If you’re receiving Medicaid and you receive a personal injury settlement, you might be wondering: “Will I lose my benefits?” The answer isn’t always simple, but understanding the basics can help you protect both your settlement and your healthcare coverage.
Why Medicaid Cares About Your Settlement
Medicaid is a needs-based program. To qualify, you must have limited income and assets. When you receive a lump sum from a personal injury settlement, that money counts as a new asset. If the settlement pushes you over your state’s asset limits—typically around $2,000 for an individual—you could lose your Medicaid coverage until you spend down below the limit again.
You Must Report the Personal Injury Settlement
Federal Medicaid rules require you to report any significant change in your financial situation, including receiving a personal injury settlement. Most states require you to notify the Medicaid agency within 10 days of receiving the funds. Failing to report can result in penalties, loss of benefits, or even accusations of fraud.
Medicaid May Seek Reimbursement
Here’s something many people don’t realize: Medicaid has the right to be repaid for medical expenses it paid on your behalf that were related to your accident or injury. This is called “third-party recovery” or “subrogation.”
For example, if you were injured in a car accident and Medicaid paid $50,000 for your emergency room visit, surgery, and rehabilitation, the Medicaid agency can file a claim against your settlement to recover those costs. The state becomes like any other creditor with a legal right to reimbursement for accident-related medical bills it covered.
This reimbursement right is established by federal law and applies in all states, though the details of how it works can vary. The key point: Medicaid is not just concerned about whether the personal injury settlement makes you ineligible—it also wants to be paid back for covered medical expenses that resulted from the incident that led to your settlement.
What Happens to Your Eligibility?
If you receive a settlement and keep the money in your own name, you will likely become ineligible for Medicaid if the total pushes you over the asset limit. Once you spend the settlement down below the limit again, you can reapply.
But there are legal strategies that may allow you to preserve your Medicaid eligibility while still benefiting from your settlement funds.
Planning Options: Special Needs Trusts
One of the most common tools for preserving Medicaid eligibility after a personal injury settlement is a Special Needs Trust, sometimes called a Supplemental Needs Trust. Federal Medicaid law specifically allows certain trusts to be exempt from the usual transfer penalties.
If you are under age 65 and meet the disability requirements under Social Security rules, you may be able to place your settlement funds into a special type of trust authorized by federal law. This type of trust, often called a “(d)(4)(A) trust,” allows the money to be used for your benefit without disqualifying you from Medicaid.
The trust can pay for things Medicaid doesn’t cover, like special equipment, therapies, personal care assistance, travel, entertainment, and other quality-of-life expenses. However, the trust cannot be used for food, shelter, or medical care already covered by Medicaid, or it could jeopardize your benefits.
There’s an important catch: the trust must include a “payback provision.” This means that when you pass away, any money left in the trust must first be used to reimburse the state for Medicaid benefits you received during your lifetime.
If you’re over 65, these trusts generally cannot be used, but other planning options may be available depending on your state’s rules.
Pooled Trusts: Another Option
Another alternative is a Pooled Trust, which is managed by a nonprofit organization. These trusts work similarly to Special Needs Trusts but allow individuals to combine their funds with others for investment purposes while maintaining separate accounts. Pooled Trusts may be an option even for individuals over 65 in some states, though rules vary widely.
Like Special Needs Trusts, Pooled Trusts include a payback provision, but the nonprofit may retain a portion of remaining funds for its charitable purposes instead of everything going to the state.
Spend-Down: The Alternative Path
If you don’t qualify for a trust or choose not to use one, you can spend the settlement on allowable expenses to bring your assets back below the Medicaid limit. Allowable expenses include:
- Paying off debts like medical bills, credit cards, or loans
- Making home repairs or accessibility modifications
- Purchasing a vehicle
- Buying necessary household items or appliances
- Prepaying funeral and burial expenses
Once your countable assets drop below the limit, you can reapply for Medicaid.
State Rules Vary Significantly
It’s critical to understand that Medicaid rules differ from state to state. Some states are more flexible than others about trusts, spend-down options, and reimbursement procedures. What works in one state may not work in another.
Get Professional Help Before You Settle
The biggest mistake you can make is accepting a settlement without understanding how it will affect your Medicaid benefits. Before you agree to any settlement terms, consult with one of the experienced attorneys at Ward, Shindle & Hall. Proper planning before the settlement is finalized can make the difference between losing your healthcare coverage and preserving it for years to come.
Your personal injury settlement represents compensation for your injuries and losses. With the right planning, you can protect both your financial recovery and your access to the medical care you need.
