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Effective: November 1, 2009 |
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19.25.10ar2 - Retirement Funds and Retirement Plans (Archive) |
Archived: June 1, 2011 |
Retirement funds are cash and other assets held by an individual for use during retirement.
A retirement plan is an arrangement to provide individuals and their spouses with income during retirement. Employers, insurance companies, the government or other institutions such as employer associations or trade unions may set up retirement plans. Examples of retirement plans include funds held in an individual retirement arrangement (IRA), retirement plans for self-employed individuals, and in some cases, profit-sharing plans.
When retirement funds and retirement plans are not excluded, they must be evaluated individually to determine their specific conditions, how payments are or can be made, and restrictions or limitations, if any, on withdrawal.
Individually-Purchased Individual Retirement Arrangements.
Employer-Sponsored or Union-Sponsored Retirement Plans.
Retirement Funds Not In a Retirement Plan.
MinnesotaCare, MA Method A, and MA-EPD.
Retirement Funds Verification.
Individually-Purchased Individual Retirement Arrangements
An IRA is an umbrella term used to describe a personal retirement savings plan that provides the owner tax advantages for setting aside money for retirement. IRAs can be in the form of a trust, an account, or an annuity. Individually-purchased IRAs are generally purchased by a person from an insurance company, bank or financial planner. Common individually-purchased IRAs include:
n Traditional IRAs.
n Roth IRA.
n Spousal IRA.
See Employer-Sponsored IRAs for information on IRA’s purchased by an employer.
Employer-Sponsored or Union-Sponsored Retirement Plans
These retirement plans fall under one of the following three categories: defined-benefit plans, defined-contribution plans and employer-sponsored IRAs.
1. Defined-Benefit Plans.
This is a retirement plan (also referred to as a pension plan) that promises a specified monthly benefit at retirement. The plan may state the promised benefit as an exact dollar amount. More commonly, however, the plan sponsor calculates a benefit through a plan formula that considers certain factors such as salary and years of service. There are three types of defined benefit plans: Traditional Plans, Cash Balance Plans and Defined-Benefit Keogh Plans.
m Traditional Plans - A type of defined-benefit retirement plan offered by both private and public employers. These types of retirement plans are often referred to as a pension. Examples of traditional defined benefit plans include:
q Northwest Airlines Pension Plan for Salaried Employees.
q Public Employees Retirement Association (PERA).
q Minnesota Teachers Retirement Association (TRA).
q 3M Pension Plan.
q Military Pension (Air Force, Marine Corps, Navy, and Coast Guard).
q Federal Employee Retirement System (FERS).
m Cash Balance Plan - A defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. Employers bear the financial risk of cash balance plans and are required to maintain sufficient funds to pay future benefits. The unique feature of a cash balance plan is that the employee’s account shows benefits as a lump sum - the ”cash balance” of the account - rather than as periodic payments the employee will receive during retirement.
Example:
Andrea’s employer offers her a cash benefit plan. Each year the employer credits to the plan 5% of Andrea’s current salary, plus provides a credit based on 6% of the prior year’s balance. At retirement, Andrea has $100,000 credited to her cash benefit plan. She may take a lump sum payment of $100,000 at retirement or receive an annuity payment each year. The annuity payment is based on an account balance of $100,000.
m Defined Benefit Keogh Plan - A tax deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. A Keogh plan can be set up as either a defined-benefit or defined contribution plan, although most plans are defined contribution plans.
2. Defined Contribution Plans.
A defined contribution plan is a retirement plan that does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee’s individual account under the plan. These contributions generally are invested on the employee’s behalf. The employee will ultimately receive the balance in the account, which is based on contributions, plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments purchased with the contributions added to the employee's individual account. The following are examples of defined contribution plans:
n 401(k) Plans.
n 403(b) Plans.
n 457 Plans.
n Thrift Savings Plans (TSPs).
n Employee Stock Ownership Plans (ESOPs).
n Defined-Contribution Keogh Plans.
An employer-sponsored IRA is an IRA which an employer establishes for an employee. The following are examples of employer-based IRAs:
n Simplified Employee Pension (SEP) IRAs (available to employees and self-employed individuals).
n Savings Incentive Match Plans for Employees (SIMPLE) IRAs (available to employees and self-employed individuals).
n Deemed IRAs.
Note: When an IRA is held in the form of a trust, account or annuity, the IRA is the plan that meets the federal government guidelines to receive certain tax advantages and the trust, account or annuity is the vehicle used to fund the IRA (retirement plan). IRAs held in the form of a trust or account must be evaluated as a retirement plan using the policy in this section. IRAs held in the form of an annuity (or an annuity account for an annuity in the accumulation phase), must be evaluated as an annuity using the policies in the Annuities and related topics.
Retirement Funds Not Held in a Retirement Plan
Funds that a person intends to use for retirement, but that are not placed in a retirement plan are treated differently than funds placed in a retirement plan. For all health care programs, evaluate retirement funds not in a retirement plan as Liquid Assets.
For example, if a person intends to use funds held in a bank account for retirement, evaluate the funds in the bank account as a liquid asset, not as a retirement plan.
MinnesotaCare, MA Method A, and MA-EPD
Exclude funds held in all types of retirement plans. This includes funds left in an employer’s plan when the employee leaves employment.
Example:
George is enrolled in MA-EPD. He has an IRA account and a PERA pension benefit from a previous employer which he is neither eligible to withdraw a lump sum from nor to receive periodic payments.
Action:
Exclude both of these funds from his asset total.
Example:
Michele and her minor child are enrolled in MinnesotaCare. Michelle has a 401(k) plan from a former employer and a defined benefit plan through her current employer. She also has a savings account that she intends to use for retirement.
Action:
Exclude the 401(k) and the defined benefit pension plan from Michele's asset total. Do not exclude the savings account. Evaluate the savings account based on the asset type.
Each specific retirement plan establishes the circumstances under which retirement funds are available. Some retirement plans allow for disbursements of retirement funds due to disability or other circumstances. The value of a retirement plan is the amount of funds that a person can currently withdraw. If there is a penalty for early withdrawal, the plan’s value is the amount of funds available after the penalty deduction. However, any taxes due as a result of the withdrawal are not deductible when determining the plan’s value.
Evaluate retirement plans for MA Method B and GAMC using the following rules:
1. Determine if the client can withdraw funds in a retirement plan as a lump sum.
n Exclude from assets funds in retirement plans that are not available as a lump sum withdrawal.
Exception: Do not exclude funds in a retirement plan that the client cannot withdraw in a lump sum if the client does not apply for periodic benefits to which he or she is entitled.
n Count funds in a retirement plan as an asset that the client may withdraw as a lump sum.
m Subtract any early withdrawal penalty from the lump-sum amount available to determine the countable value.
m Add any taxes that may have been deducted back to the lump sum withdrawal. Count taxes due when the client withdraws the lump sum in the value of the lump sum.
Example:
Bernard is 52 years old and has an Individual Retirement Arrangement (IRA) held in the form of an account with a current balance of $3,500. He will have to pay $100 as an early withdrawal penalty if he cashes it in. The withdrawal will also be subject to a 10% tax penalty.
Action:
Subtract the $100 penalty from the account balance of $3,500. Count $3,400 toward Bernard’s asset total. Do not deduct the 10% tax penalty from the amount considered available to Bernard.
2. Determine if the client is eligible for periodic payments.
n If a client is eligible for periodic payments, do not treat the retirement plan as an available asset as long as he or she has applied for the periodic payments. Count periodic payments as income in the month received and any retained funds as an asset in future months.
n If a client is not eligible for periodic payments, determine and document whether the client can make a lump-sum withdrawal. Treat as an available asset any portion of the funds in the retirement plan that the client can currently withdraw as a lump sum, even if the full amount is not withdrawn.
Example:
Fern is entitled to a defined benefit retirement plan benefit through her employer. She is currently on medical leave for several months. The defined benefit plan benefits are available in cases of disability.
Action:
Determine whether the defined benefit plan is available to Fern. Count the amount of funds that are currently available for withdrawal because she meets the disability criteria or for any other reasons. Any funds that Fern cannot withdraw are unavailable; do not count these unavailable funds toward Fern’s asset total.
n A delay in payment of retirement plan funds for reasons beyond the client’s control, such as processing time, does not mean that the funds are unavailable. Consider the retirement plan funds available because the client is legally able to obtain the money.
Exceptions:
l IRAs held in the form of an annuity (or an annuity account for an annuity in the accumulation phase), must be evaluated as an annuity. See Annuities and related topics.
l Do not deem a retirement plan that an ineligible spouse owns to an eligible spouse.
l Do not treat a retirement plan as an available asset if a client must terminate employment in order to obtain any payment.
Example:
Jeff worked full-time for a company for eight years and now works just three days a week. Under his employer’s defined benefit plan, Jeff is entitled to a $4,000 pension benefit. Jeff is not currently eligible for periodic payments from the fund. Jeff provides proof that he could withdraw his retirement benefits now in the form of a lump sum payment, but there would be a penalty for early withdrawal and he would forfeit eligibility for an annuity when he stops working.
Action:
Since Jeff can withdraw the retirement funds without terminating employment, treat the amount available to Jeff after the penalty deduction as an available asset, even though Jeff forfeits eligibility for periodic annuity payments in the future.
Retirement Funds and Retirement Plan Verification
Follow policy in Verification of Assets to verify retirement funds and retirement plans for all programs.
Exception: Do not verify retirement or pension funds for people eligible for Medical Assistance for Employed Persons with Disabilities (MA-EPD).
Refer to the following topics for more information:
Naming DHS a Preferred Remainder Beneficiary.
Evaluation of Annuities under Transfer Policy.