Ask the Expert: 529 plans and Medicaid

We own our grandchildren's 529 plans. I've just learned that if we applied for Medicaid nursing home coverage, these plans would be considered our assets. How might transferring plan ownership to our children affect our grandchildren's eligibility for financial aid?

A college 529 plan is controlled by its owner; legally, this money is still yours. So yes, Medicaid would treat plans you've funded for your grandchildren as assets available for your nursing home care.

Transferring 529 ownership to their parents would remove the plans from Medicaid's eligibility formula — but not right away. Assets you transfer in the five years immediately before your Medicaid application trigger a penalty period during which you're ineligible for nursing home benefits.

How a 529 ownership transfer might impact your grandkids' financial aid depends on the formula on the financial aid form. This column only has space to address the most widely used form — the Free Application for Federal Student Aid, or FAFSA.

Qualified 529-plan distributions taken after Dec. 31, 2021, no longer count as untaxed student income on the FAFSA, no matter who owns the 529 plan, says Kalman Chany, a New York City-based college aid consultant. (That’s good news: Distributions from grandparent-owned 529s before Jan 1, 2022, were treated as student income and could cut financial aid by as much as 50 cents on the dollar.)

A grandparent-owned 529 isn’t counted as an asset on the FAFSA. A parent-owned 529 is counted as an asset, says Chany. But its impact on financial aid is relatively small. At most, a parent-owned 529 could reduce financial aid by 5.64%. For example, $50,000 plan could cut a student’s financial aid by up to $2,820.

The bottom line

Read the fine print! Medicaid long-term care coverage and student aid are both subject to complex rules.

More information

bit.ly/CouncilonagingMedicaidplanning

bit.ly/USDOEtypesoffinancialaid