Can Undocumented Expenses Trigger a Medicaid Penalty Period?

This is an excellent and very common concern. You are absolutely right to be thinking about these expenses, as they can be a major issue during the Medicaid application process. Yes, these undocumented expenses can trigger a Medicaid penalty period.

Here’s a breakdown of why this happens and what you should know.

The Problem with “Undocumented” Transfers

When a person applies for Medicaid for long-term care (which includes assisted living in most states), the state’s Medicaid agency reviews their finances for the past five years. This is the Medicaid “lookback” period. The agency is looking for any money or assets that were transferred for less than fair market value.

This is where your mother-in-law’s spending habits become a problem. Medicaid will review her bank statements and financial records and see that a significant amount of money was withdrawn as cash.

• Undocumented cash withdrawals: The Medicaid agency will see a cash withdrawal and treat it as a “transfer” of an asset to an unknown recipient. Since there’s no paper trail, they will assume the money was given away.
• Gifts: Giving gift cards or small amounts of money to people is considered a gift and a transfer for less than fair market value. Unlike the IRS, Medicaid does not have a “gift tax exclusion” for small gifts. Every gift, no matter how small, counts.
• Expenses that should have been documented: While buying groceries or paying for lunch are legitimate expenses, without a paper trail (like a debit card transaction or a receipt), the state has no way to verify how the money was spent. They will assume the money was transferred.

How a Penalty Is Calculated

The state adds up all of these unexplainable or undocumented transfers during the lookback period. Then, they divide that total amount by a “penalty divisor,” which is the average monthly cost of private-pay long-term care in your state.

Example:

• Total undocumented transfers: $100,000
• State’s average monthly cost of care (divisor): $5,000
• Penalty Period: $100,000 ÷ $5,000 = 20 months of ineligibility

This means that even if your mother-in-law’s assets drop below the Medicaid limit, she will not be eligible to receive benefits for over four months. During this time, the family would be responsible for paying for her care out of pocket. In many cases, this is not financially feasible, which is exactly the situation the family wants to avoid.

What You Can Do

• Document everything: Encourage her to use a debit or credit card for all purchases, no matter how small. If she insists on using cash, you must keep meticulous records. Save every receipt and write down who she gives a gift to and for how much. This is a difficult task, but it is the only way to “prove” where the money went.
• Consult an elder law attorney: This is the most important step. An elder law attorney can review your mother-in-law’s financial records and help you understand the specific rules in your state, which can vary. They can also help you create a plan to mitigate the impact of past spending and establish a clear record-keeping system for the future. They are experts in these rules and can be a huge asset in navigating a complex and often stressful process.