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For workers with disabilities, saving for retirement can feel like trying to solve a Rubik's cube...

My younger son likes to play with his Rubik’s Cube. Yes, I mean that same multi-colored cubic puzzle that debuted in the seventies. So far, he can manage to get one side back to its desired unicolored state. This is, I believe, further than I ever got. According to this article, it took Erno Rubik himself (the inventor of the puzzle) a month to solve it initially because there are more than 43 quintillion possible arrangements, and only one of which is correct. Nearly half a century after its invention, there are those prodigies, who can solve it in mere seconds. But for the rest of us mortals, it remains a frustration that any attempt to complete a second side necessarily requires one to disrupt the side already completed. Many aspects of financial planning for people with disabilities feel as frustrating as trying to solve a Rubik’s Cube. Working out one dimension can frequently create challenges in another dimension.

Nowhere are these conflicting requirements more evident than in a situation, where a person with a disability (who has the capacity to work full-time simultaneously), requires support services that are funded by what are called “means-tested” benefits. To put it simply, pretty much all support services for adults with physical, mental/emotional, intellectual, or developmental disabilities are funded by Medicaid waivers. Waivers are state-by-state programs that permit the state to use Medicaid dollars to support people in their homes and in the community, “waiving” the requirement that those receiving support must live in a nursing facility. In order to access services that are funded by these waivers, a person must maintain eligibility for Medicaid. Traditional or “original” Medicaid (pre-Affordable Care Act) has very strict income and asset requirements for eligibility. I have discussed Medicaid income limits in a number of blogs (and will likely do so again) and how a worker, in particular, has options that will allow her/him to exceed these limits. In this post, I will devote to the “problem” of accessing Medicaid, when one has accumulated too many assets. “Too many” is defined as cash or cash equivalents, worth more than $2,000 if you are single or $3,000 if you are part of a couple. (One’s personal residence, vehicle, and household/business-use items are never countable assets for Medicaid). I should mention, too, that assets that contribute towards a Medicaid limit may also be termed “countable resources”.

The Rubik’s-Cubian problem is this. People who work successfully generally accumulate assets. In fact, one of the most visible and important benefits that full time workers obtain is access to their employer’s retirement plan, which offers them the chance to put aside money for their senior years, while also deferring taxes on that income and the subsequent income, generated from investing the funds.

People with disabilities, who work over a certain number of hours, also have access to their employer-sponsored retirement plans. Like their coworkers without disabilities, they will want to retire at some point, will have no earned income at that point, and will need to live off their savings. They may also need, both in their working present and in their post-retirement future, personal assistance services, which are paid for by their state’s Medicaid waivers. If you cannot save more than $2,000 in order to have services, how do you put away a pool of money to pay for your other retirement expenses, such as rent or mortgage, property taxes, utilities, food, insurance, transportation, out-of-pocket medical, and so forth?

Most states have more than one pathway to Medicaid eligibility. In states that expanded Medicaid under the Affordable Care Act (aka Obamacare), one can obtain Medicaid with the status of “low-income adult”. Unlike traditional Medicaid, ACA Medicaid has income limits, but no asset limits. However, the income limits, while higher than those of traditional Medicaid, are still quite low, generally around 138% of the Federal Poverty Level for the previous year. This would make that limit $17,600 from many applicants. Even at minimum wage, many full-time workers with disabilities would exceed this limit, making that path unusable.

Most states also have a Medicaid access route, specifically for people with disabilities who work. This version of Medicaid can accommodate people with countable income between (leaving aside one outlier), $24,000 and $60,000. Since most states also use a formula that only “counts” about ½ of a worker’s earned income, these programs are quite generous, when it comes to income eligibility. When it comes to asset eligibility, these programs have an even more important feature: in most (if not all) states, qualified retirement plans, such as 401(k), 403(b), and IRA accounts are not counted. And, though a few people stick to the same minimal $2,000 asset limit for non-retirement accounts, many are more realistic, permitting non-retirement account values between $10,000 and in excess of $20,000. “Aha,” you might think, as you twist into place that side of the financial planning Rubik’s Cube, problem solved. And in the present, you might be correct.

But financial planning is about the future, more than the present. When a person with a disability ceases to work, s/he ceases to be eligible for Medicaid as a worker with a disability. At the same time, s/he continues to need those Medicaid-funded services and, indeed, may need more of those services, once retired. Only now, the only eligibility route is the one with an asset limit of $2,000, and now, retirement assets count. One possibility is to begin systematic withdrawals from your retirement accounts. This will, effectively, convert it from an asset (or countable resource) into an income stream. The obvious problem with this solution (see how the Rubik’s Cube analogy works) is that, depending on the size of the person’s retirement account and her/his actuarial lifespan, this might generate a regular monthly payout that exceeds the various Medicaid income thresholds.

Another possible solution is to put the retirement assets into what is called a “first-party” or “self-settled” special needs trust. But this approach, too, generates several unwelcome twists. First, the trust cannot become the owner of the 401(k) or IRA itself. Therefore, the owner must withdraw the assets, pay the IRS the ordinary income due on the distribution, and then use the remaining, after-tax money to fund the trust. This means the owner will generate a large and premature tax expense. If the owner retires before 59 and a half, s/he may also face an early withdrawal penalty, although that penalty is waived for someone, who can meet the definition of “permanently and totally disabled”. Moreover, even if the person would prefer to work past 65, s/he would need to withdraw the qualified retirement funds earlier because, in most cases, a first-party special needs trust cannot be funded beyond the beneficiary’s age 65.

In some cases, an ABLE account may prove some use, but here, too, there are many unwanted challenges. First of all, under current law, an ABLE account cannot be opened by anyone, whose disability started after her/his age 26. Second, an ABLE account has a contribution limit of $15,000. If a person has a six-figure retirement account, s/he would be ineligible for Medicaid-funded services for as many years as it would take to move the funds from the retirement account to the ABLE. And since there is currently no provision to roll assets from a 401(k) or IRA to an ABLE, the assets would have to be withdrawn, the ordinary income tax to be paid, and the after-tax balance reinvested. Young workers with disabilities, who have only just begun to build their retirement savings, might opt to forego contributing to their employer-sponsored retirement plan and direct all their savings straight into an ABLE, since workers have the option to contribute an additional amount equal to $12,000 or the total of their work earnings, whichever is greater. This, too, has its drawbacks. ABLE contributions are after-tax, even though the resulting earnings grow tax-deferred. More importantly, few, if any, employers have a mechanism for “matching” funds that are contributed to an ABLE in the way they would with funds contributed by an employee to their 401(k).

When my son grew frustrated with solving his cube, he and his dad found a “professional” to guide them through via an online tutorial. As a worker with a disability, saving for your retirement frequently requires solving multiple equations simultaneously. An experienced professional can guide you through the process.

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