A common question arises for individuals with disabilities who enter the workforce: Should they contribute to their employer’s 401(k) plan, especially when considering the potential impact on Medicaid waiver services? This question is particularly relevant when the employer offers matching contributions, making the decision even more complex.
The Scenario
Recently, a client inquired whether her adult child, who has a disability and recently gained employment, should participate in his employer’s 401(k) plan. Given the employer’s offer of matching contributions, this seems like an attractive opportunity. However, the decision is not straightforward, especially when considering potential future eligibility for Medicaid services.
Evaluating the Decision
In this particular case, the individual is not currently receiving Medicaid services, but there is a possibility they might require such services in the future. The dilemma here is clear: How should individuals in similar situations approach the decision to contribute to their 401(k) plans?
For someone who does not anticipate ever needing Medicaid services, the decision might seem simple—take full advantage of the 401(k), at least up to the employer match. This approach ensures that no “free money” is left on the table, which is generally sound financial advice.
However, the situation becomes more complex for those who are either currently receiving Medicaid waiver services or anticipate needing them in the future. In states like Ohio, a 401(k) is considered a resource. This means that having significant funds in a 401(k) could potentially jeopardize Medicaid or waiver eligibility, a risk that must be carefully considered.
Strategic Alternatives
For individuals who wish to save without jeopardizing their Medicaid eligibility, contribute to an ABLE account which offers a viable alternative. For 2024, the ABLE account contribution limit, which includes work earnings, is approximately $32,000. Contributing to an ABLE account allows individuals to save while protecting their eligibility for essential Medicaid services.
The downside to this approach is that individuals miss out on the employer match offered by the 401(k) plan. However, when weighing the loss of the employer match against the potential loss of Medicaid eligibility, retaining Medicaid coverage often outweighs the benefits of the match.
Looking to the Future
There is ongoing discussion about legislative changes that could provide more flexibility for individuals with disabilities. One proposed law, the ABLE Employment Flexibility Act, would allow employers to shift their 401(k) contributions directly into an individual’s ABLE account. This would enable employees to benefit from employer contributions without risking Medicaid eligibility. Unfortunately, this legislation has not yet been passed, so this option remains unavailable.
Conclusion
For most individuals with disabilities who are working, the safest financial strategy is to contribute additional work income to their ABLE account rather than their 401(k). This approach helps preserve Medicaid eligibility, which is crucial for accessing the necessary support and services.
While it may be tempting to contribute to a 401(k) plan, especially when an employer offers matching contributions, the potential risk to Medicaid eligibility is significant. Until laws change to provide more flexibility, individuals with disabilities should carefully consider their long-term needs and prioritize maintaining their access to vital Medicaid services.
Phil Ratcliff
Disclaimer: The information contained on this blog is for informational and educational purposes only and should not be construed as professional financial advice. Investment decisions should be based on your individual circumstances and objectives. Before making any investment decisions, you should consult with a qualified financial advisor, tax advisor, and/or attorney to determine what may be best for your individual situation.
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