Caregiver Agreement Last Updated January 28, 2018

Table of Contents:
  1. Introduction
  2. Example
  3. How Does It Work?
  4. Who is it for?
  5. How can I create a Caregiver Agreement?

A Caregiver Agreement is a way of compensating family members for the care they provide, while avoiding the Medicaid penalty period that can result from transferring assets to family members. It is an effective way of giving back to those who provide care, while also reducing the Medicaid applicant's assets and therefore making them eligible for Medicaid sooner.

Also known as a "Personal Service Contract" ("PSK") or "Personal Care Contract," a Caregiver Agreement is a contract between the care recipient (the person who needs care) and caregiver (the person who provides it). It states the services to be provided and compensation to be paid. This contract turns what would have been an informal "helping out" situation into a formal "payment for services" agreement.

While this may seem unnecessary, it can be of critical importance to Medicaid eligibility. Without the agreement, payments to a caregiver will be considered a voluntary transfer of assets (a "gift") and will incur a penalty period, during which you will not receive Medicaid.

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Chances are, before your parent or loved one enters a nursing home, some tasks will be difficult for you to perform on their own. They may call on you to assist them on an ongoing basis, and wish to compensate your for your time and effort. Since you have a trusting personal relationship with them, you keep the arrangement informal: you help when they need it and they pay you when they can.

Some time later, they decide it's time to enter a nursing home. Since they have few remaining assets, they assume they're eligible for Medicaid and apply, only to discover they are not eligible because of the payments they made to you. How did this happen? Since there was no formal agreement, the money they transferred to you was treated as a "gift." Under Medicaid rules, any gift given by the applicant over the last 5 years (the "lookback period") subjects them to a Medicaid "penalty period" – a number of months they must wait before receiving Medicaid after applying. The rationale being, since they gave that money completely voluntarily, they could have used it to pay for their medical care.

The Caregiver Agreement would have solved this problem. If you and your loved one had signed a proper agreement when the services started, those payments would have been considered an expense, not a gift, and therefore the Medicaid penalty period would not have been applied.

The Caregiver Agreement turns what would have been considered a "gift" into a legitimate medical expense, thereby exempting it from the Medicaid penalty period.

Additionally, the money they spent on your caregiving reduced their personal assets, and since Medicaid eligibility is partly based on assets, they may have become eligible for Medicaid sooner than if they had never paid you.

How does it work?

Before paid services begin, you and your parent or loved one will review and sign a Caregiver Agreement, which should be drafted by a professional with Medicaid expertise. When the time for the Medicaid application comes, the agreement will be evidence that the payments were part of a service agreement, and not a gift.

The agreement should include the following:

  • Services. Detail the exact services to be performed, ensuring that they are realistic and do not require any physical or technical ability that the caregiver does not have. While a broad array of duties may be performed under the agreement, some states explicitly exclude services that are traditionally done for free by family members, such as shopping, laundry, transportation, and providing companionship. It is essential to be aware of these exclusions to avoid penalties. A Medicaid expert can advise.
  • Service Period. Be sure to state when the services will begin, which must be in the future (not retroactive). You may include an end date or not. Also include a "termination clause," stating that the agreement can be terminated by either party with timely notice. You may also want to add provisions for caregiver absences, such as sick leave or paid time off (PTO).
  • Compensation. This is the amount to be paid to the caregiver. Compensation must be based on a "reasonable rate," which varies according to your location and the duties performed, but is generally in the $20-$30 per hour range. Be careful not to set the rate too high, as this may be considered "overpayment" and the penalty period will be applied. Note that care through an agency would be charged at a higher rate than private care (from a family member), due to the agency's overhead costs.
  • Payment frequency. Compensation may be paid when services are received, but more often is paid periodically, such as monthly. In most cases, you should avoid a "lump sum" payment (a large, single payment), as well as prepayment, because these look more like a gift than a payment for services. In states where lump-sum prepayments are allowed without penalty, it can be a useful tool to transfer assets quickly, but keep in mind that the caregiver will be taxed substantially on a lump sum, and any portion of the prepayment that the caregiver hasn't earned by the time services end must be repaid to Medicare.
  • Signatures. Both the caregiver and care recipient must understand and agree to the contract terms.

Once the Caregiver Agreement has been drafted and signed, paid services may begin. While under the agreement, both the caregiver and care recipient must continue to treat the services as employment, with the formalities that employment entails. Specifically:

  • The caregiver should keep a log of hours and dates for specific services provided, and report this income on taxes. Depending on your state and exact circumstances, a self-employment tax may apply.
  • The care recipient should keep up regular payments per the agreement, and consult with an expert to ensure compliance with rules on tax withholding and worker's compensation. Due to potential conflict of interest, the caregiver should not be the care recipient's tax consultant.
  • Both parties should review and update the agreement annually, or any time the terms change (caregiving hours increase, rate increase, service change).

Who is it for?

The Caregiver Agreement is recommended for anyone who wants to compensate a family member (or other care provider) for caregiving services, without incurring a Medicaid penalty period. It has the added benefits of providing additional income to the caregiver and reducing the Medicaid applicant's "countable assets" (the assets counted when determining Medicaid eligibility), helping the applicant become eligible for Medicaid sooner.

The exact terms allowed under a Caregiver Agreement vary from state to state. Most states permit a broad range of services to be counted as paid caregiving, but certain states specifically exclude certain services. For example, Texas excludes services that would "normally be provided by a family member" (Texas Medicaid Manual § I-4140) and Pennsylvania excludes "merely providing companionship" (Pennsylvania Long-Term Care Handbook §440.8). A Medicaid expert will be aware of your state's rules and exclusions.

How can I create a Caregiver Agreement?

Your Caregiver Agreement should be considered as part of an overall strategy for long-term care and Medicaid eligibility. With or without a Caregiver Agreement, if your paid care does not comply with your state's Medicaid rules, your loved one's Medicaid eligibility may be delayed or denied. Professional advice from an expert with Medicaid knowledge and experience is essential. A Medicaid expert can create an optimal Caregiver Agreement for your situation, and advise you on related Medicaid planning tools, such as long-term care insurance policies (a method of paying for family caregiver services) or a "transfer of home" (a way of transferring the home to a caregiver without penalty).