How does the Affordable Care Act affect Disabled People & Special Needs Trusts?

Ever since the Affordable Care Act (ACA)—also known as “Obamacare” was passed in 2010, it seems like everyone in the country has been trying to make sense of it. Well, time's up! As of January 2014, ACA went into full effect, so right now is crunch time when it comes to understanding how it affects Americans, especially those with special needs.

While it is a bit early to see how Obamacare will play out exactly, for the most part, these new laws should substantially assist the disabled and families with younger as well as adult special needs children. For example, people with disabilities will benefit immensely in terms of health care coverage because pre-existing conditions cannot preclude one from coverage. In the past, people with disabilities had been excluded from accessing private insurance primarily because of pre-existing conditions. Plus, health insurers must now implement annual out-of-pocket limits to protect families’ incomes against the high cost of health care services. In addition, the Affordable Care Act eliminates old law which permitted insurance companies to include annual or lifetime caps on insurance coverage. So in general, the Affordable Care Act is positive for the disabled and those with special needs.

But how does the Affordable Care Act Specifically Affect People with Mental Impairment?

ACA contains important provisions for individuals with autism as well as similar conditions, and their families. Starting in 2014, individuals on the autism spectrum and families of children on the autism spectrum will have expanded access to affordable insurance options through new Affordable Insurance “Exchanges” and improvements in Medicaid.

At the same time, new health plans sold in the individual and small group markets, including on the Exchanges, will cover “essential health benefits” (EHB) to help make sure that health insurance is comprehensive. Congress specified in ACA documentation that one of the EHB categories must be “mental health and substance use disorder services, including behavioral health treatment.” This was added to ensure that there would be coverage for individuals on the autism spectrum and for those with other developmental disabilities.

So, the above seems to indicate huge positive changes have been made for people with special needs. Having said that though, a question lingers: would a disabled person be better off if he or she was covered under “new” ACA rules vs. “old” Medicaid law? As you will see, this question is multi-layered and there is not one perfect answer. Moreover, even if a special needs person likes the medical changes and choices available through the Affordable Care Act, new law only applies to medical benefits. But for special needs persons, there are a lot of other potential government benefits available to think about. Thus, analyzing the full spectrum of benefits and how they apply to Special Needs Trusts are more important than ever for special needs persons.

First of all, does ACA or the Affordable Care Act Make a Special Needs Trust Moot or Somehow Irrelevant?

The answer is no. Despite the fact that a person can now easily obtain private health insurance, most attorneys and financial advisers agree, that this factor alone should not impact the decision whether or not to create a Special Needs Trust (SNT). Besides specific medical care, many of the services available to people with special needs are accessed through eligibility for public benefits. Besides health care, other services include housing, vocational training, day programs, as well as the all important Supplemental Security Income (SSI) benefit, which are all paid solely to, and for, special needs persons who pass specific “means-test” requirements (generally speaking, for a single person, he or she is limited to having $2,000 or less).

By utilizing a SNT, special needs beneficiaries preserve eligibility for Supplemental Security Income (SSI), which is often that person’s only access to income. SSI provides cash to blind and disabled persons to help them pay for basic needs, such as for food, clothing and shelter. Without a SNT, SSI and the other public benefits (besides the Obamacare medical benefits mentioned above), would be lost for most special needs persons.

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So how does a Special Needs Trust preserve benefits for disabled or special needs beneficiaries?

Well, it's important to understand how SSI, Medicaid, and other government benefits work in relation to special needs trusts. SSI is the federal assistance program that provides a guaranteed income to persons who are blind or disabled. A person is disabled if they are “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months.” 42 USC §1382c(a)(3)(A).

But these “means-based” benefits are not automatic for the blind or disabled. There are both resource and income limits in order to be eligible for SSI. As stated above, the resource limit is $2,000 for a single person. That means a qualified SSI beneficiary cannot have more than $2,000 in cash or other liquid assets. Conversely, some items that are excluded from this resource limit are the individual’s personal home, a vehicle, furniture, clothing, personal care items, as well as a few other specific assets.

As to income limits, both earned and unearned income are considered when determining the SSI benefit amount. There are several different types of income and they are all treated slightly differently when it comes to SSI. Basically, if the income or other assistance can be converted into food or shelter, then SSI administrators will count it as income and either reduce, or completely get rid of, the beneficiary’s monthly SSI payment.

But SSI is very important because if an individual qualifies for SSI, then he or she will automatically qualify for various other government benefit programs - such as Medicaid. Medicaid provides payments for hospitalization, treatment in medical clinics, doctors’ services, lab tests, X-rays, home health care, nursing home care, and other related medical services. It also pays for community mental health, drug abuse services, and intermediate care facilities for the developmentally disabled. (Please note that in the Affordable Care Act section below we discuss how ACA provides some of these benefits, but doesn't provide all of them. Thus, Special Needs Trusts remain a very important tool.)

The key factor in whether assets in a special needs trust will be considered resources or whether distributions from that trust will be considered income with respect to SSI, are the beneficiary’s powers over the trust – i.e., if the beneficiary can revoke the trust or direct the use of trust assets for his or her support and maintenance, the trust will disqualify the individual from eligibility to receive SSI and Medicaid. Conversely, so long as the special needs beneficiary cannot exercise the aforementioned powers, the SNT trustee can pay for countless goods and services that benefit a special needs child.

While Special Needs Trusts can help preserve SSI, Medicaid, and other government benefits, the question remains as to what kind of medical coverage is best for special needs persons?

So parents wonder: Is it worth the hassle of creating a Special Needs Trust, so that their child can receive government benefits?

The answer is almost always yes. However, the real question which reveals the answer is: Will parents who chose to forego setting up a SNT, opting instead to purchase ACA medical insurance, improve or worsen the financial situation of their special needs child? The answer might be surprising to people: If your child is forty or younger (unless you are leaving well in excess of $1 million dollars for your special needs beneficiary), it is always better to create a Special Needs Trust for him or her from a cost-benefit analysis.

First of all, the non-financial reasons for such: it's important to note that not using a SNT and instead leaving assets to a person with special needs, makes him or her a prime target for financial predators. Even if they are never preyed upon, the SNT provides a safe place for management of the assets, which is essential for most special needs beneficiaries. Furthermore, the Special Needs Trust protects the funds from creditors and there is no need to “payback” the state for Medicaid benefits received-at least with third-party Special Needs Trusts.

By the way, if you don't understand the difference between first-party and third-party Special Needs Trusts, and you have a special needs child, it's imperative that you learn the difference. Please click below and read the following Hub for an in-depth explanation of the different types of SNTs:

Second, there are a few situations where maintaining Medicaid eligibility is critical. For example, in California, the Medi-Cal program offers access to certain waiver programs that provide free targeted solutions for the unique needs of disabled persons, which cannot be replicated or replaced with ACA programs.

Third, many states are likely to follow California's lead in adopting “Expanded Medi-Cal”. Expanded Medi-Cal gets rid of the resource requirement for Medi-Cal and instead focuses on an individual's income. Therefore, for people between the ages of 19 to 65, Medi-Cal eligibility will include persons with incomes up to 133 percent of the Federal Poverty Limit. Where this becomes important is for those special needs persons who want Medi-Cal, but have too much investable assets. It is hard to say exactly how much would disqualify a special needs person however, because the amount depends on the rate of return on those assets. At any rate though, if a SNT were utilized this would be a non-issue from the start and a special needs beneficiary would be eligible to receive Expanded Medi-Cal.

Fourth, and perhaps most important, a SNT allows the recipient of government benefits to get SSI over their lifetime, with cost of living adjustments to boot! The value of that income is worth hundreds of thousands of dollars for most beneficiaries. For example, imagine a special needs person who is to receive an inheritance of $1 million dollars. If that money is not in a SNT, and the beneficiary loses SSI, it literally means that that special needs person's income is cut by over 50% (based on average rates of return). If the special needs beneficiary were to receive less than $1 million dollars the haircut to income becomes increasingly profound or worse. In fact, only in the situation where a beneficiary is older than forty and/or to receive far in excess of $1,000,000, does the financial argument become more murky. The bottom line is that if you want your special needs beneficiary, first, to have more resources available to him or her, and second, more to be available to other loved ones after your special needs child passes away, using a third-party Special Needs Trust is far superior to not using one-again, from a cost-benefit analysis.

Fifth, if your special needs beneficiary needs to go into an assisted living facility and they do not qualify for SSI, they lose out on the special lower SSI rate for these facilities. Even most experts forget about this critical benefit. Loss of the special SSI rate for assisted living could literally mean that a person needs to come up with an additional $5,000/month in places like California!

The bottom line: Both before and after enactment of the Affordable Care Act, most special needs beneficiaries would be better off, if mom and/or dad created a third-party Special Needs Trust for them, than if they left money outright to their loved one instead.

Understanding Special Needs Trusts:

Because of ACA, what changes should be made to third-party Special Needs Trusts already in existence?

Third-party SNTs currently in effect should be amended and made more flexible by allowing Trustees to decide whether or not they are going to buy private medical insurance on the “Exchanges” or simply rely on Medicaid. Private medical insurance is thought to lead to better medical care and there is no need for “payback” to the state for medical services received (important mainly for first-party SNTs). On the other hand, Medicaid provides many benefits that are not available solely from private medical insurance. So nowadays, people need to think about flexibility when creating or modifying a SNT. That is, your Trustee should have the leeway to make the “right” decisions, based on the circumstances of your special needs loved one and the benefits available to him or her, in his or her specific community.

Conclusion:

A family member looking to provide for a loved one with a disability should always consider using a third-party Special Needs Trust, as it offers the most protection. The SNT should be flexible enough to allow the trustee to spend or not spend money for their special needs child, depending on his or her particular circumstances. The main point of a SNT is to allow the person with the disability to be on means-tested government benefits but still get “extras” that family members want their loved ones to have. Under ACA, as of 2014, it is important to factor in the new Affordable Care Act changes that apply to SNTs. This means that more flexible SNTs are needed. While for most special needs persons the Affordable Care Act makes their life better, it does not in any way, negate the need for creation of a (third-party) Special Needs Trust so that other critical government benefits can be received.

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