Can a Medicaid Denial Be Appealed?

This is a common and frustrating situation in health care. Your patient is stuck between a rock (the Medicaid asset limit) and a hard place (penalties for accessing the 401(k)).

Your patient has the right to appeal the denial. However, the ultimate solution will likely involve a legal strategy called “asset restructuring” to make the 401(k) an “unavailable” asset under Medicaid rules.

Appealing the Medicaid Denial

Your patient has the right to appeal the denial and request a fair hearing. This is the most direct first step. The denial letter should contain instructions, deadlines, and the specific reason for the denial.

• File quickly. There is a strict deadline to file the appeal (often between 60 and 90 days from the denial notice, but sometimes as short as 10 days to continue any existing benefits).
• The core of the appeal should focus on the nature of the 401(k) as an unavailable or inaccessible asset.
  • Because your patient is under the age for penalty-free withdrawal (usually), the funds are not freely available to him to “spend down” for medical costs.
  • Many states have different rules for retirement accounts, so the appeal can argue that his specific plan should not be counted as a resource because he cannot use it without a massive tax penalty, or because it should be treated as an asset in “pre-payout status.”

Other Options if the Appeal is Denied

If the appeal is unsuccessful, the patient has other strategic options to achieve Medicaid eligibility, though these may require help from an attorney specializing in benefits planning.

“Spend Down” the Asset

“Spend down” means legally using the excess countable assets (the 401(k) value) on things that Medicaid does not count as assets. This must be done carefully to avoid a penalty period from Medicaid.

• Convert the 401(k) to a Medicaid-compliant annuity. Your patient may be able to use a trustee-to-trustee transfer of the 401(k) to a Medicaid-compliant annuity. This is an exempt transfer for Medicaid purposes, and will provide income payments for the patient commensurate with their life expectancy. An early withdrawal penalty from the IRS may still apply, but this strategy may be the most cost-effective.
• Withdraw funds and pay expenses. Your patient would take the necessary withdrawals from the 401(k) to get the remaining balance under the asset limit. He will have to pay a large income tax liability on the withdrawal, in addition to an early withdrawal penalty. Once the liability has been paid and the early withdrawal satisfied, then the patient could pay for other items as part of their spenddown:
  • Paying off debt (credit cards, mortgages, etc.).
  • Making a pre-paid, irrevocable funeral and burial plan.
  • Buying medically necessary equipment or services (like a wheelchair, home care, or adaptive technologies).
  • Making repairs or necessary modifications to his primary residence.

Explore “In Payout Status” Options

While your patient is too young for a penalty-free withdrawal, some states may allow a 401(k) to become an exempt asset if it is put into “payout status” (meaning he is taking regular, scheduled distributions).

• Check state rules. Your state’s Medicaid rules for retirement accounts are key here. In some states, once the plan is in payout status, the entire balance becomes an exempt asset, and only the monthly payout counts as income.
• Income limit. The monthly payouts will count as income and could still put him over Medicaid’s income limit, but in payout status is often better than having the entire value counted as an asset.

Consult a Professional

Given the complexities of SSI, Medicare, and a 401(k), the best advice is to consult a Certified Medicaid Planner or an elder law or special needs planning attorney.

These professionals are experts in the specific asset rules of your state and can advise on the best way to handle the 401(k) to gain Medicaid eligibility. They can also represent him during the appeal process.