Using a Caregiver Contract to Get Medicaid in New York

Instead of transferring money to a relative and incur a disqualification period, a potential Medicaid applicant may consider transferring the money to someone who is taking care of them as compensation for their services.

A caregiver contract is proper only when the person receiving money is actually taking care of the Medicaid applicant. Caregiver contracts work because although one is not allowed to transfer assets to qualify for New York Medicaid, one is allowed to pay people to take care of them.

To work, this arrangement must be documented in a legally enforceable caregiver contract which describes among other things the services provided, the hourly compensation and the amount of hours worked per month.

Because this arrangement will be treated like a regular contract, a person must report the money received from the Medicaid applicant as income on a tax return.

A caregiver contract must be drafted by an experienced Medicaid attorney; otherwise, it might be rejected by Medicaid.

Why the Caregiver Contract Tool Exists

New York Medicaid uses an asset test as one of the eligibility requirements for nursing home and long-term care benefits. An applicant who has more than the allowed level of countable resources cannot qualify until those resources are below the limit. The natural temptation is to give money to family members – usually adult children – so the applicant's bank account shows a lower balance. The problem is that Medicaid looks back at transfers for the prior 60 months (the "look-back period") when reviewing institutional Medicaid applications, and any uncompensated transfer during that window creates a penalty period during which Medicaid will not pay.

The penalty is calculated by dividing the value of the transfer by the regional rate – the average monthly nursing home cost in the applicant's region as set by the state. In downstate New York, the regional rate is high enough that even a modest transfer can produce a penalty period of several months. During that penalty period, the applicant has to pay privately, even though they may be technically out of money.

A caregiver contract is one of the recognized ways to spend down assets without triggering a transfer penalty. Money paid for actual services rendered is not a transfer – it is compensation. Medicaid accepts compensation as a legitimate use of funds. The key is that the services must be real, the compensation must be reasonable, and the arrangement must be documented in writing before the services begin.

What a Proper Caregiver Contract Looks Like

A caregiver contract is a written, signed agreement between the person receiving care and the person providing care. It should be in place before any payments begin. It must include the following elements at a minimum.

• The names of the parties and their addresses.
• The effective date of the agreement.
• A description of the services to be provided. Personal care, meal preparation, transportation, medication management, household chores, and supervision are all common categories. The more specific the description, the better.
• The hours per week or per month that the caregiver will work.
• The compensation rate. Rates should be set at the prevailing market rate for similar services in the geographic area – not a flat amount chosen for convenience.
• The method and frequency of payment, such as bi-weekly direct deposit from the applicant's account to the caregiver's account.
• The duties of each party, including the caregiver's obligation to keep time records and the applicant's obligation to pay.
• How the agreement can be terminated.
• Signatures of both parties and, ideally, notarization.

Medicaid may also ask for a doctor's note documenting that the applicant needs the level of care described in the contract. Without that medical foundation, the contract can look manufactured.

Lump-Sum Versus Hourly Caregiver Contracts

There are two general structures. The hourly contract pays the caregiver for hours actually worked, documented by time records or invoices. This is the safer structure because it tracks ordinary employment relationships. The lump-sum contract pays an upfront amount in exchange for a commitment to provide care for a specified period – sometimes the rest of the applicant's life. Lump-sum contracts have been used to move larger amounts of money out of the applicant's account in a single transaction, but they receive more scrutiny from Medicaid and they can backfire if the caregiver stops providing care or if the applicant dies before the expected period of care has elapsed.

If a lump-sum contract is used, the actuarial value of the services must be calculated using life expectancy tables and the agreed-upon hourly rate. If the lump sum exceeds the actuarial value, the excess is treated as a transfer and creates a penalty. If the caregiver stops providing the agreed-upon services, the excess (calculated as of the date care stopped) is also treated as a transfer.

Tax Consequences for the Caregiver

Because the caregiver is being paid compensation, the money is taxable income to the caregiver. The caregiver reports the income on their personal tax return. Depending on the arrangement, the caregiver may be classified as an employee (with W-2 reporting, withholding, and payroll tax obligations on the employer side) or as an independent contractor (with 1099 reporting and self-employment tax on the caregiver side).

Many family caregivers are surprised by this. Money they think of as a gift from a parent ends up being taxable income at ordinary rates, sometimes pushing them into a higher bracket. The right time to address this is before the contract is signed so the caregiver understands the after-tax value of the arrangement. The contract can be priced to account for the tax burden. The caregiver should also consider making estimated tax payments quarterly to avoid an underpayment penalty.

Common Mistakes That Cause Medicaid to Reject Caregiver Contracts

Medicaid examiners review caregiver contracts carefully. They have seen many homemade attempts and they know what to look for. The most common reasons for rejection include:

• The contract was signed after care had already been provided. Medicaid views this as evidence that the contract is a cover for a gift.
• The applicant cannot benefit from the services described. For example, paying for transportation services when the applicant is bedridden raises an immediate red flag.
• The compensation is above market rate. Paying $100 per hour to a relative for unskilled personal care will not pass scrutiny.
• There is no documentation of services actually provided – no time sheets, no invoices, no records of any kind.
• The caregiver is also providing services to other family members, with no allocation showing the time spent on the Medicaid applicant.
• The caregiver did not report the income on their tax return.
• The lump-sum amount exceeds the actuarial value of the services committed.

Combining Caregiver Contracts with Other Medicaid Planning Tools

A caregiver contract is one tool among several. Other planning tools include irrevocable Medicaid asset protection trusts, spend-down on the applicant's primary residence improvements, prepayment of funeral expenses, conversion of countable assets to exempt assets, and spousal refusal in the case of married couples. The right combination depends on the family's situation, the applicant's care needs, the timeline before institutional care is likely to be needed, and the assets involved.

It is also worth noting that Community Medicaid – the program that pays for home care – has a different look-back period than Institutional Medicaid. Until recently, Community Medicaid had no look-back period at all, which made caregiver contracts and other planning tools easier to deploy. New York has been phasing in a 30-month look-back for Community Medicaid; the implementation has been delayed several times and the exact effective date should be confirmed at the time of application.

Getting Help with a Caregiver Contract

A caregiver contract must be drafted carefully and supported with documentation that satisfies Medicaid. Doing it yourself is risky because a rejection by Medicaid not only fails to achieve the goal – it can create a transfer penalty that costs months of private pay. We draft caregiver contracts, advise on the compensation rate, set up time-keeping and payment routines, and coordinate the agreement with the applicant's broader Medicaid plan.

If you or a family member is considering a caregiver contract or is planning ahead for long-term care needs, contact the Law Offices of Albert Goodwin at 212-233-1233 or by email at [email protected].