Every so often there is a change in the Medicaid rules that makes life a little easier for older adults and their families. This is one of those moments.
A recent federal rule change, now formally adopted by New York State, has eliminated a long-standing and often frustrating requirement in the Medicaid eligibility process. For consumers planning for long-term care—particularly nursing home or chronic care Medicaid—this change can mean lower required contributions, more flexibility in retirement planning, and fewer bureaucratic hurdles.
As elder law attorneys, we recognize the confusion and stress that Medicaid planning can cause. This article is intended to explain, in plain English, what changed, why it matters, and how families may benefit.
The Old Rule: “You Must Apply for Everything First”
Historically, Medicaid applicants were required, as a condition of eligibility, to apply for any other benefit they might qualify for—even if doing so made their financial situation worse.
This included benefits such as Social Security retirement or disability benefits, Veterans’ benefits, Railroad Retirement benefits, unemployment insurance, retirement account distributions (including IRAs and pensions), and even waivers of U.S. savings bond restrictions.
The rule was based on the idea that Medicaid is the “payer of last resort.” In theory, this makes sense. In practice, it often forces older adults to artificially increase their income, resulting in higher monthly nursing home payments and less money for a healthy spouse or other essential needs.
The New Federal Rule: A Major Shift
The Centers for Medicare and Medicaid Services (CMS) has now eliminated this requirement under federal law (42 CFR § 435.608). New York State has formally implemented this change through updated guidance to local Departments of Social Services.
What This Means in Simple Terms
With one crucial exception (Medicare), Medicaid applicants are no longer required to apply for or maximize other benefits as a condition of eligibility. This applies to both applicants and current recipients.
What Has NOT Changed
It’s essential to be clear about what still applies:
- Medicare: Individuals must still apply for Medicare when required.
- Third-party health insurance: Medicaid can still require coordination with available health insurance.
- Transfer of asset rules: The five-year look-back and annuity transfer rules remain unchanged.
- Veterans’ referrals: Districts must still inform veterans about available benefits and make required referrals.
This is NOT a repeal of Medicaid rules—instead, it is a targeted and meaningful improvement.
The Most Important Change for Elder Law Planning: Retirement Accounts
From an elder law perspective, the most significant and welcome change involves retirement accounts.
Under the prior rules, if a Medicaid applicant owned a retirement account and was eligible to take payments, Medicaid required them to take the maximum periodic payment available. This was often calculated using a single life expectancy table, which produced higher monthly incomes, increased the applicant’s Net Available Monthly Income (NAMI), resulted in larger required payments to the nursing home, and reduced funds available to a community spouse. In many cases, this forced retirees to withdraw more than they needed or wanted, accelerating the depletion of retirement savings.
The New Rule: Standard RMDs Are Enough
Under the new guidance, the following changes are in place:
- Medicaid cannot require applicants or recipients to take the maximum payment.
- Standard Required Minimum Distributions (RMDs) may now be used.
- Failure to “maximize” payments cannot be used as a reason for denial or discontinuance.
- Retirement income is counted only if the account is in payout status.
The result of this change allows more assets to remain in the IRA, appreciating tax-free, and increases the IRA’s value to the beneficiaries by thousands of dollars.
How Retirement Accounts Are Now Treated
The new guidance clarifies how retirement funds are evaluated. If the retirement account is in Payout Status, the periodic payment is counted as monthly unearned income; the principal balance is not considered a resource; and the amount of the payment no longer needs to be maximized.
If the retirement account is not in Payout Status, the account balance is treated as a countable resource. The value represents what can currently be withdrawn (minus early withdrawal penalties), and income taxes are not deducted in determining this value.
If an individual later changes the payout status, Medicaid must adjust how the account is treated going forward.
Social Security: No Longer Mandatory to Apply
Another significant consumer-friendly change is the elimination of the requirement to apply for Social Security benefits as a condition of Medicaid eligibility. This includes Social Security Retirement, survivors’ benefits, and Social Security Disability Insurance (SSDI). While many individuals still choose to apply for Social Security because it makes sense for their situation, Medicaid can no longer force the issue. Importantly, cases can no longer be denied for “failure to apply for Social Security.”
Veterans’ Benefits: More Choice, Less Pressure
Veterans and surviving spouses often face pressure to apply for benefits they may not want, or that could complicate other planning goals. Under the new rule, Medicaid applicants are no longer required to apply for veterans’ cash benefits. Prior Medicaid policy mandating such applications has been rescinded.
Please note that required referrals and informational assistance for veterans remain in effect.
This change enables veterans to make informed, coordinated decisions with the guidance of legal and financial advisors, rather than reacting to rigid Medicaid requirements.
U.S. Savings Bonds: One Less Administrative Burden
Previously, Medicaid applicants who owned U.S. savings bonds were required to request a waiver of the bond’s minimum retention period as a condition of eligibility. That requirement has now been eliminated. This change reduces paperwork, delays, and stress for families already navigating a difficult time.
Elective Share: Relief for Surviving Spouses
In some instances, surviving spouses were required to exercise their elective share rights against a deceased spouse’s estate to qualify for Medicaid. That requirement has now been eliminated for couples not subject to a review of asset transfers. This is a significant change. It protects and respects estate planning intentions, allows decisions to be made with more dignity, and reduces legal pressure during a time of grief.
Retroactive Application: Important Timing Note
For changes related to the elimination of the requirement to pursue maximum retirement payments, retroactive redeterminations are limited to changes occurring on or after June 4, 2025. This timing detail matters, particularly for individuals already receiving Medicaid benefits.
Why This Matters for Families
From a practical standpoint, this rule change lowers monthly nursing home contributions in many cases, reduces the need for forced financial decisions, provides flexibility for the community spouse, and allows retirement savings to be preserved for a more extended period.
In short, it restores a measure of common sense and fairness to a system that has long been overly rigid.
A Final Word: Planning Still Matters
While this change is excellent news, some things haven’t changed. Medicaid remains a complex program with strict rules and severe consequences for errors. These new options don’t eliminate the need for proper planning. In fact, they make good elder law guidance even more valuable, because the choices are now more nuanced.
Finally, if you or a family member were previously denied Medicaid benefits under the old rules, you can reapply.
If you or a loved one are facing long-term care needs, this is a good moment to revisit your plan—or create one—before a crisis forces rushed decisions.
For once, Medicaid planning has become a little more humane. And that is something worth celebrating.
If you have questions about these changes, please call the office to discuss your situation.
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