The Retirement Security Project Protecting Low-Income ...withdraw and spend the proceeds in their...

The Ret i rement Secur i ty Pro ject

The RetirementSecurity Project

Protecting Low-IncomeFamilies’Savings:How Retirement Accounts Are Treated in Means-TestedPrograms And Steps to RemoveBarriers to Retirement Saving

Nº 2005-6

The Retirement Security Project

is supported by

The Pew Charitable Trusts

in partnership with

Georgetown University's

Public Policy Institute and

the Brookings Institution.

Advisory Board

Bruce BartlettSenior Fellow, National Center forPolicy Analysis

Michael GraetzJustus S. Hotchkiss Professor of Law,Yale Law School

Daniel HalperinStanley S. Surrey Professor of Law,Harvard Law School

Nancy KilleferDirector, McKinsey & Co.

Robert RubinDirector, Chairman of the ExecutiveCommittee and Member of the Officeof the Chairman, Citigroup Inc.

John ShovenCharles R. Schwab Professor ofEconomics and Director, StanfordInstitute for Economic Policy Research,Stanford University

C. Eugene SteuerleSenior Fellow, The Urban Institute

Commonsensereforms,real worldresults

www.ret i rementsecur i t yprojec t .org

Table of Contents

Preface 1-2

Introduction 3-4

Types of RetirementSavings Accounts 5-7

Why is Retirement Savingby Low-Income FamiliesImportant? 7-8

How Should RetirementAssets be Treated inMeans-Tested Programs? 8-12

The Food StampProgram 12-16

Temporary Assistancefor Needy Families 16-18

Medicaid and the StateChildren’s HealthInsurance Program 18-24

Supplemental SecurityIncome 25-34

Conclusion 34-35

Appendix A 36-37

Appendix B 38-39

Appendix C 40

Endnotes 41-48

The Retirement Security Project • Protecting Low-Income Families’ Retirement Savings

1june 2005

Preface

The past 25 years have seen a dramaticshift in our nation’s pension system awayfrom defined benefit plans and towarddefined contribution accounts such as401(k)s and IRAs. Our public policies,however, have largely not been updatedto reflect this shift. The RetirementSecurity Project is dedicated to promotingcommon sense solutions to improve theretirement income prospects of millions ofAmerican workers. This RetirementSecurity Project Policy Brief, written by ateam of authors from the Center onBudget and Policy Priorities, addresses acritical impediment to retirement savingsamong low- and moderate-incomeworkers: the outdated asset tests inmeans-tested benefit programs.

The asset tests represent one of the mostglaring examples of how our laws andregulations have failed to keep pace withthe evolution from a pension systembased on defined benefit plans to one inwhich defined contribution accounts play

a much larger role. At the time the asset-test rules were developed, defined benefitplans were the norm and were generallydisregarded in applying these tests. Incontrast, defined contribution accountslike 401(k)s and IRAs generally were notexempted in part because they wereviewed as being supplemental retirementplans that could be drawn upon ifnecessary prior to retirement. People whoencountered hard times during theirworking years were expected to liquidatetheir 401(k) or IRA accounts and use theproceeds before qualifying for means-tested assistance.

Since then, the pension system hasshifted away from defined benefit plans,and defined contribution accounts havemoved from supplemental plans to thedominant form of saving for retirement ontop of Social Security. Yet the asset ruleshave largely not been updated, so manyprograms still exempt defined benefitplans while counting 401(k)-type

By Peter R. Orszag1


2 june 2005

accounts and IRAs. As a result, manylow- and moderate-income workers orfamilies who are contributing to retirementsavings accounts are disqualified fromstop-gap assistance programs such asthe Food Stamp Program, cash welfare,Medicaid, or Supplemental SecurityIncome. To quality for these programsduring periods of hardship, they must firstwithdraw and spend the proceeds in theirretirement accounts even if that depletestheir primary form of retirement savingoutside Social Security.

The asset tests thus act as a steepimplicit tax on retirement savings, sincethose who make the sacrifice to save forretirement through a defined contributionplan or IRA are penalized. Not only is theresult highly inequitable, but this policylikely also discourages saving forretirement among a portion of thepopulation that also is provided littleincentive to save under our tax laws.Furthermore, the treatment of retirementaccounts under the asset tests for theseprograms is often arbitrary and confusing.For example, this Policy Brief shows thatlow-income workers who roll a 401(k)over into an IRA when they switch jobs,as many financial planners suggest theyshould, can disqualify themselves fromthe Food Stamp Program.

A growing body of evidence suggeststhat making it easy for low- andmoderate-income families to save, andpresenting them with a clear and effectivefinancial incentive to do so, succeeds ingenerating significantly highercontributions to retirement accounts. For

example, participation rates among newemployees — even low-earning ones —rise substantially when 401(k) plans arereformed so that they are essentially opt-out instead of opt-in. In other words,modifying the retirement plan so that anew worker’s default option isparticipation in the plan significantlyincreases the likelihood that this newworker will contribute to the 401(k) plan.New research from the RetirementSecurity Project, based on a path-breaking randomized experiment,underscores that the combination of aclear and understandable match forsaving, easily accessible savings vehicles,the opportunity to use part of an incometax refund to save, and professionalassistance could generate a significantincrease in retirement saving participationand contributions, even among low- andmoderate-income households.

Yet if the above policy changes were madeto encourage saving among low- andmoderate-earners, the outdated assettests in means-tested benefit programswould penalize the households thatresponded by saving. This Policy Briefaddresses this problem by documentinghow the current rules work, explaining whythey are harmful, and pointing the way tocommon sense reforms that will bring ourretirement savings laws up-to-date. Theseissues are complicated but cruciallyimportant. We are grateful to the Centeron Budget and Policy Priorities for itsoutstanding work in wading through thecurrent complexities of the asset tests andcoming up with sensible options forreform.


3june 2005

Low-income families tend to save verylittle and accumulate few or no assets.They tend to have particularly low levelsof retirement savings. Even whencombined with Social Security benefits,their savings are often insufficient tomaintain their preretirement standard ofliving. Policymakers have expressed agoal of increasing retirement savingsamong those with low or moderateincomes, which would reduce povertyamong elderly households. Policymakersand program administrators can furtherthis important goal by modifying assetrules in means-tested benefit programs toremove penalties imposed on retirementsaving by low- and moderate-incomefamilies.

Many low-income families rely on means-tested programs at times during theirworking years—during temporary spells ofunemployment or at times when earningsare insufficient to make ends meet. Themajor means-tested benefit programs,including food stamps, cash welfareassistance, Medicaid, and SupplementalSecurity Income (SSI), either require orallow states to apply asset tests whendetermining eligibility. The asset tests mayforce households that rely on thesebenefits—or might rely on them in thefuture—to deplete modest retirementsavings before qualifying for benefits, evenwhen doing so would involve a financialpenalty. As currently designed, asset testsnot only penalize low-income savers butalso may actually discourage retirementsaving in the first place.

Asset tests in means-tested programs, ascurrently applied, thus constitute a barrier

to the development of retirement savingsamong the low-income population.Modifying or even eliminating these assettests, or disregarding savings inretirement accounts when applying thetests, would allow low-income families tobuild retirement savings without having toforgo means-tested benefits at timeswhen their incomes are low during theirworking years.

In addition to imposing what amounts to asteep implicit tax on saving, the assettests treat retirement saving in a confusingand seemingly arbitrary manner. Forexample, policymakers often encourageworkers to roll the balances in a 401(k)account into an IRA when they switchjobs, rather than cashing out the 401(k)balance. Yet in some cases, rolling the401(k) account into an IRA could disqualifya worker from means-tested benefits.

Fortunately, substantial progress can bemade to mitigate the penalty on savingand simplify the rules in a number ofmeans-tested programs. The lawgoverning employer-based retirementaccounts like 401(k) plans and individualaccounts like IRAs could be revised toexempt all such accounts from beingconsidered when a household applies forfederal means-tested benefits. Even inthe absence of such a change in law,states have flexibility to disregardretirement accounts in specific programs.In Medicaid, the State Children’s HealthInsurance Program (SCHIP), andprograms funded under the TemporaryAssistance for Needy Families (TANF)block grant, states have completediscretion over the treatment of assets,

Protecting Low-Income Families’ Retirement Savings:How Retirement Accounts Are Treated in Means-Tested Programs And Steps to Remove Barriers to Retirement Saving

By Zoë Neuberger, Robert Greenstein and Eileen P. Sweeney

Introduction

As currently

designed,

asset tests not

only penalize

low-income savers

but also may

actually discourage

retirement saving

in the first place.


4 june 2005

including retirement accounts. In the FoodStamp Program, states have the ability toliberalize asset rules within federalparameters and, for the time being, todisregard all retirement accounts if theyare disregarded in the state’s TANF cashassistance or family Medicaid program. Incontrast, the federal SSI program requiresthe application of an asset test underwhich most retirement accounts arecounted as assets.

The result of the different policies thatcurrently exist in these programs is thatsome retirement accounts are counted incertain programs but not in others, withthe exact treatment across programsdependent on the state.2 Somehouseholds that have saved for retirementcan retain those savings when they needto turn to means-tested benefits, whilesimilar families that have used a differentretirement saving vehicle or live in adifferent state may have to deplete their

retirement savings or forgo means-testedbenefits during a time of need. And,some households may be able to benefitfrom some programs but not others as aresult of the different rules acrossprograms. Fortunately, as a result of recentchanges in federal policies, states nowhave the flexibility to craft a more coherentset of asset rules that treat different kindsof retirement savings more fairly andexempt more of these savings from assettests, while simplifying programadministration.

This report explains the asset rules for theFood Stamp Program, TANF, Medicaid,SCHIP, and SSI, with emphasis on howvarious kinds of retirement accounts aretreated. The report highlights bothchanges at the federal level that wouldfacilitate retirement savings andopportunities for states to remove barriersto retirement saving under current law andto conform asset rules across programs.

Key Opportunities for States to Remove Barriers to Retirement Savingsby Modifying Asset Rules in Means-Tested Benefit Programs

• Align rules regarding retirement accounts in Medicaid (for nonelderlyhouseholds) and TANF cash assistance to the Food Stamp Program rules, bynot counting 401(k) accounts and similar employer-based plans as assetsunder the Medicaid and TANF programs.

• Similarly, disregard IRAs in Medicaid and TANF cash assistance, as well as inthe Food Stamp Program, to the extent that forthcoming food stamp rulesallow states to do so, so that families with children and people with disabilitieswho have an IRA, including those who do not have access to an employer-based retirement plan and those who must roll over funds from an employer-based plan into an IRA when they are laid off or change employers, will nothave to liquidate retirement savings to obtain means-tested benefits during aperiod of need.

• Eliminate the Medicaid asset test for families with children.

States now have the

flexibility to craft a

more coherent set

of asset rules.

5june 2005

Types of Retirement SavingsAccounts

In the United States, there are three mainsources of retirement income: incomefrom Social Security benefits, incomefrom employer-based retirement plans,and individual savings. Social Security isintended to provide the foundation ofretirement security, but is not intended tobe sufficient by itself to support people inretirement. Thus, employer-basedretirement plans and individual savingsare important sources of retirementincome. Such retirement savings are thefocus of this report. This section providesa description of the main types ofretirement savings vehicles.3

Employer-Based Plans

Employer-based retirement savings plansfall into two broad categories: definedbenefit plans and defined contributionplans.4 In any given year, about half ofthe workforce is covered by an employer-based plan of one of these types,although coverage varies greatlydepending on the type of employer (aswell as on the age, race, and educationlevel of the employee).5

Defined benefit plans provide a specificbenefit based on an employee’s earningsrecord; the benefit provided to the retireeis not affected by the rate of return onthe funds invested in the plan. Thus, theemployer, rather than the employee,bears the investment risk. Over the lastthree decades, coverage by definedbenefit plans has shrunk dramatically—from 39 percent of all private-sectoremployees in 1975 to 21 percent in1997—while participation in definedcontribution plans has grown.6

Contributions to defined benefit plans aregenerally held by the employer in a single

account—rather than by theemployees—and generally are notcounted as an asset when a householdapplies for means-tested benefits.

Defined contribution plans do notpromise a certain benefit level duringretirement. The amount of paymentsupon retirement depends instead on thelevel of contributions made to anindividual’s account and the rate of returnon the funds invested. With these plans,employees bear the investment risk. Themost common defined contribution plansallow employees to make tax-deferredcontributions. (That is, the employeedoes not pay income tax on the earningscontributed to the retirement savings planuntil the funds are withdrawn.) Theamount that employees can contribute to401(k)s and similar plans each year iscapped, but at such a high level that thecap does not affect the vast majority ofworkers.7 Often both employers andemployees make contributions to theseplans. For the purposes of means-testedprograms, no distinction is made basedon the source of the contribution.Contributions to defined contributionplans are generally held in an account inthe employee’s name, and their impacton eligibility for means-tested benefitsdepends on the rules of the particularbenefit program. (The rules of variousprograms are described in the followingsections of this report.) The mostcommon defined contribution plansfollow a similar design but have differentnames depending on the nature of theemployer:

• 401(k) plans are offered by privatecompanies;

• 403(b) plans are offered by not-for-profit organizations and publiceducation agencies;


• 457 plans are offered by state andlocal governments; and

• Savings Incentive Match Plans forEmployees (SIMPLEs) are offered bysmall private-sector employers andhave some features similar to individualsaving plans, which are described inthe next section.

Individual Savings

The most common individual (asdistinguished from employer-based)retirement savings vehicle is the individualretirement account (IRA), which is aretirement savings account that receivesspecial tax treatment. Anyone who hasearned income (or whose spouse hasearned income) may have an IRA. Onlyhouseholds that have enough income topay income taxes today or will havesufficient income to owe income taxes inthe future can benefit from the special taxtreatment. In 1997, only 2 percent ofworkers with adjusted gross income (fortax purposes) below $20,000 participatedin an IRA.8

IRA contributions are limited to $4,000 in2005. The limit will increase to $5,000 by2008 and will be indexed to inflation afterthat.9 There are two main kinds of IRAs:traditional IRAs and Roth IRAs. TraditionalIRAs offer front-loaded tax benefits—thatis, contributions are tax deductible, andthe interest earned on the account is nottaxed when the interest accrues—butwithdrawals from IRAs are taxed. RothIRAs, by contrast, offer back-loaded taxbenefits—contributions are notdeductible, but withdrawals are tax free.10

The general principle that applies to bothtypes of IRAs is that earnings placed in anIRA are taxed either at the time they areearned or at the time they are withdrawnfrom the IRA, but not at both times, andinterest accumulates within the accounttax free. Whether a traditional IRA or aRoth IRA offers greater benefits to aparticular individual depends on theindividual’s earnings pattern, as well as onfeatures of the tax code during theindividual’s lifetime. Roth IRAs are typicallymore advantageous for low-income

people who do not currently earn enoughto owe income tax but may earn moreand owe income tax in the future. Undertraditional IRAs, withdrawals by someonewho is less than 591/2 years old aresubject to a penalty except in certaincircumstances, and withdrawals mustbegin by age 701/2. The rules differsomewhat under Roth IRAs.

Two other kinds of individual retirementsavings vehicles are Simplified EmployerPension Plans and Keogh plans. SEPsare IRA-like accounts into whichemployers make direct deposits. A Keoghplan is a tax-deferred retirement savingsplan for people who are self-employed.While it may resemble an IRA in somerespects, the Keogh is essentially anemployer-sponsored plan (treating theself-employed person as employer andemployee). Accordingly, the contributionlimit can be the much higher limit thatapplies to employer-sponsored plans,rather than the IRA limit. Contributions toa Keogh plan are fully deductible forincome tax purposes at the time they aremade, and interest accumulates tax free;taxes are paid when withdrawals aremade. As with other employer-sponsoredplans and IRAs, withdrawals by someonewho is less than 591/2 years old aresubject to a penalty except in certaincircumstances, and withdrawals generallymust begin by age 701/2.

Preretirement Withdrawals

One consideration sometimes used indetermining whether retirement accountsshould be counted when determiningeligibility for means-tested programs ishow accessible such accounts are andthe penalties for early withdrawals. Forthe general population, 401(k)s are lessaccessible than IRAs, but for low-incomehouseholds the accessibility of the twotypes of accounts is not very different inpractice. For low-income households, therelatively modest differences in theconditions under which 401(k) plans andIRAs may be accessed would not seemto warrant different treatment whendetermining eligibility for means-testedbenefits.


6 june 2005

7june 2005The Retirement Security Project • Protecting Low-Income Families’ Retirement Savings

As a general rule, households maywithdraw funds from their IRAs at anytime, subject to potential penalties andtaxes, while 401(k)s have morerestrictions on withdrawals. There areseveral circumstances, however, underwhich households can make earlywithdrawals from their 401(k) accounts.Many individuals with a 401(k) who haveincome low enough to participate in ameans-tested program can qualify tomake these early withdrawals. As aresult, for low-income households, theaccessibility of 401(k)s is not verydifferent from the accessibility of IRAs.

Although most 401(k) participants maynot withdraw funds from their accounts,certain categories of individuals mayaccess their 401(k) accounts withoutpenalties, including, but not limited to thefollowing:11

• people with disabilities;• individuals over age 591/2; and• individuals over age 55 who have left

or lost their jobs.

Certain other individuals are permitted tomake withdrawals from their 401(k) plansbut are subject to a penalty of 10 percentof the taxable amount they withdraw.Individuals who are no longer employedby the organization that set up the 401(k)plan may withdraw funds from theiraccount (subject to the 10 percentpenalty if they are under age 55 whentheir employment terminates). Under thisprovision, many low-income householdshave access to the funds in their 401(k)plans. Other individuals who face financialhardship also may access their accounts,subject to the penalty in many cases.12

Why Is Retirement Saving byLow-Income Families Important?

Low saving rates by poor families havebeen consistently documented.13 Low-income families tend to have inadequateretirement savings and are much lesslikely to participate in employer-based orindividual tax-preferred retirement savingsplans than higher-income households. In 1997, among households with

adjusted gross income below $20,000,only 22 percent participated in anemployer-provided retirement saving planor held an individual retirement account,whereas 51 percent of all employeessaved for retirement using suchvehicles.14 Among certain groups,participation in employer-based plans iseven lower. For example, in 1999, only 6percent of employees earning less than$10,000, 14 percent of part-timeemployees, and 18 percent of employeeswith less than a high school diplomawere covered by an employer-basedretirement plan.15 Across all groups,about three-quarters of private-sectoremployees who were not coveredworked for an employer who did not offerretirement plans.16

Moreover, when low-income householdsdo participate in such retirement savingplans, they tend to contribute a smallershare of their income than higher-incomehouseholds. For example, in 1992, theaverage contribution rate to 401(k) plansfor employees with household incomebelow $25,000 was 3.7 percent of pay,whereas employees with householdincome exceeding $75,000 contributedan average of 7.9 percent of pay.17

In recent years, policymakers haveexpressed growing interest in raisingretirement saving by low-incomehouseholds. There are four main reasonsto increase retirement saving rates bylow-income households: to reduceelderly poverty and improve the standardof living of low-income seniors, toincrease national saving rates, to reducethe numbers of individuals who need torely upon means-tested programs afterthey retire, and to reduce the largeinequities in government subsidies forretirement saving.

Increasing saving by low-incomehouseholds would increase the numberof seniors who can maintain an adequatestandard of living. For many very low-income households, Social Securitybenefits do not provide even a poverty-level income. Allowing low-incomefamilies to accumulate retirement savings

There are four main

reasons to increase

retirement saving

rates by low-income

households: to

reduce elderly

poverty and improve

the standard of

living of low-income

seniors, to increase

national saving

rates, to reduce the

numbers of

individuals who

need to rely upon

means-tested

programs after they

retire, and to reduce

the large inequities

in government

subsidies for

retirement saving.


8 june 2005

to supplement their Social Securitybenefits during retirement would reducepoverty among elderly households. Evenfamilies with moderate incomes typicallydo not save enough for retirement. In2001, the median balance in employer-based retirement savings plans and IRAsamong families on the verge of retirementwas only $10,400, which would beinsufficient to maintain the family’sstandard of living for more than a fewyears in retirement.18

In addition to the benefits to seniors,broader economic benefits would resultfrom increasing retirement saving ratesamong low-income households. One ofthe nation’s economic imperatives is toraise the national saving rate to preparefor the retirement of the baby-boomgeneration. To increase savings,government policies must not simplycause individuals to shift assets from oneform to another, but must generateadditional contributions. Since low- andmoderate-income families are less likelyto have assets to shift, policies aimed atencouraging saving by such families aremore likely to result in additional saving.

Increased retirement savings by low-income households may also reduce the numbers of individuals who need torely upon means-tested programs after they retire. In Medicaid, forexample, it costs much more to insurethe average elderly person than theaverage non-elderly one, and allowingpeople to accumulate retirement savingsduring working years (even while receivingMedicaid) could reduce or eliminate somepeople's need for Medicaid in retirement.

Increasing retirement savings is animportant-enough goal that significantfederal funds (about $150 billion annuallyin tax benefits) are devoted to subsidizingsuch saving, primarily through the specialtax treatment of employer-basedretirement plans and IRAs.19 These taxsubsidies disproportionately benefit more-affluent individuals. In 2004, about 70percent of the tax benefits from newcontributions to 401(k) plans accrued tothe highest-income 20 percent of tax filing

units, and more than half of the taxbenefits went to the top 10 percent of taxfilers.20 Modifying the rules governing howretirement accounts are treated in means-tested programs to allow and encouragelow-income households to build someretirement savings would modestly reducethe large inequities in the distribution offederal support for retirement saving.

How Should Retirement AssetsBe Treated in Means-TestedPrograms?

Policymakers have expressed interest inincreasing retirement saving by low-income households. By excludingemployer-based retirement savingsaccounts such as 401(k)s and individualretirement savings accounts like IRAsfrom the asset tests in means-testedbenefit programs, policymakers couldremove a potentially steep burdenimposed on saving by low-incomefamilies. Policies that consider onlywhether a retirement account is in someway accessible to an applicant—and thatcount defined contribution pension planswhile excluding defined benefit pensionplans, as some means-tested programsdo—undermine the broader goal ofencouraging low- and moderate-incomefamilies to save adequately for retirement.Such policies also are inequitable, since ahousehold is effectively discriminatedagainst if its employer has one type ofpension plan (a defined contribution plan)rather than another type of plan (adefined benefit plan). Finally, the currentrules are often difficult to administer andunderstand. The rules could besubstantially simplified while also reducingthe extent to which they penalizeretirement saving.

The empirical research examining theimpact of asset tests on saving, while notconclusive, suggests that raising oreliminating asset tests could increasesaving by low-income households.21 Evenif liberalizing the asset rules alone is notsufficient to change saving behavior on abroad scale, it is an important precursor toother policies and programs designed toincrease saving by low-income families.


Low-income families are unlikely to savemore if doing so jeopardizes access tomeans-tested benefits that might be crucialto them during a period of hardship.

Congress could enact legislation providingthat funds a person has set aside in aretirement account will not be counted indetermining eligibility for federally-fundedmeans-tested benefits. There is precedentfor including such a cross-programprovision in the tax code; the part of the taxcode related to the Earned Income TaxCredit includes a provision regarding thetreatment of the EITC by other means-tested programs.22 Congress included asimilar provision in the 2001 tax-cutlegislation, with regard to treatment of thechild tax credit by means-tested programs.Provisions that exclude certain federally-funded Individual Development Accountsfrom being counted as assets in federalmeans-tested programs provide anotherprecedent.23

Inclusion of such a provision in federal lawcould have salutary effects and wouldemphasize the importance Congressplaces on encouraging individual saving byall Americans, including those with lowincomes. Such an approach also wouldsimplify program administration andeliminate the confusion that can exist whenprograms have different rules.

In the absence of such a blanket disregardfor retirement accounts, different optionsare available to states in different programs,as explained in subsequent sections of thisreport. There are three main ways tomodify means-tested programs to reducebarriers to retirement saving:

• Eliminate the asset test and consideronly income when determining eligibility;

• Raise the asset limit; or

• Disregard retirement savings accounts orsome portion of them.

In situations in which a state is unable orunwilling to adopt one of those policies, itmight at least disregard certain types ofretirement accounts.

Trade-Offs in Designing Asset Rules

When designing asset policies for means-tested benefit programs, policymakersface trade-offs. Raising or eliminatingasset limits allows low-income familiesthat have assets to keep them whilerelying on public benefits to weather aperiod of economic hardship. Liberalizingasset tests also should encourage newsaving by some low-income families. Atthe same time, eliminating asset limits orsubstantially increasing the asset limitsarguably might somewhat lessen publicsupport for the programs, although thereis no sign of a lessening of public supportas a result of the changes that a numberof states have made in recent years toeliminate or liberalize asset tests inMedicaid and food stamps.

There also are trade-offs in terms ofadministrative complexity. From a policystandpoint, it might make sense to treatparticular kinds of assets differently—depending on factors such as howaccessible the asset is, what it may beused for, and the penalties for use. Themore nuanced the policy, however, themore difficult it is to administer. With acomplicated policy, more questions haveto be asked in the application process,caseworkers have to understand moreabout different types of saving vehicles,and households applying for benefits mayhave to provide more documentation evenif there are relatively few instances inwhich the assets ultimately affect eligibility.

As the sections of this report that followillustrate, there is a good deal ofcomplexity in the asset rules of variousmeans-tested programs. Simplifying thetreatment of different kinds of assetswithin programs and across programs isan important goal, although administrativesimplicity does not outweigh all otherconsiderations.

There also is a cost associated withraising or eliminating asset tests; doing somakes more people eligible for benefits.The cost to the federal governmentshould be considered in the context ofother federal policies related to retirement


10 june 2005

saving. As described in the previoussection, federal expenditures to promoteretirement savings are heavily skewedtoward higher-income households. Inaddition, if households can receivemeans-tested benefits when theyexperience temporary periods of hardshipduring their working years and can do sowithout having to liquidate and consumetheir retirement funds, then fewerhouseholds should need to rely onmeans-tested benefits in retirement.

The cost to states of raising or eliminatingasset tests depends on the fundingstructure of the means-tested program.Increases in food stamp costs have verylimited implications for states becausebenefits are federally funded. (States coverhalf of administrative costs.) In Medicaid,in which states pay an average of 43percent of benefit costs, increases inprogram costs that result from changes inasset rules have more significant budgetimplications. If more people receive TANFcash assistance, there are no costs to thefederal government because TANF isfunded by a block grant, with fixedamounts of federal funding provided. Tofund an increase in cash assistance costs,states would need either to reduce TANFfunding in another area or increase statefunding for TANF-related programs. (Theother major programs discussed in thisreport—the Food Stamp Program,Medicaid, and SSI—all operate asentitlements, which means that makingnew people eligible for benefits does notmean others will be turned away.)

The Treatment of Retirement Savings

The treatment of retirement accountsunder the asset tests in means-testedprograms poses a unique set of policydilemmas. Retirement saving vehiclesare less accessible than various otherforms of saving, such as a checkingaccount. When they are accessible,there often are penalties for withdrawingfunds before retirement. In addition,different kinds of retirement accountsoften are treated differently under theprograms’ asset rules, creating inequities

depending on the kind of retirementsaving plan that an applicant’s employerprovides.

Defined Benefit and Defined ContributionEmployer-Based Plans

Certain retirement plans—known asdefined benefit plans—generally are notcounted as assets in eligibilitydeterminations for means-testedprograms. As explained in the previoussection, these plans offer a specifiedbenefit to the employee upon retirementregardless of the investment return on thefunds. The employer holds the funds, andthere is no individual account for aspecific employee.

In many means-tested programs, thegeneral premise underlying asset rules,which were developed in the early 1970s,is that funds accessible to the applicantshould be counted because they could beused for daily expenses, but inaccessiblefunds should not be counted. At the timethese rules were developed, defined benefitretirement plans were the norm, soemployer-based retirement plans weregenerally disregarded when familiesneeded to turn to means-tested benefitsduring their working years. Since the1970s, however, employer-basedretirement plans have shifted away fromthe defined benefit model, and definedcontribution plans have become the norm.Because under defined contribution plans,there is an account in the employee’s nameand the employee can access that accountunder certain circumstances (althoughoften with a penalty), means-tested pro-grams often count these plans as an asset.

This discrepancy in the treatment ofdefined benefit plans and definedcontribution plans disadvantages themany employees who do not have accessto defined benefit plans. The discrepancyexists because the retirement savingslandscape has shifted over the past thirtyyears while the treatment of retirementsavings in the asset tests of means-testedprograms has not followed suit. Treatingdefined benefit and defined contribution


plans similarly would be much moreequitable and would remove a significantbarrier to increasing retirement saving bylow-income working households.

In fact, drawing a clear distinctionbetween defined benefit and definedcontribution plans for such purposesmakes less and less sense over time.Hybrid plan designs have developed, andeach type of plan (defined benefit anddefined contribution) has been evolving toresemble the other more closely. Inparticular, traditional defined benefit planshave been converted in large numbers tohybrid “cash balance” and “pensionequity” formats that blend elements of thedefined benefit and defined contributionmodels. These plans look and functionmuch like defined contribution plans fromthe standpoint of the employee whilegiving employers the flexibility associatedwith defined benefit–type funding rules.One important way in which definedbenefit plans have come to resembledefined contribution plans is that theyhave increasingly replaced other forms ofpayout with lump-sum distributions—a single cash payment available when theindividual leaves the employer thatsponsors the plan (or, in the case ofmany traditional defined benefit plans,when the individual leaves the plansponsor and reaches an early retirementage such as 55).

Employer-Based Plans and IndividualSaving Plans

In addition, some programs, includingthe Food Stamp Program, generallydisregard employer-based retirementsaving plans—including definedcontribution plans—but count individualsaving accounts like IRAs. This, too, isinequitable, since low- and moderate-income households that use IRAs are likelyto be households that canno use anemployer-based retirement plan becausetheir employers do not offer one.

Moreover, this distinction may reflect amisperception that IRAs are moreaccessible than employer-based plans for

low-income households. As explained inthe previous section, for low-incomehouseholds, access to each kind ofsaving plan is not very different.

Finally, when an individual with a 401(k)plan or other defined contribution planceases to work for the employer whosponsors the plan (most likely because theemployee has changed jobs or been laidoff), the individual sometimes mustwithdraw his or her retirement funds.24 Toretain the funds in a tax-favored retirementsaving vehicle, the employee must “rollover” the funds into an IRA (unless theemployee is permitted to transfer thefunds to his or her new employer’sretirement plan). A large share of IRAaccounts are, in fact, simply 401(k)accounts that have been rolled over. It isinequitable for a means-tested program toexclude funds in a 401(k) account while anindividual works for a particular employer,but to change course and count the samefunds simply because the low-wageworker has changed jobs or been laid offand had to roll over the funds into an IRA.

Savings after Retirement

Another consideration is whether retirementaccounts should be treated differently oncean individual has reached retirement age. Asmall number of individuals purchase alifetime annuity upon retirement, in whichcase there is no longer an account in theretiree’s name. Means-tested programsgenerally do not count lifetime annuities asassets.25 (The monthly annuity paymentsthat are made are generally consideredincome.) Other retirees do not purchase alifetime annuity and instead withdraw fundsperiodically from their accounts on either aregular schedule (such as monthly over tenyears) or from time to time on an ad hocbasis. In those cases, the funds remainingin such retirement accounts are treated inaccordance with the programs’ asset rules.

From the standpoint of avoidingdisqualification from a means-testedbenefit program because of theprogram’s asset rules, buying a lifetimeannuity thus may be advantageous. A


12 june 2005

lifetime annuity also ensures thatretirement savings do not run out beforean individual dies.

Yet for many low-income retirees, buyinga lifetime annuity is not financiallybeneficial. A lifetime annuity is generallynot a wise financial investment forsomeone who does not expect to reachthe average life expectancy for a retiree,and low-income people tend to haveshorter-than-average life expectancy.

In particular, if an average earnerpurchased an annuity, the value of theretirement savings used to make thepurchase would be reduced by about15 percent; many annuity carriers havetraditionally used 15 to 20 percent of theindividual’s savings to cover the risk thecompany incurs that the individual willlive longer than average (and hencerequire the company to pay out moreover time) and to cover the company’sadministrative costs and profits.26 Forlow-income workers, who tend to haveshorter life expectancies than the averageworker, the reduction would be evenlarger. Low-income households shouldnot be forced to choose between buyingan annuity that would not be wise forthem financially and being eligible formeans-tested benefits that they need.

How Much Retirement SavingsAre Needed?

The amount of savings needed to supporta former earner during retirement is largerthan the amount that might be neededearlier in the life cycle when the individualis still working and drawing a wage orsalary. One very limited measure of self-sufficiency while a household is still ofworking age is whether a household hassufficient net worth to cover poverty-levelconsumption needs for three months.27

In 1997, a one-person household wouldhave needed a net worth of $2,500 tocover poverty-level consumption needs forthree months, and larger householdswould have needed more.28

As a result, households that are subjectto a $2,000 asset limit, a common limit in

food stamps and other programs, areprevented from accumulating a cushionto sustain a minimal standard of living foreven a brief period. Raising the asset limitby a few thousand dollars would allowmost low-income families to accumulatethis level of savings. (Note: The foodstamp asset limit was set at $1,750 whenthe Food Stamp Act was enacted in 1977and raised to $2,000 in 1985. It has notbeen adjusted since. If the asset limit hadkept pace with inflation so it had thesame value today as in 1977, it wouldnow be over $5,400.)

In contrast, $5,000 or even $10,000 insavings is clearly insufficient to financea family’s needs over an extended period,such as over a worker’s retirement.For retirees whose earnings wereconsistently low throughout theircareers, Social Security paymentsreplace about 56 percent of priorearnings if benefits are claimed at age65.29 If such a retiree sought to usesavings to make up the differencebetween Social Security and 70 percentof his or her former earnings level, whichwould put the retiree just over the povertyline, the retiree would need about $2,000in additional income from savings foreach year of retirement to make up thedifference.30 A retiree who earned lowwages throughout his or her career andhad an average life expectancy wouldneed approximately $30,000 to maintain70 percent of his or her preretirementincome level over the duration of his orher retirement. This is why there is such astrong case for the asset tests of means-tested programs to disregard savings inretirement accounts or, at a minimum, todisregard retirement savings up to asubstantial level.

The Food Stamp Program

Program Overview

The federal Food Stamp Program beganas a small pilot in 1961 and graduallygrew into the nation’s largest foodassistance program. Over twenty-fivemillion individuals received food stamps inNovember 2004.

A retiree who

earned low wages

throughout his or

her career and had

an average life

expectancy would

need approximately

$30,000 to maintain

70 percent of his or

her preretirement

income level over

the duration of his

or her retirement.


Food stamp benefits are designed to fillthe gap between the money a family hasavailable to purchase food and theestimated cost of a modest diet. Theygenerally are available to families withgross incomes below 130 percent of thepoverty line. Families also must meet anasset test (discussed in more detail below)and certain other eligibility requirements.

Most food stamp eligibility rules are set atthe federal level, with day-to-dayadministration of the program carried outby states. As explained below, however,in some areas—including the treatment ofassets—states have flexibility to set policywithin broad federal parameters.

The Food Stamp Program differs fromother major benefit programs in severalkey ways. Food stamps serve a widerange of needy people and are notrestricted to specific populations such asthe elderly, families with children, orpeople with disabilities.31 This makes theprogram a particularly important part ofthe safety net for low-income households.Food stamp benefits are 100 percentfederally financed. The federal governmentshares the costs of administering theprogram equally with the states.

Treatment of Assets in Food Stamps

Food stamp eligibility depends in part on ahousehold’s assets.32 Once a householdis eligible for food stamps, its assets donot affect the amount of monthly benefitsit receives. (A household’s benefit level isbased on its income. The greater ahousehold’s countable income, the moremoney it is assumed to have available topurchase food and the smaller themonthly food stamp benefit it receives.)

The Food Stamp Program’s asset testhas two related parts: an overall limit onthe total amount of countable assets ahousehold may have and a vehicle assetlimit that is applied in conjunction with theoverall limit.33 The portion of the value ofa household’s vehicle that exceeds theprogram’s vehicle limit counts toward theprogram’s overall asset limit. If ahousehold’s countable assets exceed the

asset limit, the household does not qualifyfor benefits.

Overall Asset Limit

In general, households are not eligible forfood stamps if they have more than$2,000 in countable assets, or more than$3,000 if at least one household memberis disabled or age 60 or older.34 Countableassets include cash on hand or in thebank, stocks, bonds, and the “excessvalue” of vehicles, as explained below.35

Items that do not count as assets includea household’s home, personal items, thecash value of any life insurance policy,property that the household uses to earnincome (such as farm equipment), anditems the household cannot sell or use topurchase food (such as the securitydeposit on an apartment).36

The assets of households in which allmembers receive TANF-funded cashassistance and/or benefits from theSupplemental Security Income program(the basic federal cash assistanceprogram for poor individuals and coupleswho are aged or have disabilities) aredisregarded in food stamp eligibilitydeterminations. For these householdsand individuals, the Food Stamp Programeffectively follows the asset rules of theseother programs.37

In addition, under federal regulationsissued in November 2000, states maydisregard the assets of households thatreceive TANF-funded benefits, such as jobcounseling or child-care subsidies forworking families.38 If a particular benefit orservice program receives more than half ofits funding through TANF, the state mustdisregard the assets of individuals whoreceive the benefit or service. If a programreceives less than half its funding throughTANF, the state has the option to disregardthe assets of individuals who receive thebenefit or service. If the state determinesthat the benefit or service inures to theentire household (regardless of the portionof the benefit or service that is fundedthrough TANF), the state may disregardthe assets of the entire household.


14 june 2005

Finally, under a new option created by the2002 farm bill, a state may choose not tocount certain types of assets toward thefood stamp asset limit if the state does notcount these assets toward the asset limit ituses in its TANF cash assistance programor toward the asset limit it uses for familiescovered under Medicaid.39 This newoption is very significant; it opens newavenues for states to exclude moreretirement accounts from the food stampasset test. How retirement accounts maybe treated under this provision isdiscussed in more detail below.

The Vehicle Asset Limit

Although there are specific federal rulesregarding how to consider vehicles infood stamp eligibility determinations,states now have considerable flexibility toestablish their own food stamp vehiclepolicies that are much less restrictive thanthe federal rules.40 Only two statescontinue to use the federal rule.

Under the federal food stamp rules, the“excess value” of most vehicles—definedas the amount by which a vehicle’s fair-market value exceeds $4,650—iscounted as part of a household’scountable assets.41 For example, if thevalue of a vehicle exceeds the $4,650limit by $500 (because the vehicle isworth $5,150), the household ispresumed to have $500 in countableassets from the vehicle. That $500 isadded to the value of the household’sother resources, such as bank accounts,to see if the household’s total countableassets fall below the overall asset limit of$2,000 (or $3,000 for a household withan elderly or disabled member). Forhouseholds with more than one vehicle,each vehicle is evaluated separatelyagainst the $4,650 threshold.

States may, however, establish their ownfood stamp vehicle policies that are lessrestrictive than these federal rules. In fact,states may eliminate the vehicle testaltogether. At present, 39 states excludeentirely at least one vehicle per householdin determining food stamp eligibility, and

approximately 25 of these states excludethe value of all household vehicles.42

Liberalizing or eliminating the federal foodstamp vehicle rule has the effect ofliberalizing the overall food stamp assettest for families with vehicles because theexcess value of those vehicles no longercounts toward the $2,000 limit.

Treatment of Retirement Accounts inFood Stamps

Some types of retirement savingsaccounts are counted toward the foodstamp asset limit while other types ofretirement accounts are excluded.43

Most employer-sponsored retirementplans are excluded. The types ofaccounts that are excluded include, butare not limited to, the following:44

• Defined benefit plans;• 401(k) plans; • 403(b) plans;• 457 plans;• the Federal Employee Thrift Savings

plan; • Section 501(c)(18) plans, which are

retirement plans for union members;and

• Keogh plans that involve a contractualobligation with someone who is not ahousehold member.

The following types of retirement savingsare counted as an asset for food stamppurposes, regardless of whether there isa penalty for early withdrawal:

• IRAs; • Keogh plans that involve no contractual

obligation with someone who is not ahousehold member; and

• Simplified Employer Pension Plans,which are IRA-like accounts into whichemployers make direct deposits.

If the cash value of an excluded type ofplan is “rolled over” into an IRA, it losesits exclusion and becomes a countableasset following the rollover. This rule isvery significant. An employee often musttake his or her retirement benefits out ofthe employer’s defined benefit plan or


defined contribution plan when he or shestops working for the employer. For suchfunds to remain in a tax-favoredretirement saving account, the employeemust roll the funds over into an IRA(unless the employee is able to roll thefunds into a new employer’s retirementplan). A large share of IRAs are 401(k) orother defined contribution accounts thathave been rolled over.

This food stamp rule means thatchanging jobs or being laid off can causea low-wage working family with a modestretirement account to lose the exclusionfor the account and hence to beterminated from the Food StampProgram unless the family liquidates itsretirement account and spends theproceeds.

The New Food Stamp Option

An important new option for disregardingcertain retirement plans has recently beenmade available to states. Underprovisions of the farm bill enacted in2002, a state may choose not to countcertain types of assets toward the foodstamp asset limit if the state does notcount these assets toward its asset limitfor TANF cash assistance recipients ortoward its asset limit for families coveredunder Medicaid.45

One important caveat is that the FoodStamp Program must count certainassets even if they are disregarded inTANF cash assistance or family-basedMedicaid. The 2002 law specifies that theassets that cannot be disregarded for foodstamp purposes include cash and“amounts in any account in a financialinstitution that are readily available to thehousehold.”46 The law does not define“readily available.” The U.S. Department ofAgriculture, which administers the FoodStamp Program, will determine themeaning of this phrase through programregulations.

This requirement raises the questionas to whether funds in an IRA are “readilyavailable” to the account-holder.

Proposed regulations that the Departmentof Agriculture issued in April 2004would allow states to disregard IRAsif the terms of these accounts imposea penalty, other than forfeiture of interest,for early withdrawal. Some commentssubmitted to USDA in response to theproposed regulations argued that thefinal regulations should go further andafford states flexibility to disregard IRAsgenerally.

Until final regulations are issued, USDAhas advised states that they mayexercise discretion regarding thetreatment of IRAs.47 For the time being,so long as a state excludes funds in IRAsfrom its TANF or its family Medicaid assettest, it may exclude them from the foodstamp asset test as well.48 As of August2003, only Ohio had acted to disregardIRAs as an asset based on this option,although there may be other states thathave done so since then.49 Most statesdecided to wait for the final regulationsbefore making policy decisions in thisarea. If the final regulations are the sameas the proposed regulations, then statesshould be able to exclude IRAs thatimpose a penalty for pre-retirementwithdrawals, so long as they do so intheir TANF cash assistance or familyMedicaid program.

The 2002 farm bill also included a similarprovision that allows a state to conformwhat counts as income in the FoodStamp program to the definition ofincome in its TANF cash assistanceor family Medicaid program. Generally,interest that accrues on nonexemptretirement accounts is counted asincome when determining eligibilityfor food stamp benefits. (Interestaccruing on exempt accounts is notcounted as income.) Under the 2002provision, however, states may ceasecounting the interest on nonexemptaccounts as income under the FoodStamp Program. This provision of thelaw gives state Food Stamp Programsthe flexibility not to count as incomemost items that a state excludes fromincome under either its TANF cash


16 june 2005

assistance program or its Medicaidprogram for families. This shouldpermit states to exclude interest onnonexempt retirement plans from beingcounted as part of a household’s incomeunder the Food Stamp Program, solong as a state excludes such interestincome in its TANF or family Medicaidprogram.50

Opportunities for Policy ImprovementsUnder Current Law

Excluding retirement accounts generallyfrom being counted for purposes ofthe food stamp asset test would simplifyprogram administration and facilitateretirement saving by low-incomeindividuals. Once USDA publishes finalregulations, states will be able todisregard retirement accounts in theFood Stamp Program to the extent thenew federal rules allow; they will be ableto do so by disregarding such accountsin their TANF cash assistance or familyMedicaid programs and aligning theirfood stamp rules accordingly.51 If finalfood stamp regulations preclude someor all types of IRAs from beingdisregarded under this conformityoption, states will continue (underfederal food stamp rules) to disregardthe vast bulk of employer-basedretirement plans—including 401(k) plansand similar defined contribution plans,and defined benefit plans—whendetermining eligibility for food stamps. Iffinal food stamp regulations precludesome or all types of IRAs from beingdisregarded under this conformity option,under current program rules states stillwill disregard the vast bulk of employer-based retirement plans—including 401(k)plans and similar defined contributionplans—when determining eligibility forfood stamps.

As described in subsequent sections ofthis report, states have the option ofexcluding 401(k) plans and other suchdefined contribution plans in their TANFand Medicaid programs as well.(Defined benefit plans already areuniversally disregarded.) By taking

advantage of this option in TANF andMedicaid, a state could conform thetreatment of defined contributionretirement plans across the Food Stamp,TANF, and Medicaid programs, whichitself would represent a significant policyadvance in many states.

In addition, states can disregard interestincome on IRAs or 401(k) plans whencounting a household’s income, as longas the state excludes such interestincome in its TANF or family Medicaidprograms. It is difficult and administrativelyburdensome for caseworkers to trackthe small amounts of interest incomeearned on these accounts. As a practicalmatter, such income may already beoverlooked by many caseworkers. Bydisregarding such interest as a matter ofpolicy across food stamps, TANF, andMedicaid, states can simplify programadministration.

Temporary Assistance for Needy Families

Program Overview

The Temporary Assistance for NeedyFamilies (TANF) block grant, created bythe 1996 welfare law, provides states with$17 billion a year in federal TANF funding.States also contribute funds; each statemust meet a maintenance-of-effort (MOE)requirement each year by spending atleast 75 percent of the amount it spenton certain welfare programs in federalfiscal year 1994.

States use the federal TANF funds andthe state maintenance-of-effort funds fora wide array of programs, such as cashassistance benefits, welfare-to-workprograms, child-care subsidies, childwelfare services, transportationassistance, and pregnancy preventionprograms.52 States have broad flexibilityto establish eligibility and other rules inthese programs. While all states use aportion of their TANF funds on cashassistance benefits, those benefits nowaccount for only a little more than one-third of total TANF spending.53


Treatment of Assets in TANF

States have very broad discretion todetermine eligibility criteria, includingincome and asset limits, for TANF-fundedbenefits and services.54 Moreover, a statecan set different eligibility tests fordifferent TANF-funded programs orservices. For example, a state could limitTANF cash assistance to very poorfamilies but provide TANF-funded childcare to working families with somewhathigher incomes.

Many TANF-funded programs do notimpose an asset test, including manychild-care subsidy programs, childwelfare services, after-school programs,and pregnancy prevention programs.However, all states except two (Ohio andVirginia) do have assets tests in theirTANF cash assistance programs.55

This tendency may reflect the federal rulein place before the 1996 welfare law thatlimited eligibility for cash welfare benefitsto families with less than $1,000 inassets. Most states have since increasedthe asset limit above the $1,000 level.Most states now set limits between$2,000 and $3,000. In TANF cashassistance programs, eligibility isdetermined based on the circumstancesof the “assistance unit” rather than theentire household; thus, the assets of anextended family member who is part ofthe household but not part of theassistance unit are not counted towardthe asset limit.

As in the Food Stamp Program, whencalculating the value of a family’sassets for purposes of determiningeligibility for TANF cash assistance, somestates count a portion of a family’s car asan asset. Twenty-nine states entirelydisregard the value of at least one vehiclewhen determining a family’s countableassets. The remaining states generallydisregard the value of a vehicle up to acertain limit, ranging from $1,500 to$12,000.56

Treatment of Retirement Accounts in TANF

States have complete flexibility regardingwhat to count as assets. Thus, a statecan disregard any or all kinds ofretirement accounts. We are not aware ofany compilation of state rules regardinghow retirement accounts are treatedunder the asset tests in state TANFprograms. For a given state, suchinformation can be obtained from astate’s TANF plan or its regulations,guidance, or policy manuals.57

In addition, states have flexibility regardingwhat counts as income. A state canexclude the interest earned on any or allretirement accounts. Most states countinterest income in general, but it isunclear whether interest income iscounted if the underlying retirementaccount is excluded.58


Since many states do not use asset testsin TANF-funded programs other thancash assistance programs, theopportunities described below applyprimarily to TANF cash assistanceprograms.

A state can establish policies that excludeall retirement accounts, and their interestincome, from eligibility and benefitdeterminations for TANF cash assistance.Alternatively, a state can disregard specifictypes of retirement accounts. A uniformrule for all types of retirement accountsensures that families are not treateddifferently based on the particularretirement savings vehicle they hold—andalso reduces the complexity of programrules that caseworkers and families mustfollow.

If a state chooses to disregard only sometypes of retirement accounts, then itshould, at a minimum, disregard thetypes of retirement accounts—401(k) andsimilar plans—that are disregarded in theFood Stamp Program. Most cash

A state can

establish policies

that exclude all

retirement

accounts, and their

interest income,

from eligibility

and benefit

determinations

for TANF cash

assistance.


18 june 2005

assistance recipients also receive foodstamps, so aligning asset rules wouldallow the application process for thetwo programs to be integrated moreeasily. Moreover, disregarding 401(k)and similar plans would eliminate theinequity between employees who havedefined benefit plans, which generallyare disregarded, and those who haveaccess to defined contribution planslike 401(k)s. (Unfortunately, such apolicy would not help families that hadrolled over a 401(k) plan into an IRA toretain tax-favored treatment of thesavings after being laid off or changingjobs.)

Alternatively, states can effectivelyexclude most retirement accounts fromconsideration when determining TANFcash assistance eligibility or benefitlevels by raising overall asset limits to alevel where most retirement accountswould not affect TANF eligibility. Thisoption would allow all low-incomesavers to accumulate a limited amountof savings regardless of the savingsvehicle they choose. Because raisingthe overall asset limit would makeadditional low-income families eligiblefor cash assistance, this policy changewould increase cash assistance costs.Likewise, disregarding retirement savingswould increase cash assistance costsmodestly.

Medicaid and the StateChildren’s Health InsuranceProgram

Program Overview

Established in 1965, Medicaid is a publichealth insurance program for low-incomeindividuals and families. In 2001,Medicaid covered about forty-sevenmillion people, including twenty-threemillion children, twelve million adults infamilies with children, eight millionpersons with disabilities, and four millionelderly persons.59

On average, the federal government pays57 percent of state Medicaid costs;

states pay the remaining 43 percent.States must comply with certain federalrequirements, but there are importantpolicy areas over which states haveconsiderable flexibility. For example,to qualify for federal matching funds,states must offer insurance coverageto several specific populations, includingthe following: certain low-income childrenand pregnant women; families thatwould have qualified for cash welfareassistance under the Aid for Familieswith Dependent Children program thatexisted in the state prior to the 1996welfare law; and (in most states) elderlyand disabled individuals who areeligible for the Supplemental SecurityIncome program.60 This coverage must,at a minimum, include coverage forcertain health-care services, such asphysician care and hospital care. Statesalso may cover additional services,such as prescription drugs and personal-care services. In addition, states mayprovide Medicaid coverage to certain“optional” populations, including near-poor parents and children, elderly anddisabled people who live below thepoverty line but are not poor enough toqualify for SSI, and low-income peoplewho have high medical costs but whoseincome modestly exceed the incomelimits for other Medicaid eligibilitycategories.61

In determining Medicaid eligibility,states consider both whether a personfits into an eligible category and theperson’s income and assets. The federalgovernment has given statesconsiderable flexibility in setting incomeand asset limits, as well as what thestates count as income and assets. As aresult, state policies in these areas varywidely.

As part of the Balanced Budget Act of1997, Congress also established the StateChildren’s Health Insurance Program(SCHIP), under which the federalgovernment is providing $40 billion overten years to states to expand healthinsurance coverage to low-incomeuninsured children. States may use SCHIP


funds to expand children’s coverage underMedicaid or to create separate statechildren’s health insurance programs.

If a state uses SCHIP funds for aMedicaid expansion, the state’s Medicaideligibility rules apply.62 If a state creates aseparate children’s health insuranceprogram, the state has complete flexibilityover income and asset rules. States withsuch programs generally cover children infamilies with incomes up to about 200percent of the poverty line ($31,340 for afamily of three in 2004), but some statescover children in families with somewhathigher incomes. Currently, more than fourmillion children are covered throughSCHIP.

Treatment of Assets in Medicaid and SCHIP

States have significant discretion inestablishing asset rules for determiningMedicaid and SCHIP eligibility. They havethe flexibility under federal law to waive orliberalize asset tests for most Medicaidpopulations and to determine what typesof assets count when applying an assettest.63 Since asset policies vary acrossstates—and within a state across differentcategories of beneficiaries—the treatmentof assets depends on the state and theMedicaid category under which anindividual or family would be eligible, as

well as the state’s rules regarding whatcounts as an asset. It is important tonote that state asset tests in Medicaid,as well as the asset tests in the fewstates that use them in separate SCHIPprograms, apply to families ratherthan to entire households. The assets ofan extended family member, such as agrandparent, are not counted towardthe asset limit when a family unitconsisting of parents and children appliesfor coverage.

Formerly, states used Medicaid assettests equivalent to the tests that they usedin their closely related cash assistanceprograms. Medicaid asset rules forfamilies with children followed those usedin state AFDC programs, while the federalSSI asset rules governed in determiningMedicaid eligibility for people who wereelderly or had a disability.64 In recentyears, however—and especially sinceenactment of the 1996 welfare law—manystates have liberalized their Medicaidasset tests. (A table of each state’sMedicaid asset limits for children andfamilies appears in appendix A.)65

Most states have elected to eliminate theMedicaid asset test for children.66 Someforty-five states and the District ofColumbia have now done so.67 (Theelimination of the asset test for childrenmeans that parents’ assets do not affect

States That Have Eliminated the Medicaid Asset Test for Families with Children

AlabamaArizonaConnecticutDelawareDistrict of ColumbiaIllinoisKansas

LouisianaMassachusettsMississippiMissouriNew JerseyNew MexicoNorth DakotaOhio

OklahomaPennsylvaniaRhode IslandSouth CarolinaVirginia WisconsinWyoming

See Beneath the Surface: Barriers Threaten to Slow Progress on Expanding Health Coverage ofChildren and Families, Donna Cohen Ross and Laura Cox, Center on Budget and Policy Priorities forthe Kaiser Commission on Medicaid and the Uninsured, October 2004, table 8, available athttp://www.kff.org/medicaid/7191.cfm.


20 june 2005

their children’s eligibility for Medicaid.) Inaddition, twenty-one states and theDistrict of Columbia have eliminated theMedicaid asset test for families withchildren, rather than eliminating the testonly for children and not for their parentsas well.68

States have generally retained assettests for applicants who are elderly,blind, or disabled. A table of eachstate’s asset limit for elderly, blind, ordisabled individuals and couples inselected coverage categories appears inappendix B.69

• The asset limit for individuals in theoptional “medically needy” category forpeople who are elderly or disabled—thecategory for low-income elderly ordisabled people who have high medicalcosts but too much income to qualifyfor Medicaid in another category—ranges from a low of $1,600 inConnecticut to a high of $10,000 inIowa. The asset limit for such individualsin most states is $2,000 to $3,000.70

• The asset limit for elderly, blind, ordisabled people in other coveragecategories is often aligned with thefederal SSI asset limit of $2,000 for anindividual and $3,000 for a couple,although states have the option to sethigher limits and some states do so forsome coverage categories.

• In the Medicaid coverage categories forwhat are known as Qualified MedicareBeneficiaries and Specified Low-incomeMedicare Beneficiaries, the asset limit is$4,000 for an individual and $6,000 fora couple.71 These categories consist ofpeople who are elderly or disabled withincomes below 120 percent of thepoverty line who are not eligible for SSI,but for whom the Medicaid programpays part or all of the beneficiary’sshare of Medicare costs.

The implications of these asset limits foran applicant’s eligibility depend in largepart on how states use their flexibility todefine what counts as an asset. For

example, most of the states that haveretained a Medicaid asset test for familieswith children use their flexibility toexclude from countable assets the entirevalue of one family automobile.72 Somestates still count the value of a vehicle asan asset above certain fixed dollaramounts, usually no less than $1,500. Thetreatment of retirement accounts isdiscussed below.

As already noted, if a state has usedSCHIP funds to expand its Medicaidprogram for children, the asset rules forchildren under the state’s Medicaidprogram apply to the newly coveredchildren as well. Under federallyapproved waivers, several states haveused SCHIP funds to extend Medicaidcoverage to the parents of SCHIP-eligiblechildren (and in some cases, to otheradults). In these states, the Medicaidasset rules that the state applies to otherfamilies with children apply to theseparents as well.73

States that use SCHIP funds to financeseparate children’s health insuranceprograms have total flexibility overwhether to apply an asset test in theseprograms and, if so, how to designthat test.74 Among states with separateSCHIP programs, all but three (Idaho,Oregon, and Texas) do not apply an assettest for children. As is the case withMedicaid, this means that parents’ assetsdo not affect their children’s eligibility forSCHIP.

Treatment of Retirement Accounts inMedicaid and SCHIP

States have complete flexibility with regardto which types of assets — includingwhich types of retirement accounts — areconsidered when applying asset tests inMedicaid or SCHIP.

Most of the thirty states that still use anasset test in their Medicaid programs forfamilies with children count retirementsavings in 401(k) plans, as well as IRAs,as assets, even though a state can opt toexclude such accounts. (The table in


appendix A shows how each state thatuses an asset test for families treatsretirement accounts.)

Since states generally apply an asset testto applicants who are elderly, blind, ordisabled, the treatment of retirementaccounts is especially important for thesepopulations. No compilation of stateMedicaid policies for the elderly anddisabled is available that covers thetreatment of retirement accounts. Somestates follow the rules of the SSI program.Under SSI, defined benefit retirement plansare generally disregarded as assets whilean individual either is employed by the firmthat sponsors the retirement plan or isreceiving regular payments from the plan;defined contribution plans and IRAsgenerally are counted. (The treatment ofretirement plans under SSI is examined inthe next chapter of this report.) Anexplanation of a state’s Medicaid assetpolicies for elderly, blind, or disabledbeneficiaries can be found in its stateMedicaid plan.75

One related issue is how states treatinterest earned on retirement accounts.Such income is difficult to track.Moreover, unlike in food stamps,TANF cash assistance, or SSI—in whichinterest income can affect the level ofbenefits—interest income rarely makesa difference with regard to whether anindividual or family qualifies for Medicaidcoverage. States could simplify programadministration by disregarding suchinterest as income, using their flexibilitywith regard to what counts as income.It is unclear whether many states haveadopted such a policy.


States have considerable flexibility overwhether and how to count assets formost Medicaid and SCHIP populations.States thus have substantial opportunitiesto encourage retirement savings andsimplify program administration bymodifying their Medicaid (and SCHIP)asset rules.

States can waive their Medicaid assettests entirely for both children and theirparents. Few states still administer aMedicaid asset test for children. Themajority of states retain an asset limit forparents, although twenty-two states havenow disposed of asset tests for suchfamilies. States that have dropped theasset test for families generally havereported that doing so helped them tostreamline the eligibility determinationprocess and reduce administrative costswhile easing the enrollment process forfamilies.76

States that continue to impose aMedicaid asset test for families withchildren can disregard savings held in alltypes of retirement accounts. In somestates, this would require state legislativeapproval. Once approval is obtained,states need only submit a state planamendment to the Centers for Medicareand Medicaid Services (CMS) toimplement this disregard.

At a minimum, states that impose aMedicaid asset test could conform theirMedicaid policy with the policy in theFood Stamp Program and disregardretirement savings in 401(k)s and similarplans. Making such a change wouldsimplify administration of the Medicaidprogram and facilitate integration ofMedicaid and food stamp eligibilitydeterminations. In addition, disregarding401(k) and similar plans would eliminatethe inequity between employees whohave defined benefit plans, which aregenerally disregarded, and those whohave access only to defined contributionplans like 401(k) plans. Unfortunately,such a change would not help employeeswho had to roll over their 401(k) savingsinto an IRA upon changing jobs or beinglaid off.

Through waivers, states can use SCHIPfunds to extend coverage to populationsbesides children, such as low-incomeparents. If a state that undertakes suchan expansion has no asset test forchildren, applying the same rule toparents would make the program simpler

States can waive

their Medicaid asset

tests entirely for

both children and

their parents.


22 june 2005

Eighteen of the

thirty-two states

that offer Medicaid

Buy-In programs

for people with

disabilities have

chosen to exclude

retirement

accounts from

counting as assets.

Asset Test for Low-Income Subsidies for New Medicare Drug BenefitWill Count Many Retirement Accounts

Beginning in January 2006, Medicare will provide coverage for outpatientprescription drugs. The coverage will be partial; most Medicare beneficiaries willhave to pay a substantial amount in monthly premiums, annual deductibles, andco-payments. The law provides, however, for subsidies to defray part of thesecosts for: 1) those low-income Medicare beneficiaries who are also enrolled inMedicaid (including beneficiaries who do not receive full Medicaid coverage, butfor whom Medicaid pays their Medicare premiums); 2) low-income beneficiarieswho receive SSI but not Medicaid; and 3) Medicare or SSI beneficiaries who arenot enrolled in Medicaid but whose incomes and assets are below certainlevels.

There are several tiers of these low-income subsidies. People who are coveredby Medicaid or SSI, or whose income is below 135 percent of the poverty lineand whose assets are less than $6,000 for an individual or $9,000 for a couple,will qualify for the largest subsidies. Medicare beneficiaries who do not meetthese criteria but whose incomes are below 150 percent of the poverty line andwhose assets are less than $10,000 for an individual or $20,000 for a couplewill be eligible for a much smaller, but still significant subsidy. Individuals notreceiving Medicaid or SSI who have assets of more than $10,000 for anindividual or $20,000 for a couple are not eligible for a subsidy.

The new law requires that the definitions used in determining what income andassets are counted be modeled on SSI program rules. The Social SecurityAdministration issued a notice of proposed rulemaking on March 4, 2005,spelling out the specific rules to be followed. SSA has explained in theproposed rule making that it intends to count as assets all liquid resources(defined as those that can be converted to cash within 20 days), including“retirement accounts (such as individual retirement accounts (IRA), 401(k)accounts), and similar items.”

The Henry J. Kaiser Family Foundation recently issued a detailed study of theestimated effects of the asset test for these subsidies. The study found that theasset test for the low-income drug subsidies will disqualify about 2.4 million ofthe 14 million Medicare beneficiaries whose incomes are low enough tootherwise qualify for the subsidies.* About half of those whom the asset testwill disqualify have relatively modest assets, the study reports.

The study also finds that approximately 70 percent of the individuals whom theasset test will disqualify have incomes below 135 percent of poverty. (Theothers have incomes between 135 percent and 150 percent of poverty.) Thestudy reports that those who will meet the income criteria for the subsidies butbe disqualified by the asset test “are disproportionately older widows who livealone.” Some 13 percent of the aggregate assets of those who meet theincome criteria but not the asset test are in 401(k)s, IRAs, Keoghs, or similarretirement accounts, according to the study.


The Kaiser study concludes:

“The study’s findings raise serious questions about the equity of the assettest. During their work years, Americans are encouraged to save forretirement and the possibility that they will face sizable long-term careexpenses. Those to whom this message is most salient will have little orno income beyond what they receive from Social Security. Byaccumulating modest amounts of assets, either through bank accounts orretirement-savings vehicles, these same people have guaranteed that theywill not qualify for the low-income Medicare drug subsidies — but the vastmajority use prescription drugs every day. Using more common parlance,they find themselves in a ‘Catch 22.’ If they do save, they are disqualifiedfrom the subsidies. If they do not save, they will receive the subsidies butwill have almost nothing to fall back upon besides their Social Securitychecks. And this burden tends to fall on the most vulnerable of seniors:older, low-income widows living alone.”

These problems could be eased if the modifications regarding the treatment ofretirement accounts under the SSI asset test that are proposed in the SSIsection of this report were applied to the asset test for the low-income drugsubsidies, as well.

See Thomas Rice, Katherine A. Desmond, Low-Income Subsidies for the Medicare PrescriptionDrug Benefit: The Impact of the Asset Test, The Henry J. Kaiser Family Foundation, April 2005,http://www.kff.org/medicare/7304.cfm. The quotations cited here are found on pages 21 and 27of the study.


24 june 2005

to operate. As a result of the toughfiscal environment that states havefaced in the past few years, few stateshave used SCHIP funds to extendcoverage to adults during this time.In the future, however, some additionalstates may wish to extend SCHIPcoverage to parents or other adults.Ensuring that asset tests are not appliedto these new populations, as they are notapplied to children, would enable workingparents who are covered under theseprograms to accrue retirement savingswithout fear of losing their healthinsurance coverage.

States also can take steps to disregardinterest earned on retirement accountsfrom counting as income in determiningeligibility for Medicaid or SCHIP. Toeffectuate such policies, states needsimply to submit a state plan amendmentto the Centers for Medicare and MedicaidServices.

For people who receive Medicaid basedupon their age or disability, the issues aresomewhat more complicated. As astarting point, to the extent that anychanges are made in the rules of thefederal SSI program, which are discussedin the next chapter, those changes willapply to people who are aged or disabledand categorically eligible for Medicaidbecause they receive SSI.77 This couldhelp low-income individuals withdisabilities to retain retirement accountsso that the accounts are available to helpsupport them in old age.

For the elderly population, states mayhave concerns about going beyondany changes made in SSI because ofissues related to assets and assettransfers with regard to people who seekMedicaid to pay for their long-term care.This report does not attempt to addressthose issues.

For low-income people with disabilities,states also should consider ways toenable people who do not receive SSIto retain their retirement accounts while

they are enrolled in Medicaid duringperiods when they are unable to work,as well as during periods when theyare working but cannot get insurancethrough their employers.78 This couldbe done by adopting proposals, such asthose proposed in the SSI chapterof this report for SSI applicants andrecipients, to disregard retirementaccounts for people with disabilitieswho have not reached retirement ageso that these accounts remain availableto provide support to these individuals inold age.

Many states already are moving in thisdirection in their “Medicaid Buy-In”programs. Under these programs,states may permit people with disabilitieswho are working and need healthcare to apply for and obtain Medicaidcoverage. States have substantialflexibility in setting the income and assetsrules used in these programs. Eighteen ofthe thirty-two states that offer MedicaidBuy-In programs for people withdisabilities have chosen to excluderetirement accounts from counting asassets.79

It also is important for such states todesign their regular Medicaid programsso that individuals with disabilitieswhose retirement accounts weredisregarded while they were workingand participating in their state’s MedicaidBuy-In program can retain their accountsif their conditions worsen and theymust stop working for awhile andreenroll in regular Medicaid coverage.By not requiring liquidation of aretirement account at that time, thestate not only would be providing theindividual with some assurance aboutretirement income but also may beproviding an incentive for the personto try to work again, since resumptionof employment then could result inenlargement of the individual’s retirementaccount without jeopardizing theindividual’s future eligibility for Medicaidif his or her condition should worsenagain.

Supplemental Security Income

Program Overview

Established through legislation proposedby President Richard Nixon and enactedin 1972, the Supplemental SecurityIncome (SSI) program is a means-tested,federally funded and federallyadministered program that provides cashbenefits for low-income individuals whoare aged, blind, or disabled.80

In January 2004, some 6.6 millionindividuals received monthly federal SSIchecks.81 Approximately 14 percent ofthe beneficiaries were children under 18with disabilities, another 57 percent wereindividuals aged 18–64 with disabilities,and 29 percent were aged 65 or older.82

The SSI program provided approximately$33 billion in federal cash assistance tothese beneficiaries in 2003.83

SSI rules prescribe how various typesand amounts of income and resourcesare treated in determining eligibilityfor the program. Individuals and couplesare eligible for SSI benefits if theircountable income falls below themaximum federal SSI benefit level, whichis $579 a month for individuals and $869a month for couples in 2005. Most, butnot all, income that an applicant receivesis considered in determining SSIeligibility.84

Some states provide a supplementto the SSI benefit for individuals who areaged, disabled, or blind. These stateprograms generally have somewhat higherincome limits than the federal SSIprogram, so some individuals withincomes modestly above the maximumfederal SSI benefit level may receive statesupplemental benefits and also be eligiblefor Medicaid. (In most states, an individualwho receives either SSI or a state SSIsupplemental benefit is automaticallyeligible for Medicaid.)85 State supplementprograms typically use SSI income andasset rules, although in some states,these as well as certain other aspects ofthe eligibility rules are more restrictive thanthe rules applied in SSI.86

Treatment of Assets in SSI EligibilityDeterminations

Rules regarding federal SSI eligibility andbenefit levels are set by Congress and theSocial Security Administration, whichadministers SSI. There is no stateflexibility with regard to the treatment ofassets in SSI. In general, eligibility for SSIis limited to individuals with no more than$2,000 in countable assets and coupleswith no more than $3,000.87

Some assets are not counted indetermining SSI eligibility.88 These includethe beneficiary’s home, one vehicle (if it isused for transportation for the individual ora member of the individual’s household), upto $2,000 in household goods andpersonal items, and life insurance with aface value of less than $1,500.89

Treatment of Retirement Accounts in SSI

The SSI asset test is generally designedto exclude inaccessible resources and tocount accessible resources. The SocialSecurity Administration (SSA) looks to theterms of a retirement account todetermine whether a person can accessthe account and take a lump-sumwithdrawal, as well as whether the personis receiving or could receive periodicpayments from the account. In its rulesand policy guidance, SSA generally doesnot characterize various types ofretirement savings plans by the namescommonly associated with such plans(such as defined benefit plans anddefined contribution plans). In thissection, we apply SSA’s principlesregarding the treatment of retirementplans under the SSI program toretirement plans by type.

• Defined benefit pension plans, as wellas a particular type of definedcontribution plan known as a “moneypurchase plan,”90 do not count asassets as long as individuals areemployed by the firm that sponsors theplan because such individuals cannotaccess the plans and makewithdrawals. (SSA does not require an



26 june 2005

individual to terminate employment inorder to access a retirement plan.)

Defined benefit plans generally do notcount as assets if the individual isreceiving regular payments from theplan. The payments count as income.91

• If an SSI applicant or recipient has theoption at the time that the individualceases to work for an employer of 1)making a lump-sum withdrawal from aretirement plan; 2) starting to receiveperiodic payments immediately fromthe plan; or 3) rolling over the retirementfunds into an IRA or a new employer’sretirement plan, SSA will require theperson to take the periodic payments.92

If, however, the periodic paymentswould not start until some point inthe future (e.g., until the person reachesan age designated in the retirementplan), then SSA will count the amountof the lump sum as a resource. Theperson may take the lump-sumpayment and spend most of theproceeds in order to qualify for SSI.93

In that case, the person will qualify forSSI after the combination of theperson’s other countable assets andwhatever is left of the person’sretirement funds falls below the SSIasset limits of $2,000 for an individualand $3,000 for a couple.

• Stated another way, if an individual hasa retirement plan from which he or shecan make a lump-sum withdrawal nowand the plan does not offer (or theindividual does not elect) periodicpayments that would start immediately,SSA will count the retirement accountas an asset. The person thus mustliquidate most or all of the account andspend the proceeds to qualify for SSI.This rule—that funds in a retirementaccount count against the SSI assetlimits if the individual can withdraw thefunds from the account (unless theindividual arranges for periodic pay-ments that start immediately)—appliesregardless of whether the person mustpay a penalty to withdraw the funds.94

SSI policy states: “Since SSI is a current

needs program, all sources of availablesupport (unless otherwise excluded) areconsidered in determining eligibility. Thisis true even when current needs compelan individual to sacrifice future pensionbenefits.”95

• A lifetime annuity that provides periodicpayments for the rest of an individual’slife usually does not count as anasset.96 In purchasing such an annuity,the individual turns his or her assetsover to the insurance company (orother firm selling the annuity); theindividual relinquishes the assets inreturn for receipt of monthly paymentsas long as he or she lives. As a result,the individual no longer has aretirement account to access.

If an SSI applicant or recipient converts aretirement account into a lifetime annuity,SSA counts the monthly payments asunearned income.97 If the sum of theperson’s income from the monthly annuitypayments and his or her other income isat least $20 a month above the federalSSI monthly benefit level (or above thestate’s supplemental benefit level if thestate has a SSI supplement), then theperson will not be eligible for SSI (or forthe state supplement).

Thus, to qualify for SSI, an individualwith an IRA or a 401(k) or similardefined contribution plan must (unlessthe account is tiny) liquidate most or all ofthe account and spend the proceeds orelse purchase a lifetime annuity thatbegins making periodic paymentsimmediately. The only exception to thisrule occurs in cases where a currentlyemployed individual does not meet theconditions under which an employeemay withdraw funds from the definedcontribution plan in which he or sheparticipates. Most SSI applicants andrecipients would, however, meet theconditions under which withdrawalscan be made because people withdisabilities and certain other individualsmay access their 401(k) accountswithout penalties.98


Individuals Who Change Jobs orOtherwise Leave an Employer

For many years, if an individual had nomore than $5,000 in a defined benefitor defined contribution plan and ceasedto work for his or her employer, federalrules allowed the employer to requirethe individual to take his or her fundsout of the retirement plan. The personcould take a lump-sum payment orroll the funds over to an IRA (or, insome cases, to a retirement plansponsored by the individual’s newemployer). Under a new federal rulethat takes effect this year, if such anindividual does not notify the employerof his or her choice, the employermay no longer force a lump-sumpayment on the individual (unless thevalue of the funds or benefits is $1,000or less). Starting this year, the employerwill have two choices regarding thedisposition of funds or benefits ofbetween $1,000 and $5,000 when theemployee gives no explicit directions:the employer can either retain theindividual’s funds in the individual’saccount in the employer’s plan or theemployer can roll over the funds to anIRA that the employer sets up for thatindividual with a financial institution.

In a situation in which an employee hasbetween $1,000 and $5,000 in funds orbenefits, if the former employee retainsthe ability to seek a lump-sum payment,the Social Security Administration willcount the funds as an asset.99 To receiveSSI benefits, the person must take thelump-sum cash payment from his or herretirement plan and spend most of theproceeds (unless the amount involved isvery small).

If an employee has accumulated morethan $5,000 by the time he or she leavesemployment, the individual generally maytake a lump-sum payment, but theemployer cannot require the person to doso and thereby forgo future pensionpayments. However, SSA will count theamount of the lump-sum payment that isavailable as an asset even if the person

does not take the lump-sum payment. Asa result, to receive SSI, the individualmust take the lump sum and spend it(unless the person receives regularpension payments starting immediately)and thereby forgo any future pensionpayments.

Problems That These Rules Pose forLow-Income People with Disabilities

These rules pose particular problems forSSI applicants and recipients who havedisabilities. A working-age person with adisability who has a condition thatenables the person to work periodicallyought to be able to use his or herretirement account as a savingsmechanism for retirement. Beingcompelled to liquidate the retirementaccount as a condition of receipt of SSIbenefits during periods when theindividual cannot work does not serve theindividual’s long-term needs. Moreover,being required to liquidate the accountmay remove an incentive for the individualto attempt to return to work—namely, theincentive to build savings for retirementby working and participating in aretirement plan.

The rules also pose other problems.Suppose an individual with a disability ismanaging to work for the time being butworries that, at some point, his or hermedical condition will deteriorate to thepoint that he or she can work no longerand needs to apply for SSI and Medicaid.The SSI program’s treatment of retirementaccounts may discourage the individualfrom participating in his or her employer’sretirement plan while he or she is workingout of fear that doing so will jeopardizethe individual’s eligibility for SSI andMedicaid in the future.

In addition, for more than two decades,the SSI program has provided importanthelp for individuals with disabilities whoreceive SSI and want to try to return towork. Under such circumstances, an SSIdisability recipient can have a portion ofhis or her earnings disregarded and canmove seamlessly through various

These rules pose

particular problems

for SSI applicants

and recipients who

have disabilities.


28 june 2005

protective SSI and Medicaid eligibilitystatuses. In 2003, more than 320,000 SSIrecipients with disabilities or blindnesswere working. Some 71,000 of theseindividuals earned a sufficient amount thatthey no longer qualified for an SSI cashbenefit but participated in a special SSIprogram that allowed their Medicaidcoverage to continue.100 To qualify eitherfor a continuation of SSI cash benefitsand Medicaid or for a continuation ofMedicaid coverage only, the individual’scountable assets must remain below theSSI asset limits of $2,000 for an individualor $3,000 for a couple. This generallymeans that such an individual cannottake advantage of the employer’s definedcontribution plan without risking loss ofprogram benefits that may be critical tothe person’s ability to continue working.

In all these situations, the individual willnot be saving for retirement. Yet if theindividual had an account at retirement, itwould provide an additional source ofincome that could reduce or eveneliminate the individual’s need for SSI atthat time.

Problems for Low-Income Seniors

The rules also pose problems for poorelderly people who are ready to retire andwish to use funds they have accumulatedin a modest retirement account to providesome income during their remainingyears. If such an individual converts aretirement account to a lifetime annuity,SSA will not count it as an asset. But ifthe person finds that purchasing anannuity is not a financially wise choice—as will often be the case for low-incomepeople, depending on theircircumstances—SSA has no alternativemechanism to enable the individual toretain the retirement account and makeperiodic withdrawals from it withouthaving the account count as an assetand make the person ineligible for SSIand, in most cases, for Medicaid as well.

These problems are compounded by thevery low asset limits in SSI—$2,000 foran individual and $3,000 for a couple.These asset limits have remainedunchanged since 1989, with noadjustment for inflation. When SSI was

The Adverse Effects of Current SSA Policy

The following appears in the Social Security Administration policy instructions that governthe SSI program.

“F. EXAMPLE

“1. Situation

“Jeff Grant currently works 3 days a week for a company where he has been employed full-time for 20 years. Under his employer’s pension plan, Mr. Grant has a $4,000 retirementfund. The CR [claims representative] confirms that Mr. Grant could withdraw the funds now,but there would be a penalty for early withdrawal and he would forfeit eligibility for an annuitywhen he stopped working.

“2. Analysis

“Since Mr. Grant can withdraw the retirement funds without terminating employment, theyare a resource in the amount available after penalty deduction. This is true despite the factMr. Grant forfeits eligibility for periodic annuity payments in the future. Since SSI is a currentneeds program, all sources of available support (unless otherwise excluded) are consideredin determining eligibility”

SSA POMS §SI 01120.210.F


implemented in 1974, the resource limitswere $1,500 for an individual and $2,250for a couple. Had these original amountsbeen indexed, the SSI resource limits in2005 would be $5,885 and $8,828,respectively. The asset limitsconsequently are far more restrictivetoday than the limits were when the SSIprogram was established under the Nixonadministration in the early 1970s.

Purchasing a Lifetime Annuity

Having a lifetime annuity often is verydesirable. It ensures that income fromretirement savings will not run out beforea person dies.

There are several reasons, however, whyit may be disadvantageous for a low-income elderly person who is not eligible

SSI Rules Can Penalize Recipients Who Seek to Protect Their Spouses from Poverty in Old Age

In most arrangements under which someone with a pension or retirement fund canreceive a monthly annuity-like payment for the rest of his or her life, a married employeecan receive either a higher monthly payment that ends when he or she dies (a “single lifeannuity”) or a somewhat lower monthly amount that is payable until the employee diesand that is followed by a further reduced monthly amount (for example, one-half or two-thirds of the monthly amount payable during the employee’s lifetime) that is payable to theemployee’s surviving spouse until the spouse’s death. The “joint and survivor annuity”approach, under which payments continue to be made to the surviving spouse, has longbeen recognized as the approach that public policy should favor, as it reduces povertyamong elderly widows, especially those who live to a very old age.

Indeed, federal law governing tax-qualified pension plans goes to great lengths toencourage and enforce such a public policy. A qualified plan can lose its tax-favoredstatus for failure to provide that the joint and survivor annuity is the default mode ofpayment under the plan or for failure to protect the employee’s spouse by ensuring thatthe spouse has a veto over the employee’s choice to take a single-life annuity (or a lump-sum payment) instead of a joint and survivor annuity. This policy is considered soimportant that the Internal Revenue Code and ERISA (the Employee Retirement IncomeSecurity Act of 1974, as amended) explicitly provide that a spouse’s consent to theemployee’s waiver of the joint and survivor annuity is not effective unless notarized orwitnessed by a plan representative.

The rules that govern the SSI program, however, are contrary to this federal pensionpolicy and push individuals to take annuities that end with their own death andconsequently leave their widows (or widowers) with nothing. Under these rules, if an SSIrecipient who has a pension or retirement fund has the choice of whether to take a highermonthly payment that ends when he dies or a lower monthly payment that continues untilboth the individual and spouse have died, the recipient must take the higher benefit andeliminate the spouse’s ability to receive payments after his death. The SSI rulesspecifically state that SSA staff must “[a]dvise the SSI claimant/recipient that he/she mustelect the higher current benefit to retain SSI eligibility. Election of the lower benefit willresult in the loss of SSI eligibility until such time as the election is changed or the optionfor change is no longer available” (POMS SI 00510.001.D.3).

The SSI rules do state that SSA will not require the SSI applicant or recipient to take thehigher monthly payment if the spouse refuses to waive his or her right to a spousalsurvivor benefit, but recipients and their spouses often will not know that this right exists.SSA rules do not require SSA staff to inform SSI applicants and recipients of theconsequences that apply if the spouse declines to waive his or her right to the spousalsurvivor benefit.


30 june 2005

to receive annuity payments through adefined benefit plan to purchase a lifetimeannuity. If the person’s health is poor andhe or she has only a modest remaininglife expectancy, purchase of an annuitywould not be beneficial, as the annuitypayments likely to be made before theperson’s death would not be sufficient tojustify the purchase.

A lifetime annuity generally is not a wiseinvestment for someone who is notexpected to reach the average lifeexpectancy for a retiree. Firms that sellannuities set prices and monthly annuitypayment levels in accordance with theexpectation that the people who choose topurchase these products will generally havelonger-than-average life expectancy (sincethat is, in fact, the case). The purchase of alifetime annuity can impose a loss on low-income people since they tend to havebelow-average life expectancy.

Historically, lifetime annuities purchased inthe commercial market have also tendedto be expensive, since the price ofannuities reflects the administrative costsand profits of the firms that sell theseproducts (see note 26). A low-incomesenior could reasonably conclude that theamounts that would be siphoned off incosts and fees would be better used tohelp cover his or her living expenses. In short, while a lifetime annuity is verydesirable in many cases, especially if paidfrom a defined benefit plan (which avoidsthe need for an individual to purchase anannuity independently, with the attendantcosts), it is inappropriate for the SSIprogram to force low-income elderlypeople who are not in a defined benefitplan and who wish to qualify for SSI tochoose between purchasing an annuitythat might be ill-advised for themfinancially and immediately spending mostor all of their retirement funds.

Circumstances in Which RetirementAccounts Do Not Count

The Social Security Act requires that theincome and assets of an ineligible spouseor an ineligible parent (or the spouse ofsuch a parent) be “deemed” to be

available to the SSI applicant or recipient.This means that the income and assets ofthe spouse or parent are treated as if theywere the income and assets of the SSIapplicant or recipient.101

The statute permits the SSAcommissioner to determine if there arecircumstances when such deemingwould be inequitable and should not berequired.102 Relying upon this statutorylanguage, the Commissioner of SocialSecurity has ruled that retirementaccounts of ineligible spouses, parents,or spouses of parents are not to be“deemed” to (i.e., not to be treated asthough they were owned by) SSIapplicants or recipients.103 SSA has saidit would be “inequitable to jeopardize thefuture of a person whose resources aredeemed” by treating that person’s futureretirement income as though it belongedto another individual. SSA hascharacterized its policy of excludingretirement accounts from the deemingrules as being “supportive of families.”

SSA distinguishes this situation from thatin which the SSI applicant or recipienthimself or herself has a retirementaccount. SSA has said, “SSI is a currentneeds-based program. Consequently, theindividual’s own current needs mustoutweigh his or her future needs.”104

Opportunities for Policy Improvements

SSA’s specific policies on the treatment ofretirement accounts do not appear in,and are not required by, the SocialSecurity Act. The statutory provision uponwhich SSA has relied in issuing thesepolicies merely states that if a person has,or may potentially have, another source ofincome, the person must seek thatincome.105 The income, if received,reduces the person’s SSI benefits.

Over time, SSA has taken this principle—that an individual must pursue otheravailable income—and applied it to verydifferent circumstances, with somedeleterious effects. SSA effectively requiresan SSI-disability applicant or recipient toliquidate a retirement account as a


condition of receiving benefits, rather thanallowing the person to retain the retirementaccount while receiving SSI so theaccount can provide income to theindividual in old age. With the shift over thepast several decades from defined benefitpension plans to defined contributionplans, what may initially have been arelatively benign extrapolation by SSA fromthe statutory language has turned into aperverse rule that threatens to disinvestmany low-income working-age peoplewith disabilities of their modest retirementsavings (or to prevent them fromestablishing a retirement account in thefirst place), and thereby to leave them lesswell prepared for their retirement years.

Some people with disabilities experienceperiods when they cannot work and needfull SSI benefits, followed by periods whenthey can return to work and go off SSIuntil their medical conditions worsen. Suchindividuals should not have to liquidatetheir retirement accounts when they needto return to SSI. Other people withdisabilities can work while remainingeligible for SSI; they should be permittedto establish and build retirement accounts.

Similar issues arise with regard to poorelderly individuals who have modestretirement accounts. The current ruleseffectively require such individuals toliquidate their accounts and spend theproceeds as a condition of receiving SSI,unless they purchase a lifetime annuity. Amore sensible policy would allow them to

retain their accounts but require them todraw reasonable amounts of income fromthe accounts on a regular basis or deemthem to be making such withdrawals forpurposes of the income test.Because important aspects of SSA’scurrent policy are not mandated bystatute, SSA does not need a legislativechange to modernize and improve thepolicy. SSA has the opportunity toredesign its policy to encourage savingfor retirement and, where possible, areturn to work. Such a change in policycould reduce some individuals’ need forSSI in old age, by enabling them toreceive income in old age from theirretirement accounts and thus to be ableto rely to a greater degree in retirementupon a combination of Social Securityand income from retirement savings.

How to Proceed

The SSA rule discussed above on thedeeming of assets reflects the tensionbetween two policy goals—the need onthe one hand to ensure that SSI is aprogram of last resort (the “currentneeds-based” policy) and the importanceon the other hand of not “jeopardiz[ing]the future” and of encouraging individualsto save for retirement. SSA’s ruleexcluding the retirement accounts ofineligible spouses and parents is intendedto avoid jeopardizing the future of therelatives of SSI recipients and toencourage the relatives to save for theirown retirement. In addition, SSA’s policy

Protecting Against Unintended Consequences in Medicaid

The federal Medicaid statute permits some states to maintain Medicaid eligibility rules forSSI recipients that are more restrictive than the SSI eligibility rules. This means that SSIrecipients in these states are not automatically eligible for Medicaid. Eleven states followthese procedures. They are known as “209(b)” states. (The states are listed in note 60.)

Reforms in the treatment of retirement accounts in SSI would not automatically apply tothe Medicaid eligibility rules for SSI recipients in these states. If SSA makes changes in theSSI rules, it will be important to encourage these states to make similar changes in theirstate Medicaid rules so that an SSI recipient who benefits from being able to retain aretirement account for use in retirement will not lose eligibility for Medicaid by retaining theaccount. For many people who receive SSI, the health care they receive through theMedicaid program is as important as—and, in many cases, more valuable than—their SSIcash benefit.


32 june 2005

of excluding lifetime annuities from theSSI asset test reflects an understandingthat ongoing periodic payments arepreferable to one-time lump-sumpayments. These policies provide SSA aframework upon which to build inimproving SSI policies related toretirement saving.

Further, SSA policies instituted in recentyears emphasize helping andencouraging SSI recipients withdisabilities to return to work or tocontinue working. This is a key emphasisboth at SSA and of President Bush’s“New Freedom Initiative.”106 Thisemphasis provides additional grounds forreassessing and modifying the policy onthe treatment of retirement accounts inthe SSI program. A change in policy toexclude retirement accounts for working-age people with disabilities from beingcounted as assets would support effortsto encourage people with disabilities toattempt to return to work and, onceworking again, to remain employed. Itwould provide an additional incentive towork—the incentive to build retirementsavings without jeopardizing anindividual’s ability to return to SSI andMedicaid if the individual’s conditionshould worsen and he or she cannotcontinue employment.

Such an approach would be consistentwith the choices many states have madein designing their Medicaid Buy-Inprograms. As noted in the Medicaidchapter of this report, under theseprograms, states may permit people withdisabilities who are working and needhealth care to apply for and secureMedicaid coverage. States havesubstantial flexibility in setting the incomeand assets rules used. Eighteen of thethirty-two states that exercise this optionhave chosen to exclude retirementaccounts from counting as assets in theirMedicaid Buy-In programs.107

Another point worth noting is thatrequiring SSI applicants and recipients toliquidate their retirement accounts mayoften generate little savings for the SSI

program. If a person receives a lump-sumpayment upon liquidation of a retirementaccount, SSA will not count the paymentas income in the month it is received, butwill count as an asset whatever portion ofthe lump-sum amount remains, starting inthe first month after receipt of thepayment.108 If the remaining amount,when combined with other countableassets, exceeds the asset limit of $2,000for an individual and $3,000 for a couple,the person will remain ineligible for SSI.This provides an incentive for individualsto use most or all of the funds from aretirement savings account to pay offaccumulated bills, purchase anexcludable resource such as a vehicle,undertake deferred home or automobilerepairs, replace a household appliance, orthe like. When this occurs, ineligibility forSSI can last for only a short period oftime, and the savings to the SSI programare limited to a few months of benefits.Accordingly, changing the policy mayhave a modest cost.

In fact, if individuals were allowed to retaintheir retirement accounts, the futureincome from those accounts could reducethe cost of the individuals’ SSI checks inretirement or make the individuals ineligiblefor SSI at that time because their incomewould exceed the SSI income limit. Thiscould occur, for example, if an SSIdisability recipient with a small retirementaccount were able to hold on to theaccount and to return to work at asubsequent point, which would provide anopportunity for the retirement account togrow. Upon retiring, the person might beable to rely upon Social Security,Medicare, and funds from the retirementaccount without needing SSI or Medicaid.Even if the person still needed SSI, his orher benefits would be lower in old agethan would otherwise be the casebecause of the income that he or shewould receive from the retirement account.

The Specific Changes That Should Be Made

Accordingly, there are three administrativerule changes that SSA should seriously

SSA or Congress

should modify the

SSI rules to

exclude retirement

accounts from

counting as assets

and to count as

income in

retirement the

monthly annuity

value of such

accounts.


consider. These changes would markedlyimprove the ability of people who havedisabilities or are aged—and who needSSI—to retain retirement savings and usethose savings to provide income in oldage.

• First, SSA or Congress should modifythe SSI rules to exclude retirementaccounts from counting as assets andto count as income in retirement themonthly annuity value of suchaccounts. This would entail broadeningthe current exclusion for retirementaccounts held by ineligible spousesand parents to include retirementaccounts held by working-age peoplewith disabilities. Such a rule couldinclude language stating that anyamounts that individuals withdisabilities withdraw from suchaccounts prior to age 65, and whilereceiving SSI, will be treated ascountable income in SSI.

It should be noted that the SocialSecurity Administration cannot changethrough administrative action therequirement that as a condition ofreceiving SSI, a disabled SSIbeneficiary who can begin to draw aregular payment from a retirement fundimmediately must do so, even ifbeginning to draw payments now willmean that the payments will besignificantly smaller than if the personwaited until he or she reached the agethe retirement plan designates forreceipt of such payments.109 Asexplained earlier, the SSI statuterequires that a person apply for andobtain any benefits or income for whichhe or she is eligible.110 (Given theretirement savings issues that areinvolved, Congress may wish toconsider whether there should be anexception to the current statutorylanguage in cases where electing notto take immediate regular paymentswould result in a more substantialstream of regular income in old age.)

The statutory provision in questionrequires a person to apply for and

secure ongoing income. It does notbind SSA in cases when all that theperson can receive is a lump-sumpayment. SSA now applies the policyin such a situation, as well, but it wouldbe better public policy to permit an SSIdisability beneficiary to retain retirementfunds and not have those funds affecteligibility for SSI, as long as the persondoes not withdraw those funds. At thetime the person retires or reaches age65, the person would have the samechoices as SSI elderly applicants andrecipients concerning whether to retainthe retirement account or convert it toan annuity. The person thus wouldhave additional income in retirementthat would reduce or eliminate theneed for SSI. This is a step that SSAcan and should take administratively.

• Second, SSA should amend its rules toprovide that a person age 65 or olderneed not convert his or her retirementaccount into a lifetime annuity to have itexcluded from the SSI asset test;instead the principle should be thatretirement accounts will not count asassets for aged SSI recipients but thatSSA will count as income the amountof money the person could take fromsuch an account on a monthly basis forthe remainder of his or her life. Toenable SSA to implement such a rule,the Social Security Administration’sactuaries would provide a table withmonthly annuity amounts, based on thevalue of an account and an individual’sage. (This would be easy for theactuaries to do and would reflect life-expectancy projections the actuariesalready make.) SSA staff would take anindividual’s age and the value of his orher retirement account and simply lookup on the table the annuity value of theaccount. The amount shown on thetable would be counted as unearnedincome in determining SSI eligibility andbenefit levels.111

SSA redetermines the income and asseteligibility of SSI recipients on an annualbasis. As part of this process, SSAcould check to see if an adjustment in

SSA should amend

its rules to ensure

that the rights of

spouses to a

pension after the

death of the worker

are protected.


34 june 2005

the amount being imputed as incomefrom a recipient’s retirement account isneeded to reflect changes either in lifeexpectancy (since the person will havelived for another year) or in the value ofthe person’s account.

This approach would have the salutaryeffect of allowing older people to retainrather than liquidate their retirementfunds, without having to reduce thevalue of their accounts to purchase alifetime annuity that might not beappropriate for them. Those whowished to purchase a lifetime annuitywould still be able to do so, with theirmonthly annuity payments counting asincome, as under the current rules.

Such changes also could be madethrough legislation. For example,pension legislation introduced by then-Rep. Rob Portman (R-Ohio) and Rep.Ben Cardin (D-Maryland) in 2003included reforms consistent with theprinciples outlined here. Under thelegislation, the first $75,000 in aretirement account would not becounted against the SSI asset limit. Amonthly annuity value would becomputed for the balances in suchaccounts for applicants and recipientswho are aged 601/2 and over, based ona table that SSA would issue, with themonthly annuity value being countedas income.112

• Finally, SSA should amend its rules toensure that the rights of spouses to apension after the death of the workerare protected. As explained in the boxon page 29, current SSA rules requirean SSI recipient to take a highermonthly pension payment thatterminates when the recipient dies (asingle-life annuity), instead of taking alower monthly pension payment withthe guarantee that the person’s spousewill continue to receive benefits untilthe spouse dies if the recipient shoulddie first (a joint and survivor annuity).SSA’s rules conflict with other federalpolicy that seeks to protect spouses in

these situations, and these rules arelikely to harm needy, uninformedcouples. (If the spouse knows to refuseto waive his or her right to benefits,SSA drops the matter.) The SSA ruleshould be changed to eliminate thecurrent requirement, or better still, toprovide that it is SSA’s policy toencourage SSI recipients to take thelower (joint and survivor) pensionbenefit in order to ensure protection forthe spouse until the spouse dies.

Conclusion

Federal law reflects a national interest inincreasing retirement saving by low- andmoderate-income households, andpolicymakers have expressed interest on abipartisan basis in making further progresstoward this goal. Doing so would helpreduce elderly poverty, increase nationalsaving rates, reduce the number of elderlypeople who need to rely upon means-tested programs in retirement, and makefederal investments in subsidizingretirement savings less regressive.Policymakers and administrators ofmeans-tested benefit programs can playan important role in increasing retirementsaving by low-income families byeliminating or modifying asset rules thataffect program eligibility.

Congress could create a blanket disregardfor retirement accounts that receivepreferential tax treatment (such as 401(k)plans and IRAs) by amending the tax codeto exclude such accounts when deter-mining eligibility or benefit levels underfederal means-tested programs. Even inthe absence of such a change, stateshave complete flexibility in TANF programs,Medicaid, and SCHIP with regard to assetrules. To facilitate retirement saving, statepolicymakers and administrators couldeliminate asset tests entirely in thoseprograms or could disregard retirementplans when applying asset tests.

At a minimum, states should disregard401(k) and similar employer-basedretirement plans in these programs and


also should disregard IRAs to the extentthat forthcoming federal food stampregulations permit. Such a policy wouldalign the treatment of defined contributionplans like 401(k) plans with the treatmentof defined benefit plans, which aredisregarded when asset tests are applied.This policy also would conform to thetreatment of retirement plans under theFood Stamp Program. (In the FoodStamp Program, states must disregard401(k)s and similar plans.) Takingadvantage of this flexibility would allowstates to simplify program administrationby establishing a uniform rule acrossseveral major benefit programs thatdisregards savings in employer-basedretirement plans.

In the SSI program, which operates underfederal rules, policymakers have anopportunity to make administrativechanges to treat different kinds ofretirement plans more fairly and to allowmore people with disabilities to saveadequately for retirement. Within the limitsof the current statute, the Commissionerof Social Security should change SSApolicy to permit SSI applicants andrecipients to retain retirement accountsprior to age 65 and not have them countas resources. For those 65 or older,including those who previously receivedSSI based on disability or blindness, SSAshould change its rules to allow individualsto retain their retirement accounts ratherthan having to purchase an annuity, while

requiring that the monthly annuitized valueof such an account be deemed to beincome to the individual. Congress alsocould make such changes throughlegislation, perhaps along the lines of thePortman-Cardin proposal introduced in2003. (In addition, in situations in whichan individual with a disability is underage 65 and is eligible to receive aperiodic payment from a retirement fundor account, Congress could considerwhether it would be better public policyto allow the individual to postponereceipt of payments from the retirementaccounts until he or she reaches 65,when the payments would be moresubstantial and could reduce the person’sneed for SSI.)

Eliminating or changing asset rules willhave modest costs, because some low-income households that otherwise wouldhave been precluded from receivingmeans-tested benefits will be able tosecure benefits to see them through atime of need. Such an investment wouldbe well worth it. If low-income householdscan save more adequately for retirement,the economy as a whole should benefitfrom increased national saving, and fewerpeople will be poor and have to rely onpublic benefits in old age. Moreover, thecosts would be tiny compared with thecosts that the federal government bears inproviding extensive tax subsidies forretirement saving that accrue primarily tohigher-income households.


36 june 2005

Asset Limits and Treatment of Retirement AccountsIn Medicaid for Children and Families and in SCHIP

State Children’s Medicaid Family Medicaid Family Medicaid Family Medicaidand SCHIP

_________________ _________________ _________________ _________________

Asset Limita,b Asset Limitb Is the First Are Retirement(family of three) (family of three) Vehicle Counted Accounts Counted

As an Asset?b As an Asset?b

Alabama None None Not applicable Not applicable

Alaska None $2,000 No Yes

Arizona None None Not applicable Not applicable

Arkansas None $1,000 No Yes

California None $3,150 No, if used for IRAs and Keogh plans certain purposesc are counted; 401(k)s

are not counted

Colorado Medicaid: $1,000 $2,000 No YesSCHIP: None

Connecticut None None Not applicable Not applicable

Delaware None None Not applicable Not applicable

District of Columbia None None Not applicable Not applicable

Florida None $2,000 $8,500 of value is Yesnot counted

Georgia None $1,000 No, if primarily used Yesfor income-producing purposesd

Hawaii None $3,250 No Yes

Idaho Medicaid: $5,000 $1,000 No Only withdrawnSCHIP: $5,000 funds are counted

Illinois None None Not applicable Not applicable

Indiana None $1,000 $5,000 of value is Yes not counted

Iowa None $2,000 $4,115 of value Yesnot counted

Kansas None None Not applicable Not applicable

Kentucky None $2,000e No Only withdrawn funds are counted

Louisiana None None Not applicable Not applicable

Maine None $2,000, but No Yes$12,000 of savings are not counted

Maryland None $3,000 No IRAs and Keogh plans are counted; 401(k)s are not counted

Massachusetts None None Not applicable Not applicable

Michigan None $3,000e No Yesf

Minnesota None $20,000 No No

Mississippi None None Not applicable Not applicable

Missouri None None Not applicable Not applicable

Montana Medicaid: $3,000 $3,000 Vehicle with the YesSCHIP: none highest equity is

not counted

Nebraska None $6,000 No Yes

Nevada None $2,000 No Yes

Appendix A


State Children’s Medicaid Family Medicaid Family Medicaid Family Medicaidand SCHIP

_________________ _________________ _________________ _________________

Asset Limita,b Asset Limitb Is the First Are Retirement(family of three) (family of three) Vehicle Counted Accounts Counted

As an Asset?b As an Asset?b

New Hampshire None $1,000 No Yes

New Jersey None None Not applicable Not applicable

New Mexico None None Not applicable Not applicable

New York None $3,000 (the asset limit No Yes is $1,000 but the first $2,000 in assets are not counted)g

North Carolina None $3,000 No Only withdrawn funds are counted

North Dakota None None Not applicable Not applicable

Ohio None None Not applicable Not applicable

Oklahoma None None Not applicable Not applicable

Oregon Medicaid: none $2,500, but up to No YesSCHIP: $10,000 $10,000 if participating

in a TANF work activity

Pennsylvania None None Not applicable Not applicable

Rhode Island None None Not applicable Not applicable

South Carolina None None Not applicable Not applicable

South Dakota None $2,000 No Yes

Tennessee None $2,000 $4,600 of value is Yesnot counted

Texas Medicaid: $2,000 $2,000 $4,650 of value is IRA and Keogh plansSCHIP: $5,000 if not counted are counted; fundsincome is above 150% withdrawn from a of poverty line; 401(k) are countedotherwise, none (remaining funds are

not counted)

Utah Medicaid: $3,025 if $3,025h No Yeschild is age 6 or older; otherwise noneSCHIP: none

Vermont None $3,150i No Yes

Virginia None None Not applicable Not applicable

Washington None $1,000 $5,000 of value is Yesnot counted

West Virginia None $1,000 $1,500 of value is Yesnot counted

Wisconsin None None Not applicable Not applicable

Wyoming None None Not applicable Not applicable

a. See Beneath the Surface: Barriers Threaten to Slow Progress on Expanding Health Coverage of Children and Families, Donna Cohen Ross and LauraCox, Center on Budget and Policy Priorities for the Kaiser Commission on Medicaid and the Uninsured, October 2004, table 5, available athttp://www.kff.org/medicaid/7191.cfm.

b. Based on a national survey conducted by the Center on Budget and Policy Priorities in 2004 that asked about resource limits and rules, including thetreatment of IRAs, 401(k)s, and Keogh plans. States that count a particular kind of retirement account, generally do so only if the account is in some wayaccessible to the client. Some states do not count Keogh plans that involve a contractual relationship with individuals outside of the household.

c. If the value of the first vehicle is counted, California disregards $1,500 of its equity value.

d. If the value of the first vehicle is counted, Georgia disregards $4,650 of its equity value.

e. Michigan counts only liquid assets.

f. Michigan counts 401(k) plans, Keogh plans, and IRAs even if they are not accessible to the client; defined benefit plans are counted only if accessible tothe client.

g. There is no asset test in New York’s expanded Medicaid program for parents, known as Family Health Plus.

h. There is no asset test in Utah’s expanded Medicaid program for parents, known as the Primary Care Network Program.

i. There is no asset test in Vermont’s expanded Medicaid program for parents, known as the Vermont Health Access Program.


38 june 2005

State Mandatory Mandatory Optional Optional Optional SSI or 209(b) SSI or 209(b) Medically Needy Medically Needy Poverty-Level

Coverage Coverage Coverage Coverage CoverageCategorya Categorya Categoryc Categoryc Categorye

______________ ______________ ______________ ______________ ______________

— — Asset Limit Asset Limit —Asset Limit Asset Limit (individual)d (couple)d Asset Limit(individual)b (couple)b (individual)f

Alabama $2,000 $3,000 No coverage No coverage No coverage

Alaska $2,000 $3,000 No coverage No coverage No coverage

Arizona $2,000 $3,000 No coverage No coverage No coverage

Arkansas $2,000 $3,000 $2,000 $3,000 No coverage

California $2,000 $3,000 $2,000 $3,000 $2,000

Colorado $2,000 $3,000 No coverage No coverage No coverage

Connecticut $1600 $2,400 $1,600 $2400 No coverage

Delaware $2,000 $3,000 No coverage No coverage No coverage

District of Columbia $2,000 $3,000 $2,600 $3,000 $2,000

Florida $2,000 $3,000 $5,000 $6,000 $5,000

Georgia $2,000 $3,000 $2,000 $4,000 No coverage

Hawaii $2,000 $3,000 $2,000 $3,000 $2,000

Idaho $2,000 $3,000 No coverage No coverage No coverage

Illinois $2,000 $3,000 $2,000 $3,000 $2,000

Indiana $1,500 $2,250 No coverage No coverage No coverage

Iowa $2,000 $3,000 $10,000 $10,000 No coverage

Kansas $2,000 $3,000 $2,000 $3,000 No coverage

Kentucky $2,000 $3,000 $2,000 $4,000 No coverage

Louisiana $2,000 $3,000 $2,000 $3,000 No coverage

Maine $2,000 $3,000 $2,000 $3,000 $2,000

Maryland $2,000 $3,000 $2,500 $3,000 No coverage

Massachusetts $2,000 $3,000 $2,000g $3,000g $2,000

Michigan $2,000 $3,000 $2,000 $3,000 $2,000

Minnesota $3,000 $6,000 $3,000 $6,000 $3,000

Mississippi $2,000 $3,000 No coverage No coverage $2,000

Missouri $999.99 $2,000 No coverage No coverage No coverage

Montana $2,000 $3,000 $2,000 $3,000 No coverage

Nebraska $2,000 $3,000 $4,000 $6,000 $4,000

Nevada $2,000 $3,000 No coverage No coverage No coverage

New Hampshire $1,500 $1,500 $2,500 $4,000h No coverage

New Jersey $2,000 $3,000 $4,000 $6,000 $2,000

Asset Limits In Medicaid for People Who Are Elderly, Blind, or DisabledAppendix B


State Mandatory Mandatory Optional Optional Optional SSI or 209(b) SSI or 209(b) Medically Needy Medically Needy Poverty-Level

Coverage Coverage Coverage Coverage CoverageCategorya Categorya Categoryc Categoryc Categorye

______________ ______________ ______________ ______________ ______________

— — Asset Limit Asset Limit —Asset Limit Asset Limit (individual)d (couple)d Asset Limit(individual)b (couple)b (individual)f

New Mexico $2,000 $3,000 No coverage No coverage No coverage

New York $2,000 $3,000 $3,750 $5,400 No coverage

North Carolina $2,000 $3,000 $2,000 $3,000 $2,000

North Dakota $3,000 $6,000 $3,000 $6,000 No coverage

Ohio $1,500 $2,250 No coverage No coverage No coverage

Oklahoma $2,000 $3,000 $2,000 $3,000 $2,000

Oregon $2,000 $3,000 $2,000 $3,000 No coverage

Pennsylvania $2,000 $3,000 $2,400 $3,200 $2,400

Rhode Island $2,000 $3,000 $4,000 $6,000 $4,000

South Carolina $2,000 $3,000 No coverage No coverage Not available

South Dakota $2,000 $3,000 No coverage No coverage No coverage

Tennessee $2,000 $3,000 $2,000 $3,000 No coverage

Texas $2,000 $3,000 No coverage No coverage No coverage

Utah $2,000 $3,000 $2,000 $3,000 $2,000

Vermont $2,000 $3,000 $2,000 $3,000 No coverage

Virginia $2,000 $3,000 $2,000 $3,000 $2,000

Washington $2,000 $3,000 $2,000 $3,000 No coverage

West Virginia $2,000 $3,000 $2,000 $3,000 No coverage

Wisconsin $2,000 $3,000 $2,000 $3,000 No coverage

Wyoming $2,000 $3,000 No coverage No coverage No coverage

a. States are required to provide Medicaid coverage to SSI recipients, in which case the SSI asset limits of $2,000 for an individual and $3,000 for a cou-ple apply. As an alternative to covering all SSI recipients, under section 209(b) of the Social Security Act Amendments of 1972, some states are permittedto cover only those SSI recipients who meet the income and asset tests that were in place in 1972 when SSI was enacted. States that take up this optionare known as 209(b) states, and their asset limits may be lower than the SSI asset limit.

b. See Medicaid Eligibility Policy for Aged, Blind, and Disabled Beneficiaries, by Brian Bruen, Joshua Wiener, and Seema Thomas of the Urban Institute forthe AARP Public Policy Institute, November, 2003, table 4, available at http://research.aarp.org/health/2003_14_abd.html, and the National Association ofState Medicaid Directors’ Aged, Blind, and Disabled Medicaid Eligibility Survey, available at http://www.nasmd.org/eligibility/results3.asp.

c. States are permitted to provide Medicaid coverage to low-income elderly or disabled people who have high medical costs but too much income toqualify for Medicaid in another eligibility category. Applicants can qualify for coverage under this category, known as the “medically needy” category, if theyhave income below the income limit for this category or if they incur high out-of-pocket medical expenses and their income drops below the limit whenthese expenses are subtracted from it. (This is known as “spending down.”)

d. See Medicaid Eligibility Policy for Aged, Blind, and Disabled Beneficiaries, by Brian Bruen, Joshua Wiener, and Seema Thomas of the Urban Institute forthe AARP Public Policy Institute, November, 2003, table 7, available at http://research.aarp.org/health/2003_14_abd.html, and the National Association ofState Medicaid Directors’ Aged, Blind, and Disabled Medicaid Eligibility Survey, available at http://www.nasmd.org/eligibility/results6.asp.

e. States have the option of providing Medicaid coverage to elderly and/or disabled people with incomes up to the poverty line who are not SSI recipients.

f. See Medicaid Eligibility Policy for Aged, Blind, and Disabled Beneficiaries, by Brian Bruen, Joshua Wiener, and Seema Thomas of the Urban Institute forthe AARP Public Policy Institute, November, 2003, table 6, available at http://research.aarp.org/health/2003_14_abd.html.

g. Massachusetts does not apply an asset test to noninstitutionalized blind or disabled applicants under the age of 65.

h. The asset limit for disabled couples in New Hampshire who are in this category is $2,500.


40 june 2005

Appendix C Where to Find More Information on State Asset Policies

The Food Stamp Program

State policy manuals (which may explain the treatment of retirement savings):

Online Information about Key Low-Income Benefit Programs—Links to PolicyManuals, Descriptive Information, and Applications for State Food Stamp, TANF,Child Care, Medicaid, and SCHIP Programs, Sharon Parrott, Center on Budget andPolicy Priorities, updated November 29, 2004, available at http://www.cbpp.org/1-14-04tanf.pdf.

Temporary Assistance for Needy Families

State TANF cash assistance asset limit and vehicle rules:

Temporary Assistance for Needy Families (TANF) Sixth Annual Report to Congress,U.S. Department of Health and Human Services, November 2004, chapter 12, table12:6, available at http://www.acf.hhs.gov/programs/ofa/annualreport6/ar6index.htm.

State treatment of assets held by children:

Urban Institute’s Welfare Rules Database athttp://anfdata.urban.org/WRD/WRDWelcome.CFM.

State TANF plans:

Links are available at http://www.financeprojectinfo.org/win/tanf.asp.



Medicaid

State Medicaid plans:

Links and a search function are available athttp://www.cms.hhs.gov/medicaid/stateplans/.




Endnotes

1 Peter R. Orszag is Director of The Retirement Security Project, the Joseph A. Pechman Senior Fellow in Taxand Fiscal Policy at the Brookings Institution, and Co-Director of the Urban-Brookings Tax Policy Center.

2 This is not the case in the Supplemental Security Income program, which has national standards. A list ofresources to find more information on state policies in specific means-tested programs appears in appendix C.

3 The descriptions of various retirement savings vehicles are primarily drawn from Utilization of Tax Incentivesfor Retirement Saving, Congressional Budget Office, August 2003, available athttp://www.cbo.gov/ftpdocs/44xx/doc4490/08-07-Retirement.pdf.

4 Some plans are considered hybrids and have features of both defined benefit and defined contributionplans.

5 In each year from 1975 through 1997, between 45 percent and 47 percent of private-sector workersparticipated in a defined-benefit or defined-contribution plan. See Utilization of Tax Incentives for RetirementSaving, Congressional Budget Office, August 2003, figure 1, available at http://www.cbo.gov/ftpdocs/44xx/doc4490/08-07-Retirement.pdf. Public-sector coverage rates tend to be higher.

6 Ibid., p. 4.

7 The cap is $14,000 in 2005 for participants under age 50. The limit will increase by $1,000, to $15,000, in2006. Participants aged 50 and older may make additional contributions.

8 See Utilization of Tax Incentives for Retirement Saving, Congressional Budget Office, August 2003, table 4,available at http://www.cbo.gov/ftpdocs/44xx/doc4490/08-07-Retirement.pdf.

9 Under current law, participants age 50 and older are allowed to make additional contributions.

10 A married individual who participates in an employment-based pension plan may not deduct contributionsto a traditional IRA if the couple’s joint income equals or exceeds $80,000 in 2005. This figure will increase to$85,000 in 2006 and will be $100,000 for 2007 and later years. (If a taxpayer does not participate in anemployment-based pension plan but the taxpayer’s spouse does, the taxpayer may not deduct contributions toa traditional IRA if the couple’s joint income equals or exceeds $160,000.) The income limits are higher for RothIRAs. A married individual may not use a Roth IRA if his or her income equals or exceed $160,000. Theseincome limits do not affect households eligible for the means-tested benefits discussed in this paper becausetheir household incomes are far below these levels.

11 See 26 U.S.C. §72(t).

12 In addition, many 401(k) plans allow loans. Loans are not treated as withdrawals so long as 1) the amountof the loan is less than a certain percentage of the amount in the individual’s account; and 2) the loan isrepayable within five years through regular payments made at least quarterly. (There is an exception for loansused to purchase a home.) However, if a borrower defaults on a loan or leaves employment with a loan balanceoutstanding, the loan is treated as a withdrawal. See 26 U.S.C. §72(p).

13 See, for example, Do Welfare Asset Limits Affect Household Saving? Evidence from Welfare Reform, ErikHurst and James P. Ziliak, National Bureau of Economic Research, Working Paper 10487, May 2004.

14 See Progressivity and Government Incentives to Save, Peter Orszag and Robert Greenstein, prepared forHarvard University’s Kennedy School of Government conference on “Building Assets, Building Credit,”November 2003, table 2.

15 See Toward Progressive Pensions: A Summary of the U.S. Pension System and Proposals for Reform,Peter Orszag and Robert Greenstein, prepared for Washington University’s conference on “Inclusion in AssetBuilding: Research and Policy Symposium,” September 2000, p. 6.

16 Ibid., p. 10.

17 See Progressivity and Government Incentives to Save, Peter Orszag and Robert Greenstein, prepared forHarvard University’s Kennedy School of Government conference on “Building Assets, Building Credit,”November 2003, p. 3.

18 See Saving Social Security, Peter A. Diamond and Peter R. Orszag, Brookings, 2004, table 8, p. 139.


42 june 2005

19 Budget of the United States, Fiscal Year 2005, Analytical Perspectives, table 18-1.

20 See Distributional Effects of Defined Contribution Plans and Individual Retirement Accounts, LeonardBurman, William Gale, Matthew Hall, and Peter Orszag, The Urban-Brookings Tax Policy Center, August 2004.

21 For a more in-depth discussion of research on the relationship between asset tests and saving rates, seeThe Effect of Asset Tests on Saving, Gordon McDonald, Peter R. Orszag, and Gina Russell, The RetirementSecurity Project, June 2005, available at http://retirementsecurityproject.org.

22 The exemption for the Earned Income Tax Credit appears at 26 U.S.C. §32(1). The child tax credit exemp-tion is included in Section 203 of the Economic Growth and Tax Relief Act of 2001.

23 Individual Development Accounts funded under either the Assets for Independence Act (AFIA) or theTemporary Assistance for Needy Families block grant (TANF) are excluded from being counted as income orassets in determining eligibility for any federally-funded means-tested benefit. The AFIA provision was amend-ed in 2000 and appears at 42 U.S.C. §604 note. The provision states: “Notwithstanding any other provision offederal law (other than the Internal Revenue Code of 1986) that requires consideration of 1 or more financial cir-cumstances of an individual, for the purpose of determining eligibility to receive, or the amount of, any assis-tance or benefit authorized by such law to be provided to or for the benefit of such individual, funds (includinginterest accruing) in an individual development account under this Act shall be disregarded for such purposewith respect to any period during which such individual maintains or makes contributions to such an account.”The TANF provision, enacted as part of the welfare reform legislation in 1996, includes virtually identical lan-guage. 42 U.S.C. §604(h)(4).

24 Under federal law, if an individual has less than $5,000 in a defined benefit or defined contribution plan andleaves his or her employer, the employer can require the individual to take his or her funds out of the retirementplan. Under a new federal rule that took effect in March 2005, if such an individual does not notify the employerof his or her choice, if the amount is greater than $1,000, and if the terms of the plan allow funds to beremoved, the employer must roll over the individual’s funds into an IRA for that individual (unless the employerretains the funds in the employer’s plan).

25 Life annuities generally are regular monthly or annual payments that are guaranteed to continue for the indi-vidual’s lifetime (or the lifetimes of an individual and the individual’s spouse). They can be provided by a definedbenefit plan or purchased from an insurance company or other financial institution that contracts to providesuch an annuity. An annuity that is not a life annuity might be payable for a fixed number of years rather than forlife; with an annuity that is not a lifetime annuity, or when someone does not purchase an annuity and insteadmakes regular withdrawals from a retirement account, there is a risk that the savings will run out before theretiree dies.

26 When an individual converts a retirement account to a lifetime annuity, the value of the savings in theaccount are likely to be reduced by roughly 3 to 5 percent to cover the annuity company’s marketing expenses,commissions to agents, other administrative costs, and profits. The value of the savings in the account are likelyto be reduced roughly another 10 percent to reflect the fact that people who purchase annuities tend to havelonger-than-average life expectancies, and firms that sell annuities price the annuities to reflect that reality. SeeMortality Risk, Inflation Risk, and Annuity Products, Jeffrey Brown, Olivia Mitchell, and James Poterba, NationalBureau of Economic Research, Working Paper 7812, July 2000.

27 See Who Are the Asset Poor?: Levels, Trends, and Composition, 1983–1998, Robert Haveman and EdwardN. Wolff, Institute for Research on Poverty, University of Wisconsin, Discussion Paper no. 1227-01, April 2001,http://www.ssc.wisc.edu/irp/pubs/dp122701.pdf.

28 Ibid.

29 Many employees, especially low-wage earners, start receiving benefits at an earlier age, in which caseSocial Security payments replace an even smaller portion of prior earnings. Low earnings are defined as aver-age earnings over the course of a career that are equal to about 45 percent of the Social Security averagewage index; in 2004, this would have meant average earnings of approximately $15,776. See The 2004 AnnualReport of the Board of Trustees of the Federal Old-Age and Survivors’ Insurance and Disability Insurance TrustFunds, March 2004, tables V.C1 and VI.F11, available at http://www.ssa.gov/OACT/TR/TR04/tr04.pdf.

30 Many financial planners suggest that a comfortable standard of living during retirement requires incomeequal to about 70 percent of preretirement income. This required “replacement rate” is less than 100 percentfor various reasons, including that work-related expenses are eliminated and retirees often have time to shop forlower-priced goods and services.


31 Legal immigrants face more restrictive food stamp eligibility rules than citizens. Some states provide state-funded food assistance to certain categories of legal immigrants who are ineligible for food stamps. In addition,eligibility for unemployed adults who do not have children is limited to three months out of a three-year period inmany parts of the country.

32 Under the Food Stamp Program, a household is generally defined as a group of people who live togetherand buy food and prepare meals together.

33 See 7 C.F.R. §273.8. In the Food Stamp Program the asset test is also known as the resource test.

34 See 7 U.S.C. §2014(g).

35 See 7 C.F.R. §273.8(c).

36 See 7 C.F.R. §273.8(e).

37 See 7 C.F.R. §273.2(j)(2)(i).

38 Under rules that USDA’s Food and Nutrition Service published on November 21, 2000, individual recipientsof any type of TANF-funded services are considered recipients of TANF “benefits” for purposes of this provisionof the law. See 7 C.F.R. §273.8(e)(17). For a more detailed discussion of these rules, see New State Options toImprove the Food Stamp Vehicle Rule, David Super and Stacy Dean, Center on Budget and Policy Priorities,January 2001, pp. 9–11, available at http://www.cbpp.org/1-16-01fs.pdf. Also, see note 52.

39 For more information on how to implement this option, see Implementing New Changes to the Food StampProgram: A Provision by Provision Analysis of the Farm Bill, Stacy Dean and Dorothy Rosenbaum, Center onBudget and Policy Priorities, revised in January 2003, available at http://www.cbpp.org/8-27-02fa.htm.

40 This explanation of food stamp vehicle asset rules has been simplified for clarity. For a more detailedexplanation of the vehicle asset test, see New State Options to Improve the Food Stamp Vehicle Rule, DavidSuper and Stacy Dean, Center on Budget and Policy Priorities, January 2001, pp. 6–7, available athttp://www.cbpp.org/1-16-01fs.pdf.

41 Under the federal rules, not all vehicles are counted toward the vehicle asset limit. A vehicle is notcounted, for example, if the household has less than $1,500 equity in it, if the vehicle is used primarily forincome-producing purposes (such as a taxi cab), or if the vehicle is needed for long-distance, employment-related travel (other than daily commuting) or to transport a physically handicapped household member.

42 For a description of each state’s vehicle asset policy, see States’ Vehicle Asset Policies in theFood Stamp Program, Center on Budget and Policy Priorities, revised February 2005, available athttp://www.cbpp.org/7-30-01fa.htm.

43 See 7 C.F.R. §273.8(e)(2). FNS clarifying policy on the exclusion of certain retirement plans can be found athttp://www.fns.usda.gov/fsp/rules/Memo/02/pensions.htm.

44 The exclusion of these retirement accounts was established through USDA policy guidance (see note 43)and is not included in the program’s regulations. There is a chance that some states or localities are not awareof the policy guidance and mistakenly count savings in such retirement accounts.

45 See 7 U.S.C. §2014(g)(6). USDA guidance on this option is in Questions and Answers Regardingthe Food Stamp Program (FSP) Certification Provisions of the Farm Bill, available athttp://www.fns.usda.gov/fsp/rules/Legislation/2002_farm_bill/farmbill-QAs.htm.

46 7 U.S.C. §2014(g)(6).

47 Questions and Answers Regarding the Food Stamp Program (FSP) Certification Provisions of the Farm Bill,Question 4107-5, available at http://www.fns.usda.gov/fsp/rules/Legislation/2002_farm_bill/farmbill-QAs.htm.

48 Similarly, so long as a state excludes funds in SEP-IRAs or Keogh plans that involve no contractual obliga-tion with anyone who is not a household member from its TANF or Medicaid asset test, it may exclude themfrom the food stamp asset test.

49 More detail on states that have conformed food stamp income and resource rules to TANF and Medicaidrules is available at http://www.fns.usda.gov/fsp/rules/Legislation/2002_farm_bill/ conformance_options.htm.

50 See 7 U.S.C. §2014(d).


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51 Until final regulations are published, states can disregard all retirement accounts, including IRAs if they disre-gard IRAs in the asset tests used in their TANF cash assistance or family Medicaid programs. See USDA'sguidance on how the new provision may be implemented until final regulations are issued athttp://www.fns.usda.gov/fsp/rules/Legislation/2002_farm_bill/fy02_resource_issues.htm

52 References to “TANF” funds or programs include maintenance-of-effort funds or programs.

53 In fiscal year 2003, states devoted 35 percent of total TANF and MOE funds used that year to providingcash assistance. Center on Budget and Policy Priorities calculations using state TANF and MOE spending datareported to the U.S. Department of Health and Human services, which is available athttp://www.acf.dhhs.gov/programs/ofs/data/index.html.

54 An exception to the broad flexibility that states generally have to establish TANF eligibility rules is that federallaw bars states from using federal TANF dollars to assist most legal immigrants who entered the country afterAugust 22, 1996 (the date the welfare law was signed), until they have been in the United States for at least fiveyears. This restriction applies not only to cash assistance but also to TANF-funded work supports and servicessuch as child care and transportation. States can use state MOE funds to provide benefits to recent immi-grants; fewer than half do so.

55 For a list of each state’s TANF cash assistance asset limit and vehicle rules, see Temporary Assistancefor Needy Families (TANF) Sixth Annual Report to Congress, U.S. Department of Health and Human Services,November 2004, chapter 12, table 12:6, available at http://www.acf.hhs.gov/programs/ofa/annualreport6/ar6index.htm. For more information on Virginia’s TANF cash assistance policy see Virginia Department of SocialServices’ TANF Policy and Manuals, Section 303 available at http://www.dss.state.va.us/policymanual/tanf/300.pdf. Some states exclude certain assets held by children, such as certain types of education savingsaccounts. For more information on the treatment of children’s assets, see the Urban Institute’s Welfare RulesDatabase at http://anfdata.urban.org/WRD/WRDWelcome.CFM.

56 These states calculate the value of vehicle using either the equity value or the fair market value, at state dis-cretion. See Temporary Assistance for Needy Families (TANF) Sixth Annual Report to Congress, U.S.Department of Health and Human Services, November 2004, chapter 12, table 12:6, available athttp://www.acf.hhs.gov/programs/ofa/annualreport6/ar6index.htm.

57 A link to each state’s TANF plan is available at http://www.financeprojectinfo.org/win/tanf.asp and links topolicy manuals for some states are included in Online Information about Key Low-Income Benefit Programs—Links to Policy Manuals, Descriptive Information, and Applications for State Food Stamp, TANF, Child Care,Medicaid, and SCHIP Programs, Sharon Parrott, Center on Budget and Policy Priorities, updated November29, 2004, available at http://www.cbpp.org/1-14-04tanf.pdf.

58 In 2002, nine states—Hawaii, Idaho, Iowa, Kansas, Kentucky, Montana, Nebraska, New Hampshire, andSouth Dakota—excluded some or all interest income. See the Urban Institute’s Welfare Rules Database athttp://anfdata.urban.org/WRD/WRDWelcome.CFM.

59 See enrollment data reported by each state through the Medicaid Statistical Information System, available athttp://www.cms.hhs.gov/medicaid/msis/mstats.asp.

60 As an alternative to covering all SSI recipients, states are permitted to cover only those SSI recipients whomeet the income and asset tests that were in place in 1972 when SSI was enacted. States that take up thisoption are known as 209(b) states. In 2001, there were eleven such 209(b) states: Connecticut, Hawaii, Illinois,Indiana, Minnesota, Missouri, New Hampshire, North Dakota, Ohio, Oklahoma, and Virginia. The asset limits inthese states are generally lower than the SSI asset limit of $2,000 for an individual and $3,000 for a couple.(The SSI asset test is discussed in more detail in the following section, and a list of each state’s asset limitappears in appendix B.) See Medicaid Eligibility Policy for Aged, Blind, and Disabled Beneficiaries, by BrianBruen, Joshua Wiener, and Seema Thomas of the Urban Institute for the AARP Public Policy Institute,November, 2003, available at http://research.aarp.org/health/2003_14_abd.html.

61 The coverage category for this last group of individuals is known as the “medically needy” category.

62 In other words, an SCHIP-funded Medicaid expansion is treated as a Medicaid expansion and the state’sMedicaid eligibility rules for children (including asset policies) apply.

63 See Social Security Act §1902(r)(2)(A). Asset limits in Medicaid are also referred to as resource standards.

64 SSI rules limit assets to no more than $2,000 for individuals and $3,000 for couples.

65 Asset limits for certain categories of Medicaid eligibility coverage for elderly, blind, or disabled individualsappear in appendix B.


66 See Social Security Act §1902(l)(3)(A).

67 The only states that continue to use an asset test for children in determining Medicaid eligibility areColorado, Idaho, Montana, Texas, and Utah. See Beneath the Surface: Barriers Threaten to Slow Progress onExpanding Health Coverage of Children and Families, Donna Cohen Ross and Laura Cox, Center on Budgetand Policy Priorities for the Kaiser Commission on Medicaid and the Uninsured, October 2004, table 5,available at http://www.kff.org/medicaid/7191.cfm.

68 Some additional states have eliminated the asset test in their “medically needy” programs. Under theseprograms, states can elect to cover individuals whose income is above the state’s regular Medicaid income limit,but who fall below their state’s “medically needy” income limit after their out-of-pocket health-care costs arededucted.

69 Asset policies for other groups of beneficiaries and details regarding what counts as an asset can be foundby examining a state’s Medicaid plan, which can be found on the website for HHS’s Centers for Medicare andMedicaid Services at http://www.cms.hhs.gov/medicaid/stateplans/.

70 See Medicaid Eligibility Policy for Aged, Blind, and Disabled Beneficiaries, by Brian Bruen, Joshua Wiener, andSeema Thomas of the Urban Institute for the AARP Public Policy Institute, November, 2003, table 7, available athttp://research.aarp.org/health/2003_14_abd.html and the National Association of State Medicaid Directors’ Aged,Blind, and Disabled Medicaid Eligibility Survey, available at http://www.nasmd.org/eligibility/results6.asp.

71 See Medicaid Eligibility Policy for Aged, Blind, and Disabled Beneficiaries, by Brian Bruen, Joshua Wiener, andSeema Thomas of the Urban Institute for the AARP Public Policy Institute, November, 2003, pp. 31–34, availableat http://research.aarp.org/health/2003_14_abd.html.

72 See appendix A for each state’s treatment of vehicles in its family Medicaid program.

73 These states are Arizona, California, New Jersey, Rhode Island, and Wisconsin.

74 See Social Security Act §2102(b)(1)(A).

75 Each state’s Medicaid plan can be found and searched on the website for HHS’s Centers for Medicare andMedicaid Services at http://www.cms.hhs.gov/medicaid/stateplans/.

76 See V. Smith et al., Eliminating the Medicaid Asset Test for Families: A Review of State Experiences,Kaiser Commission on Medicaid and the Uninsured, April 2001, available athttp://www.kff.org/medicaid/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=13750.

77 This will not necessarily be the case in the eleven “section 209(b) states.” See note 60 and the box on page31.

78 For example, a person with a disability could be ineligible for SSI because he or she receives a Social Securitydisability insurance benefit that places the person slightly above the SSI income limit, even though the person stillfalls below the poverty line. Or, the Social Security disability benefit could result in the person having gross incomethat is modestly above the poverty line, but the individual’s disposable income could fall below the poverty linebecause of large medical expenses that the person incurs. In a number of states, such people may be eligible forMedicaid.

79 The eighteen states are Arizona, California, Connecticut, Indiana, Iowa, Louisiana, Kansas, Michigan,Minnesota, Missouri, New Jersey, New Mexico, Oregon, Utah, Vermont, Washington, West Virginia, andWisconsin. In Vermont, only retirement accounts based on earnings after January 1, 2000, are excluded. In WestVirginia, only retirement accounts initiated after enrollment in the Buy-In are excluded. Washington has no assettest in its Buy-In Program. See Allen Jensen, State Medicaid Buy-In Program Design Features, Work IncentivesProject, George Washington University, September 4, 2003, draft, available on the web athttp://www.uiowa.edu/~lhpdc/work/III_Framework/2003_MedBuyInProgramDesc.doc.

80 See section 1601 et seq. of the Social Security Act, 42 U.S.C. §1381 et seq.

81 See Annual Report of the Supplemental Security Income Program, 2004 (hereafter, 2004 SSI Annual Report),p. 2, available at http://www.ssa.gov/OACT/SSIR/SSI04/.

82 See SSI Annual Statistical Report, 2003, table 3, Social Security Administration, available athttp://www.ssa.gov/policy/docs/statcomps/ssi_asr/2003/index.html.

83 See 2004 SSI Annual Report, p. 2.


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84 The first $20 of unearned income—for example, from a monthly Social Security benefit—is not counted. See§1612(b)(2)(A) of the Social Security Act, 42 U.S.C. §1382a(b)(2)(A). In addition, $65 of earned income per monthplus half of any remaining earnings is not counted. See 20 C.F.R. §1382a(b)(2)(A). “Generally, if the item receivedcannot be used as, or to obtain, food, clothing or shelter, it will not be considered as income.” 2004 SSI AnnualReport, pp. 12–13.

85 There are eleven states that have Medicaid rules that may be more restrictive than the SSI rules. In thesestates, receipt of SSI does not mean automatic eligibility for Medicaid. These states are known as “section 209(b)states.” For a list of these states, see note 60.

86 Some states provide supplements only to certain subpopulations of SSI recipients. The Social SecurityAdministration’s publication, State Assistance Programs for SSI Recipients, January 2004, SSA Pub. No. 13-11975,April 2005, http://www.socialsecurity.gov/policy/docs/progdesc/ssi_st_asst/2004/index.html, provides informationabout the features of the various state programs. See also, 2004 SSI Annual Report, table III.H.1, p. 26.

87 See 20 C.F.R. §416.1205(c). There are circumstances under which SSA will allow a person to receive SSI on aconditional basis while the person is addressing a problem related to an asset. For example, conditional SSIpayments may be made to a person who has assets that exceed the program’s asset limit if some of the assets inquestion are nonliquid and it will take time for the person to convert them to cash. Specifically, an individual mayreceive conditional SSI payments if his or her countable liquid assets do not exceed an amount equal to threetimes the maximum monthly SSI benefit level and the individual agrees in writing to convert the excess nonliquidassets within nine months for real property and within three months for personal property. The individual also mustagree to repay SSA the amount received in SSI benefits during the period that the individual’s assets exceeded thelimit. See SSA POMS §01150.200.B.1; 20 C.F.R. §416.1240; see also section 1613(b)(1) of the Social SecurityAct, 42 U.S.C. §1382b(b)(1).

88 In this report, the terms “assets” and “resources” are used interchangeably. It should be noted that theSocial Security Administration defines the terms differently. If an individual owns something and has access to it,it is a “resource” for SSI purposes. If the person does not have access to the item, it is an “asset.” Becauseother public benefit programs generally do not make this distinction, it is not used in this discussion.

89 SSA has recently modified its rules on the treatment of a vehicle and personal effects. Previously, if a vehiclewas not excluded from the SSI asset limit (because it was not needed for employment or to obtain medicalcare, and it had not been modified to transport a person with a disability), $4,500 of the market value of onevehicle was excluded from countable assets. The value of such a vehicle in excess of $4,500 would countagainst the asset limit, as would the full value of any additional vehicles. See 20 C.F.R. §416.1218. In February2005, however, SSA changed the rule effectively to exclude one vehicle entirely. See 70 Fed. Reg. 6340(February 7, 2005). In the same rule, SSA also indicated that it will no longer count clothing that an SSI appli-cant or recipient receives as income, and it is removing the $2,000 cap on the value of household goods andpersonal items that it excludes as a resource. Henceforth, all household goods and personal items that do nothave investment value will be excluded. See 20 C.F.R. §§416.1102 and 416.1216. These rules took effect onMarch 9, 2005.

90 A money purchase plan is a particular type of defined contribution plan, under which employers committhemselves to make an employer contribution determined by a fixed formula, typically as a percentage of eachemployee’s pay. These plans typically do not involve contributions from employees. Money purchase plans aresubject to some of the same rules as defined benefit plans, notably the prohibition on withdrawals while a work-er continues to be employed by the firm that sponsors the plan and the use of lifetime annuities as the defaultform of payment. Operation of money purchase plans by employers is now declining.

91 In the majority of cases, once an individual has begun receiving periodic payments, the lump-sum withdrawaloption is not available. However, in the rare case in which the individual has the option to make a lump-sum with-drawal of the rest of the annuity payments while receiving the payments, the amount of the lump sum or the pres-ent value of the periodic payments would count as a resource. Communication with SSA, February 15, 2005.

92 See SSA POMS §SI 01120.210.E.1; §SI 00510.001.D.4.

93 This has the effect of forcing the person to liquidate the resources. Rather than spending the proceeds, italso is possible for the individual to convert some or all of the proceeds into excluded resources or to use thefunds to purchase future services. For example, the person could use a portion of the funds to purchase a bur-ial plot or to set aside up to $1,500 in a special account usable only for burial expenses. SSA does not count aburial plot or a separate burial expenses fund of up to $1,500 as a resource in SSI. See 20 C.F.R. §416.1231.The person also could use the proceeds from a retirement fund to repair his or her home; a home is excludedas a resource. Purchase of an item of household goods, such as a refrigerator or water heater, also would beexcluded. See 20 C.F.R. §416.1216. Sometimes, a person may use a lump-sum payment to prepay a numberof months of utility bills. The net result of any of these steps, however, is that the person will not be able toretain the funds in a way that would help the person over the course of retirement.


94 See SSA POMS §SI 01120.210.B. While there are penalties for liquidating most retirement accountsprior to retirement, it seems unlikely that SSI applicants or recipients would be subject to such penalties. Underthe tax code, a person can liquidate a retirement account prior to age 591/2 without penalty if the person isdisabled. The definition of disability for this purpose is similar to the SSI definition of disability. The IRS ruleprovides that “[y]ou are considered disabled if you can furnish proof that you cannot do substantial gainfulactivity because of your physical or mental condition. A physician must determine that your condition can beexpected to result in death or be of long, continued, and indefinite duration” (IRS Publication 590, available athttp://www.irs.gov/publications/p590/ch01.html#d0e7872). SSA will find a person disabled for SSI purposes “ifhe is unable to engage in any substantial gainful activity by reason of any medically determinable physical ormental impairment which can be expected to result in death or which has lasted or can be expected to last fora continuous period of not less than twelve months” (Social Security Act §1614(a)(3)(A) (42 U.S.C.§1382c(a)(3)(A)). As a result, individuals who are eligible for SSI based on disability generally should not be sub-jected to a penalty for early withdrawal of funds from a retirement account.

95 See SSA POMS §SI 00510.001.D.4.

96 In the rare case in which the individual who has begun to receive lifetime annuity payments can convert to alump-sum payment, the present value of the periodic payments would count as a resource. Such acircumstance would be extremely unusual.

97 See SSA POMS §SI 00830.160.B.1.

98 See discussion of who may make early withdrawals from 401(k) plans on p. 6-7.

99 See POMS §SI 01120.210.B “A previously unavailable retirement fund . . . is subject to resources countingrules in the month following the month in which it first becomes available.” If the employer’s rules provide awindow of time during which the former employee can remove the funds and the former employee fails to actduring that period, resulting in the funds being retained in an employer’s account until some later date, SSA willnot count the funds as an available resource during the time that the person cannot access the account.Referring to a similar situation, see POMS §SI 00510.001.E.1: “If the other benefit is no longer available,establish or reestablish eligibility beginning with the month following the month the other benefit is no longeravailable. The reasons for unavailability may include a limited time period for filing which has expired orwithdrawal of a lump-sum payment from a pension fund” (emphasis added).

100 See 2004 SSI Annual Report, table V.E1, p. 94.

101 The ineligible spouse’s or parent’s countable assets are deemed to the SSI applicant or recipient andcounted as if they are the SSI applicant’s or recipient’s. See the provision on spousal deeming, Social SecurityAct §1614(f)(1) (42 U.S.C. §1382c(f)(1)), and the provision on parental deeming, Social Security Act§1614(f)(2)(A) (42 U.S.C. §1382c(f)(2)(A)).

102 Ibid. The statute requires deeming to occur “whether or not available to such individual [the SSI applicant orrecipient], except to the extent determined by the Commissioner of Social Security to be inequitable under thecircumstances.”

103 See 20 C.F.R. §§416.1202(a) and (b)(1). The policy with regard to pension funds of ineligible spouses andineligible parents took effect on September 1, 1987. Before that, these funds were counted as a resource. SeePOMS §SI 01330.120.A.1.b and §SI 01330.220.A.I.b.

104 52 Fed. Reg. 29840 (August 12, 1987). “We believe it is inequitable to jeopardize the future of a personwhose resources are deemed so that another individual’s current needs can be met. This requirement isespecially burdensome because deeming is often a temporary situation which ceases, for example, when achild reaches age 18 or a couple no longer lives together in the same household. In order to be supportive offamilies, we believe it is preferable to permit a spouse or parent to provide for his or her own future whilerecognizing the current needs of the otherwise eligible individual. Therefore, we will not count pension fundsowned by an ineligible spouse, ineligible parent or ineligible spouse of a parent. We will continue our policy ofcounting the equity value of these funds (including any interest accrued) as an available resource to an applicantor recipient who is the owner of a pension fund. . . . It is fair and correct to count the pension funds of anapplicant/recipient because SSI is a current needs-based program. Consequently, the individual’s own currentneeds must outweigh his or her future needs.”


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105 Section 1611(e)(2) of the Social Security Act provides that a person will not be eligible to receive SSI if SSAhas notified the person that he or she may be eligible for “any payment of the type enumerated in section1612(a)(2)(B)” and the person fails to apply for and obtain the payments (Social Security Act §1611(e)(2), 42U.S.C. §1382(e)(2)). See also, 20 C.F.R. §416.20(a). Section 1612(a)(2)(B) of the Social Security Act refers to thefollowing types of payments: “(B) any payments received as an annuity, pension, retirement, or disability benefit,including veterans’ compensation and pensions, workmen’s compensation payments, old-age, survivors, anddisability insurance benefits, railroad retirement annuities and pensions, and unemployment insurance benefits,”Social Security Act §1612(a)(2)(B) (42 U.S.C.§1382a(a)(2)(B)), and similar language in 20 C.F.R.§416.210(b). Thefocus here is on securing ongoing payments that can help to reduce or eliminate the need for SSI on anongoing basis. Receipt of a lump-sum payment does not meet this need and, in fact, frustrates the possibilitythat the person will later have an ongoing payment that could reduce the need for SSI.

106 For more information about the president’s New Freedom Initiative, seehttp://www.whitehouse.gov/news/freedominitiative/freedominitiative.html andhttp://www.whitehouse.gov/infocus/newfreedom/; see also http://www.ssa.gov/pressoffice/disabilityinfo-pr.htm.

107 The eighteen states are Arizona, California, Connecticut, Indiana, Iowa, Louisiana, Kansas, Michigan,Minnesota, Missouri, New Jersey, New Mexico, Oregon, Utah, Vermont, Washington, West Virginia, andWisconsin. In Vermont, only retirement accounts based on earnings after January 1, 2000, are excluded. InWest Virginia, only retirement accounts initiated after enrollment in the Buy-In are excluded. Washington has noasset test in its Buy-In Program. See Allen Jensen, State Medicaid Buy-In Program Design Features, WorkIncentives Project, George Washington University, September 4, 2003, draft, available on the web athttp://www.uiowa.edu/~lhpdc/work/III_Framework/2003_MedBuyInProgramDesc.doc.

108 See note 99.

109 Not all retirement accounts fall into the two categories that SSA generally uses: (1) those in which the personmust liquidate the account because no periodic payment is immediately available, and (2) those in which the per-son can receive an immediate regular payment from the account or from an annuity financed with funds in theaccount. For example, a person could have a plan that allows the person to take a lump sum or to leave thefunds in place but take a payment for a fixed period of time, with the period of time and the payment amountsdetermined by the individual (within the constraints posed by the amount of funds available in the account).Normally, when a person has such discretion over the use of the funds, as in a savings account, SSA will countthe full amount as being available to the person. Doing so here, however, would have the same effect as requir-ing the person to liquidate the account by taking a lump-sum payment because, either way, the person will beineligible for SSI for as long as the amount available exceeds SSI’s countable resource level ($2,000), when com-bined with other countable resources the person may have. The person thus must liquidate the account toestablish SSI eligibility, with the result that no retirement funds will be available to help support the individual in oldage. We recommend that when accounts such as this exist, SSA should use the approach described here: SSAshould provide that an individual with a disability will not be required to liquidate an account—in other words, theaccount will not be counted as a resource—until the individual reaches age 65. At that point, the procedures pro-posed here for treatment of retirement accounts for those age 65 or older would apply.

110 For example, a person who is age 55 and has a disability may meet the disability test for both SSI andSocial Security Disability Insurance benefits—which use the same test—but not have sufficient quarters ofrecent work to meet the “recency of work” test required to receive Disability Insurance benefits. However, he orshe may have sufficient quarters of coverage to be eligible for retirement benefits when he or she reaches retire-ment age. (There is no recency of work test for retirement benefits.) Assuming that the person is otherwise eligi-ble for SSI, this person will begin receiving SSI benefits at age 55. However, when the person becomes age 62,the first time that a person can receive a Social Security retirement benefit, SSA will require the person to applyfor the retirement benefit, even though this will result in the person receiving an actuarially reduced SocialSecurity retirement benefit for life. The current statutory provision requires this.

111 It would be important for SSA to help SSI recipients understand how this worked, so recipients would knowthey could take such an amount from their accounts each month.

112 See H.R. 1776, §311, introduced in the 108th Congress on April 11, 2003. Co-sponsors with Reps.Portman and Cardin on the original bill included Rep. Nancy Johnson (R-CT); Rep. Roy Blunt (R-MO); Rep. FredUpton (R-MI); Rep. Elton Gallegly (R-CA); Rep. Earl Pomeroy (D-ND); Rep. Dennis Moore (D-KS); Rep. EllenTauscher (D-CA); and Rep. Albert Wynn (D-MD). Under the legislation, recipients would be notified at age 591/2

that a monthly annuity value would be computed, and start being counted as income, in one year. The one-year grace period was intended to allow recipients time to determine whether to actually convert the account toan annuity.

Zoë Neuberger is a Senior Policy Analyst atthe Center on Budget and Policy Priorities

Robert Greenstein is Executive Director atthe Center on Budget and Policy Priorities

The views expressed in this paper are those of the authors alone and should not be attributed to the Brookings Institution,Georgetown University’s Public Policy Institute, or The Pew Charitable Trusts.

Copyright®

The authors wish to thank Mark Iwry and Peter Orszagfor reviewing earlier drafts of this report, as well as theCenter on Budget and Policy Priorities staff memberswho contributed to the chapters on specific means-tested benefit programs. The authors also thank PatriciaNemore at the Center for Medicare Advocacy for herreview of the section related to the Medicare Part Dsubsidy program.

Eileen P. Sweeney is a Senior Fellow at theCenter on Budget and Policy Priorities

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