As part of the Deficit Reduction Act of 2005 passed Feb. 1, Congress has tightened up the rules governing Medicaid eligibility, making it much more difficult to qualify for Medicaid after transferring assets or purchasing annuities.

The new rules also include a cap on the maximum amount of home equity allowed as an exemption in determining Medicaid eligibility.

Under the new rules, states will be required to look for any gifts or transfers of assets made by a Medicaid applicant within the previous five years, rather than the current three years.

Even more importantly, the penalty period of ineligibility for those gifts will not begin to run until a person applies for Medicaid and is determined to be otherwise eligible for Medicaid.

Under the old rules, the penalty period–calculated as the number of months of care the gift would have paid for at the average monthly rate for the state–for each gift would begin to run from the month of the transfer. This wiped the slate clean each month for small gifts and allowed the “half-a-loaf” strategy, in which a person gives away roughly half of his assets and retains a sufficient amount to pay for his care during the penalty period.

Now, the half-a-loaf strategy is out, and small gifts over the previous five years will be aggregated in calculating a penalty period. This promises to make the application process much more cumbersome, potentially requiring applicants to document every expenditure in the last five years.

The new rules still permit the use of non-balloon annuities in Medicaid planning, but they now require that the state be named as the primary remainder beneficiary “for at least the total amount of medical assistance paid on behalf of the annuitant.” It is not clear what this means if the “annuitant” is a spouse still living in the community on whose behalf no medical assistance is being paid.

The rules also allow the state to be a secondary beneficiary if a community spouse or a minor or disabled child is the primary beneficiary.

The new rules also limit to $500,000 the amount of equity in a home that will be exempt in determining Medicaid eligibility. States may elect to raise this threshold as high as $750,000, but they are not required to do so.

Homes of any value will continue to be exempt if the community spouse or a minor or disabled child is living there.

The new federal rules are effective immediately but will be implemented at different times in each state. The legislation allows states a grace period to implement the federal rules in state law. The effective date for the new rules could be as late as the first day of the first calendar quarter following the close of the next regular session of the state legislature.

(The relevant provisions can be found in Sections 6011 through 6014 of the DRA 2005, Senate Bill 1932.)