Medicaid Annuity Rules Under the Deficit Reduction Act of 2006

By: Jaime I. Gillis

The federal law background

Annuities are used to convert accumulated assets that exceed the asset limits of the Medicaid program into a stream of income that will be either entirely non-countable (e.g., when received by the at-home spouse) or that will be below the permissible income limits for an individual. Federal law prescribes the types of annuities that may be purchased without causing disqualification from Medicaid. In an attempt to curtail the utility of annuities, the Deficit Reduction Act of 2005 (“DRA”) adds new requirements to the Medicaid statute with respect to the treatment of annuities purchased on or after the date of its enactment.

Disclosure and treatment of annuities

As a condition for Medicaid coverage, and irrespective of whether the annuity is irrevocable or treated as an asset, applicants must disclose and describe any interest the applicant or the applicant’s spouse may have in an annuity.

The purchase of the annuity is considered to be a bone fide purchase of an asset benefiting the annuitant (as opposed to an abusive shelter of assets) if the annuity is irrevocable, non-assignable, for a term no longer than the annuitant’s actuarial life expectancy (using federally prescribed life expectancy tables), and provides for payments in equal amounts with no deferred or balloon payments. Annuities that meet this definition are considered “actuarially sound.” States may not impose Medicaid disqualification based upon the purchase of an actuarially sound annuity, but if an annuity fails to meet the outlined criteria, it will be treated as a disposal of assets for less than fair market value and will trigger a penalty period.

While the purchase of an annuity may not induce the burden of a penalty, some states have adopted the position that annuities are assignable assets for which there is a market and that therefore, annuities should be treated as countable assets. New Hampshire has not yet adopted this position, but the Department of Health and Human Services has it under consideration.

Requirement of State to be named as a remainder beneficiary

As a further requirement of coverage, the state must be named as the remainder beneficiary on any annuity purchased to the extent of the total amount of assistance furnished to the institutionalized individual. If the applicant’s at-home spouse or minor or disabled child is named in the first position, then the state must be named as the contingent beneficiary. Prior to the enactment of the DRA, RSA 167:4(IV) already required the state to be named as the remainder beneficiary of annuities purchased by a nursing home resident who applies for Medicaid.

As originally enacted, the DRA appeared to codify the provisions of RSA 167:4(IV) as it provided that the state’s remainder rights were equal to the amount paid on behalf of an “annuitant.” The Tax Relief and Health Care Act of 2006 amended this section of the DRA, striking the word “annuitant” and inserting “institutionalized individual” in its place. The amendment appears clear in providing that the scope of the DRA reaches annuities purchased by an applicant for Medicaid as well as annuities purchased by the at-home spouse. While we have little experience yet with DHHS on this provision, the expectation is that the at-home spouse can purchase an annuity provided that the state is named as the remainderman for benefits provided to the institutionalized spouse.

Effective date

The DRA applies to all annuities purchased on or after February 8, 2006. For those annuities that were purchased prior to the enactment of the DRA, annuitants should be aware that annuity-related transactions other than purchases, such as additions of principal, elective withdrawals and requests to change the distribution of the annuity, taken by the individual on or after February 8, 2006, will result in all provisions of the DRA being applicable to the annuity.

Conclusion

Impact on unmarried nursing home residents

The utility of immediate annuities for unmarried nursing home residents is greatly limited. Prior to the enactment of the RSA 167:4(IV) , annuities were useful for unmarried nursing home residents because they could be used to slow down the rate at which the individual’s assets would be consumed by the cost of nursing home care, and to thereby increase the possibility that a residue would be left for the individual’s heirs. The individual could purchase an immediate annuity using all but $2,500 of his or her assets and apply for Medicaid. So long as the annuity was actuarially sound, the purchase would be non-disqualifying for Medicaid purposes. The income received by the individual from the annuity would be countable income, but typically the monthly annuity payment would be far less than the monthly private pay cost of the nursing home. The annuity would be applied toward the nursing home bill along with the individual’s other fixed income sources, such as Social Security, and Medicaid would pay the balance according to the Medicaid reimbursement rates. Using a modest example, if the individual had $70,000 in assets, the private pay cost of nursing home care would consume those assets in about one year. If the assets were converted to an annuity paying $500 per month, the annuity might last many years.

Prior to the enactment of RSA 167:4(IV), the individual could name the intended recipients of his or her estate as the contingent beneficiaries of the annuity. If the individual died before the annuity was exhausted, those individuals would receive the balance of the contract free of any Medicaid liens. RSA 167:4(IV) has diminished this opportunity for planning by requiring that the state be named as the contingent beneficiary with first priority. If the state has paid any Medicaid benefits on behalf of the annuitant, it must receive the balance of the annuity contract to the extent of the amounts paid on the individual’s behalf. If after the state is reimbursed any amounts remain in the contract, those excess funds can go to the individual’s intended estate beneficiaries.

Neither RSA 167:4(IV) nor the enactment of the DRA entirely eliminate the possible benefits of annuities for unmarried nursing home residents. Because the rate of Medicaid reimbursement for nursing home expense is lower than the private pay rate, recovery by the state may be less than what would have been paid privately from liquid resources. Typically, other planning methods would be explored first, but annuities may still be a useful tool of last resort.

Impact on married nursing home residents

In the Medicaid planning context, immediate annuities are more commonly used to preserve assets for the benefit of the at-home spouse of a nursing home resident. When a married individual enters a nursing home, the assets of both spouses are deemed to be available to the spouse in the nursing home for Medicaid eligibility purposes. The at-home spouse is allotted a resource allowance from this combined pool of assets, but typically there are excess assets that must be spent down before the nursing home resident will qualify for Medicaid. If the at-home spouse purchases an actuarially sound immediate annuity, that purchase will be a non-disqualifying expenditure. Because income is not deemed mutually available between the spouses, the at-home spouse can receive the annuity payments without having to devote the income to the cost of his or her spouse’s nursing home care. The at-home spouse can also re-accumulate the income, since asset deeming stops once the nursing home resident spouse is eligible for Medicaid. None of these advantages were challenged by the enactment of the DRA. However, as in the case of unmarried nursing home resident, the DRA has reduced the opportunity for a married nursing home resident to preserve and direct the remainder interest of an annuity.

Contact Jaime I. Gillis (603-629-4579) or any member of the Wiggin & Nourie Trusts and Estates Group if you have questions about these and other trust and estates questions.

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