TEFRA stands for the Tax Equity and Fiscal Responsibility Act, a 1982 federal law that, among other things, created a pathway for children with disabilities to qualify for Medicaid regardless of their family’s income. While the original law covered tax policy, pension rules, and Medicare changes, most people searching for TEFRA today are looking for information about this specific Medicaid provision, sometimes called the “Katie Beckett option.” It allows families to get Medicaid coverage for a child who needs intensive medical care at home.
Why TEFRA Matters for Families
Before TEFRA, Medicaid had a frustrating gap. If a child with a serious disability was treated in a hospital or nursing facility, Medicaid would cover the cost without counting the parents’ income. But if that same child went home to be cared for by family, the parents’ income suddenly counted, and many middle-income families earned too much to qualify. Children were essentially penalized for living at home instead of in an institution.
The TEFRA provision fixed this by allowing states to treat the child as a “household of one” for Medicaid eligibility purposes. That means only the child’s own income and resources are considered, not the parents’. A child can qualify up to 100% of the federal poverty level on their own, or through what’s called an income spend-down, where excess income is offset by medical expenses. The key condition: the child must require a level of care comparable to what they’d receive in a hospital, nursing facility, or specialized care facility for people with developmental disabilities, and home care must cost the state no more than institutional care would.
Who Qualifies
To be eligible for TEFRA Medicaid, a child generally must meet all of the following criteria:
- Age: Under 19 years old
- Living situation: Living at home with at least one biological or adoptive parent
- Disability status: Certified as disabled, typically through a process similar to Social Security disability determination
- Level of care: Requires care comparable to what a hospital, nursing facility, or intermediate care facility for people with intellectual disabilities would provide
- Cost neutrality: Home care must not cost more than Medicaid would pay for institutional care
The disability certification is the biggest hurdle for most families. It requires medical documentation showing that the child’s condition significantly limits their ability to function. This is not the same as having a diagnosis on paper. The state needs evidence that the child’s daily care needs rise to an institutional level.
What TEFRA Medicaid Covers
Children enrolled in TEFRA Medicaid gain access to a federally required benefit package called Early and Periodic Screening, Diagnostic, and Treatment (EPSDT). This is one of the most comprehensive health coverage options available for anyone under 21. It requires Medicaid to cover all services that are medically necessary for the child, even if those services aren’t normally part of the state’s standard Medicaid plan.
In practice, this can include therapies, durable medical equipment, home nursing, prescription medications, and specialist visits that private insurance might limit or deny. Many families use TEFRA Medicaid as a secondary form of coverage alongside private insurance, filling in the gaps for services their employer-sponsored plan won’t pay for or caps out on. For a child with complex medical needs, those gaps can add up to tens of thousands of dollars a year.
What Families Pay
TEFRA is a cost-sharing program in most states, meaning families above a certain income threshold pay a monthly premium. In Arkansas, for example, families earning less than 150% of the federal poverty level pay nothing. For a family of four, that threshold is $48,225 per year. Above that, premiums follow a sliding scale based on household size and income.
The scale starts modest. A family earning $25,001 to $50,000 annually pays roughly $20 to $41 per month. At $100,001 to $125,000, premiums range from $145 to $182 per month. Even at the highest income levels, total out-of-pocket cost sharing is capped at 5% of the family’s gross annual income. Families can also deduct $600 per dependent child in the household and any excess medical and dental expenses reported on their federal tax return. The specifics vary by state, but the sliding-scale structure is common.
How to Apply
The application process involves more paperwork than standard Medicaid because of the disability and level-of-care determinations. Based on South Carolina’s process, which is representative, you’ll typically need to gather:
- The state’s TEFRA application form
- An in-home care certification completed by your child’s physician
- A disability report for children under 18
- A signed medical records release form
- Proof of citizenship and identity
- Recent medical records (within 15 months)
- Copies of any Individualized Education Program (IEP) and school psychological evaluations for school-age children
- Proof of any income or resources in the child’s name, such as child support, Social Security payments, bank accounts, or trust accounts
- Copies of any existing health insurance cards
Having existing private insurance does not disqualify your child. The state simply needs it on file to coordinate benefits. If you don’t have every document ready, submit the application anyway. Most states will follow up with you for missing items rather than reject an incomplete application outright. The physician certification and medical records tend to be the most time-consuming pieces to collect, so starting with those can speed things up.
State Availability
TEFRA is a state plan option, not a federal mandate. That means each state decides whether to offer it. Not all states do, and the ones that participate may call the program by different names. Some use “Katie Beckett” (named after the child whose case inspired the provision), while others refer to it simply as the TEFRA option. States like Minnesota, Arkansas, Oklahoma, South Carolina, and Connecticut all operate versions of the program, but eligibility details, premium structures, and covered services can differ. Your state’s Medicaid agency website is the most reliable place to check whether the option exists where you live and what the local rules look like.
The Broader 1982 Law
The Medicaid provision is just one piece of TEFRA. The full 1982 law made sweeping changes to the tax code, pension rules, and Medicare. On the pension side, it reduced the maximum annual benefit a tax-qualified pension plan could pay to $90,000 and capped annual contributions to defined contribution plans at $30,000. It froze automatic cost-of-living adjustments on those limits until 1986. It also created new rules for “top-heavy plans,” where most of the benefits went to highly compensated employees, limiting the compensation used to calculate pension benefits to the first $200,000 of any worker’s salary.
For self-employed individuals, TEFRA was significant because it brought Keogh retirement plans (used by sole proprietors and partnerships) under nearly the same rules as corporate pension plans, eliminating many of the stricter limits that had previously applied. On the enforcement side, the law increased criminal fines for tax evasion, willful failure to file returns, and submitting false statements. The Medicare provisions capped what the federal government would recognize as reasonable hospital operating costs, setting the stage for later payment reforms.