Can a Nursing Home Take Your 401k?

The prospect of long-term care costs consuming a lifetime of savings is a concern for many families, especially regarding retirement accounts. While a nursing home cannot unilaterally seize a 401(k), the funds are not entirely shielded from the cost of care. When an individual enters a nursing home, they sign a contract agreeing to pay for their care. This creates a financial obligation that must be met using available assets, and a 401(k) is considered an asset. If a resident is paying privately, they are expected to use their resources, including liquidating retirement funds if necessary. The situation becomes more complex when a resident’s funds are depleted and they must turn to government assistance like Medicaid.

Direct Seizure Versus Payment Obligation

Under the federal Employee Retirement Income Security Act of 1974 (ERISA), funds held in an employer-sponsored plan like a 401(k) are protected from creditors. This means a nursing home cannot obtain a court order to garnish your 401(k) in the same way a creditor could for other types of debt. This legal shield, however, does not absolve a resident of their financial responsibility.

The relationship with a nursing home is based on a contract for services. Upon admission, a resident or their representative agrees to pay the facility’s rates, creating a private payment obligation. The nursing home expects payment from the resident’s total financial picture, which includes income and assets like savings, investments, and the balance of a 401(k). If payments cease, the facility can pursue legal action for breach of contract. The pressure to pay comes from the ongoing need for care and the contractual agreement, often necessitating voluntary withdrawals from the retirement account to satisfy the debt.

The Role of Your 401(k) in Medicaid Eligibility

When private funds are exhausted, many people turn to Medicaid to cover long-term care costs. Medicaid is a means-tested program with strict limits on the amount of assets an applicant can own, often as low as $2,000 for a single individual. Whether a 401(k) is counted toward this limit depends on its “payout status.”

A 401(k) that is not in payout status, where the owner is not taking regular distributions, is considered a “countable asset” by most state Medicaid agencies. The entire balance is viewed as a resource available to the applicant, and a large balance can render an applicant ineligible until the funds are spent down.

Once the 401(k) is in payout status, meaning the owner receives regular payments like Required Minimum Distributions (RMDs), the rules change. Many states no longer treat the account balance as a countable asset; instead, they treat the monthly distributions as income. While this solves the asset problem, it can create an income problem if the payments exceed Medicaid’s income limit.

For married couples, spousal impoverishment provisions may apply. The 401(k) of the “community spouse” (the one not in a nursing home) is often treated as a non-countable asset and is not required to be spent down. This protection is not uniform across all states, and in some jurisdictions, the community spouse’s retirement account may still be considered a resource. The specific treatment of these accounts is highly dependent on individual state regulations.

Navigating the Medicaid Spend-Down Requirement

If a 401(k) is deemed a countable asset, an individual must reduce its value to meet Medicaid’s asset limit, a process known as “spending down.” Medicaid implements a “look-back period,” usually 60 months, to review all financial transactions. Any assets transferred for less than fair market value or gifted during this period can result in a penalty, delaying Medicaid eligibility.

The spend-down process requires liquidating the countable 401(k) and using the funds for legitimate expenses. The most direct use is paying for nursing home care until the asset limit is reached. Other permissible expenses include:

• Paying off a mortgage or other outstanding debts
• Settling outstanding medical bills
• Making accessibility modifications to a home
• Purchasing a new vehicle

Another valid spend-down strategy is purchasing a prepaid and irrevocable funeral contract or burial plot for the applicant and their immediate family, as these are considered exempt assets. The money must be spent on goods or services for the benefit of the applicant or their spouse, and proper documentation must be kept for all expenditures. The process of cashing out a 401(k) will trigger income taxes on the withdrawn amount, which must be factored into the financial picture. This process must be handled carefully to avoid violating the look-back rule and incurring penalties.

Asset Protection Planning Instruments

For those planning in advance, certain financial and legal tools can help protect assets from long-term care costs. These instruments are designed to convert countable assets into a non-countable form or remove them from an individual’s estate for Medicaid purposes. Two common tools are Medicaid Compliant Annuities (MCAs) and Irrevocable Trusts.

A Medicaid Compliant Annuity is a specialized financial product that can be used to convert a lump-sum of cash, such as the proceeds from a liquidated 401(k), into a non-countable income stream. To be compliant, the annuity must be irrevocable, non-transferable, provide equal monthly payments, and name the state Medicaid agency as the remainder beneficiary. This strategy effectively transforms a countable asset into income, which can help an individual meet the asset test for eligibility, although the income itself will be counted and must be managed.

An Irrevocable Trust, specifically a Medicaid Asset Protection Trust (MAPT), is another planning tool. By transferring assets into a properly structured irrevocable trust, the grantor gives up control and ownership of those assets. After the five-year look-back period has passed, the assets held within the trust are no longer considered countable for Medicaid eligibility. A 401(k) must first be liquidated and taxed before the resulting cash can be placed in the trust well in advance of needing care.