In order to qualify for Medicaid benefits, applicants cannot possess assets which exceed the financial limits established in the program. In order to prevent applicants from wrongly achieving Medicaid eligibility by transferring their excess resources to others, Congress has established rules which impose a “transfer penalty”, or period of ineligibility for Medicaid benefits, whenever an applicant makes an uncompensated transfer of assets, or a gift, to another person. The length of the penalty period varies with the value of the assets transferred. However, Congress has ruled that certain uncompensated transfers of assets are exempt from the transfer penalty rules. One such exempt transfer is any transfer of assets by a Medicaid applicant outright to his or her blind or disabled child, as well as any transfer by a Medicaid applicant to a trust established by the applicant for the sole benefit of the applicant’s blind or disabled child. In New Jersey, any trust established for a Medicaid applicant’s blind or disabled child must include a “payback” provision, or a provision making the State the first remainder beneficiary of the trust to the extent of the Medicaid benefits paid. In recent years, because of budget constraints New Jersey has attempted to limit the “disabled child” exemption. The limitation was accomplished by mandating that the “disabled child” exemption applied only to transfers from a Medicaid applicant to a trust with a payback provision, and that transfers by a Medicaid applicant outright to his or her blind or disabled child were subject to the transfer penalty rules. The limitation put New Jersey in conflict with the federal law governing the Medicaid program.

Earlier this year, Medicaid applicants challenged New Jersey’s limitation on the “disabled child” exemption. In Sorber v. Velez, Civ. No. 09-cv-3799, plaintiffs, William Sorber and Grace Johns, aged parents of blind or disabled children, applied for nursing home Medicaid benefits. Both plaintiffs possessed assets in excess of the financial limits in the Medicaid program, rendering them both ineligible for Medicaid benefits. At the time of their applications, however, each plaintiff transferred substantial assets outright to his or her blind or disabled child. Upon applying, New Jersey denied plaintiff Johns’ application, explaining that the transfer of assets outright to her daughter resulted in a period of ineligibility for Medicaid. The State claimed that the “disabled child” exemption applied only to those transfers made to a trust for the sole benefit of the applicant’s blind or disabled child which contained a payback provision. Plaintiff Sorber’s application was also expected to be denied for the same reason. Thereafter, plaintiffs filed a complaint in federal court under 42 U.S.C. §1983 asking the Court to enjoin the State of New Jersey from treating a transfer of assets outright to a disabled or blind child as subject to the transfer penalty rules.

After filing a complaint, plaintiffs filed motions for a preliminary injunction, which were opposed by the State. Deciding the motions on the papers without oral argument, United States District Judge Anne E. Thompson found (1) that the plaintiffs would likely succeed on the merits at trial because the language in the federal Medicaid statute “clearly exempts outright transfers of resources to blind or disabled children”; (2) that without an injunction plaintiffs would suffer irreparable harm because they would most likely lose their nursing services; (3) that harm to the defendants was unlikely if the injunction was granted; and, (4) that granting the request for an injunction would be in the public interest because New Jersey thereby would be required to administer the Medicaid law correctly. As a result, Judge Thompson enjoined New Jersey “from applying the asset transfer penalties … to Plaintiffs’ outright transfer of assets to their respective blind or disabled children.”

The federal court Order enjoining the State of New Jersey from denying Medicaid eligibility based upon plaintiffs’ transfers of assets to their blind or disabled children outright and not in a “payback” trust is annexed here – Sorber v. Velez – Order and Opinion