. There may of course be income taxes due upon the withdrawal that will need to be taken into consideration, although frequently any tax withheld will be later received as a tax refund, depending of course on the worker’s tax circumstances. A guardian or trustee should inquire of the employer as to what exactly are the rights of withdrawal of the employee while the employee is still working. If the employee has a present right to withdraw from the retirement account, then it appears that the retirement fund would be treated as a resource thus creating the likelihood of disqualification of the employee from receipt of Medicaid and/or SSI.

If you find yourself facing this type of problem, please contact us as soon as possible so that appropriate steps can be taken in an attempt to preserve any SSI and/or Medicaid benefits.


Curtis J. Shacklett, OBA # 8101
Barber & Bartz
525 S. Main Street, Suite 800
Tulsa, Oklahoma 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
E-mail: cshacklett@barberbartz.com

TAXABLE INCOME VS. MEDICAID "INCOME" FROM A SPECIAL NEEDS TRUST

A common source of confusion for parents and trustees of a special needs trust is how distributions from a trust to or for the benefit of a disabled person will be treated by the IRS versus how will the Social Security Administration and the state Medicaid agency treat those very same distributions. Because not all distributions from a special needs trust are treated the same by those three agencies, trustees are often confused as to the consequences of making distributions. The following is some general guidance.

Basically, the general rule for IRS purposes is that actual distributions from the trust of taxable trust income to or for the benefit of the beneficiary will be treated as income to the beneficiary and reportable on his/her personal income tax return (if one is required) even if the distributions are not made directly to the beneficiary. (There may be certain exceptions too complex to discuss in this blog). However, only those distributions made in cash to the beneficiary, or sums paid to other persons, vendors, etc. for food, clothing, or shelter, will be treated as income for Medicaid purposes, and only those funds distributed for food, or shelter will be treated as income for Supplemental Security Income (SSI) purposes. Understanding this distinction is very important since excess “income” according to the SSI rules as well as Medicaid, may disqualify the disabled person from continuing to receive those public benefits. Thus, even if there is a lot of “income” from an IRS perspective, unless those distributions fall into the category of cash to the beneficiary, or are distributed for food, clothing or shelter needs, they will not constitute “income” for SSI or Medicaid purposes.

Feel free to contact us to discuss these details further.

Curtis J. Shacklett, Esq.