Prior to 1993, Medicaid law prevented persons with a disability to place his or her own money into a Special Needs Trust.
That privilege was reserved for donor funded trusts only and any Medicaid recipient that exceeded the asset cap limit would lose their benefits until the money was spent down.
In response to perceived exploitation of some policy gaps by people over 65 and their financial planners, Congress acted in 1993 to eliminate the possibility that people over 65 could plan and time their asset transfers into a Special Needs Trust so that they could leave assets to heirs while making themselves qualified for Medicaid long term care services.
The disability community, specifically those representing people with intellectual/developmental disabilities and mental illness, worked with Congress to ensure that the harsher new rules did not harm families' attempts to plan for the future of their children with severe disabilities. Advocates made the case that families had been engaging in planning to supplement SSI and Medicaid benefits because these benefit programs were unable to cover all of an individual's needs over a lifetime. Such supplementation is possible while a parent or other family member is living; families engaged in trust planning to enable such supplementation to continue beyond their own deaths.
As a result, Congress included several provisions in the Omnibus Budget Reconciliation Act of 1993 (ORBA '93). Harsh new financial penalties were established for people over 65 who engaged in certain transfers of assets prior to application for Medicaid benefits. To address the concerns of people with disabilities, several provisions were included as exceptions to the general prohibitions on transfers of assets and trusts. The exceptions are:
- The prohibition on transfers of assets does not apply to people who transfer assets, including a home, to a person with a disability under 65 or to a trust to benefit a person with a disability under 65. While there is no statutory limit on who is protected in making this transfer, it generally works to protect a parent or other family member who transfers funds to a person with a disability and who then needs Medicaid long term care services for him/herself. (Although important to members of The Arc, these transfers and trusts are not the subject of this policy statement.)
- Any individual with a disability under age 65 is exempted from the prohibition on transfers of assets and trust if he/she transfers his/her own funds into trust that meets certain criteria.
- If the trust is an individual trust (known as "(d)(4)(A)" trusts), the state Medicaid agency must be designated to receive the funds remaining in the trust at the beneficiary's death before any other remainder beneficiaries with receive funds.
- If the trust is established as an account in a qualifying pooled trust (known as "(d)(4)(C)" trusts), the pooled trust may retain a percentage of the funds remaining in the individual's account at the beneficiary's death and the state Medicaid agency must be designated to receive remainder funds.
- In both cases, other remainder beneficiaries are not entitled to receive funds unless the accumulated debt to Medicaid has been satisfied.
The Medicaid pay-back provision, as it is known, was established in lieu of an upper limit on the amount of funds that could be placed in a trust by an individual with disabilities for him/herself. In short, the Medicaid pay-back serves to satisfy policy-makers that the funds in the account are truly designed to supplement the needs of the beneficiary. This is especially important for those policy-makers who were concerned about the Medicaid program serving only those people who have low incomes and resources. After the death of the beneficiary, Medicaid programs are "paid back" any remaining funds up to the value of the services Medicaid has provided to the individual during life.
In final legislative negotiations on the provision, it was clearly intended that a percentage of the funds could remain in a pooled trust ((d)(4)(C)trust) before the Medicaid pay-back is calculated. The purpose of this provision was to acknowledge and accommodate a common practice of the pooled trusts in existence in 1993. At the time, pooled trusts often required up to 50 percent of the amount remaining at the beneficiary's death to remain with the pooled trust. The pooled trusts used these funds for two purposes: to assist in providing services to other pooled trust beneficiaries who outlived their actuarial life expectancy and to allow provision of advocacy services to people who were "indigent" or did not have funds in the pooled trust. These were the circumstances presented to Congress in 1993 which led to the language allowing payment to the pooled trust.
In 1999, Congress acted again to require that where beneficiaries of SSI have their own funds in trust, the trusts must meet the requirements of Medicaid law.
Visit the Social Security Program Operations Manual System (POMS) website to view the actual rules related to the use of special needs and pooled trusts.