Immediate annuities have long been used in long-term care planning as a means of transforming assets that are countable against the limits for Medicaid eligibility into an income stream that does not affect eligibility. The Deficit Reduction Act of 2005 (DRA) changes the rules under which immediate annuities may be used. While it limits and complicates their use, they are still a very valuable long-term care planning tool.
The first and most significant change under the DRA is that the state must be named the first remainderman on the annuity up to the amount of Medicaid benefits paid on the annuitant's behalf. Any annuity payments that exceed this reimbursement requirement may be paid to other remaindermen.
While the reimbursement requirement would seem to eliminate the use of immediate annuities for unmarried nursing home residents, when considered with the new DRA restrictions on transfers of assets, the immediate annuity may still make sense in some instances, especially for higher-income nursing home residents. For instance, let's assume that Mr. Green has savings of $100,000 and a monthly income from Social Security and pension of $4,000, and that the private-pay cost of his nursing home care is $8,000 a month. With no planning, he will spend down his savings in approximately two years.
If, instead, Mr. Green purchased an annuity with a five-year term certain, he could immediately qualify for Medicaid coverage. He would still have to pay his income, including his new annuity income, to the nursing home as his share of his cost of care. The state Medicaid agency would pay the balance of his cost of care and would have a right to reimbursement from the annuity upon Mr. Green's death (if he does not outlive the guaranteed term certain). Assuming that the annuity pays Mr. Green $1,750 a month, his monthly contribution would be $5,750 a month (less the personal needs allowance).
Significantly, the state Medicaid agency will not pay the full private pay rate for Mr. Green's care, instead paying the Medicaid rate. If that is $6,000 a month, then the state's cost will be only $250 a month, or $3,000 a year. In this case, if Mr. Green died after three years in the nursing home, the state reimbursement would be only $9,000. Approximately $30,000 would be paid to his children during the final two years of the annuity's term certain.
The DRA requires that any immediate annuity be non-assignable and that payments be in equal amounts with no deferral or balloon payment. This is no different from the rules adopted in virtually every state.
DRA Notice Requirements
A completely separate section of the DRA requires that the states request information about annuities owned by the Medicaid applicant or recipient upon application or recertification. This does not appear to be different from current law. However, it then requires the 'application or recertification form shall include a statement that under paragraph (2) the State becomes a remainder beneficiary under such an annuity or similar financial instrument by virtue of the provision of such medical assistance.' This would seem to require that the state be named the remainderman on old as well as new annuities. It might also apply to annuities owned by the community spouse, whether or not they have been annuitized or are still deferred.
However, paragraph (2) refers back to transfer rules described above, meaning that it seems to apply only to immediate annuities, the purchase of which may be subject to a transfer penalty. For that reason, it does not appear to apply to deferred annuities. That said, none of this is entirely clear and may be clarified by a transmittal from the Center for Medicare and Medicaid Services (CMS). It also may differ from state to state.
This provision of the DRA goes on to require each state to notify the annuity issuer of its claim. The states may also require the issuer to notify the state of any change in the amount and timing of withdrawals. This provision raises the question of whether this section of the law applies to deferred as well as immediate annuities since, presumably, no changes could be made in the amount of withdrawals after annuitization.
Qualified Plans Exempted
Interestingly, the DRA exempts immediate annuities purchased within a qualified plan, such as an IRA or 401(k) plan, from some of its rules. The states differ on how they treat such assets, some counting them, some counting them if owned by the nursing home resident but not by his or her community spouse, some counting them unless the spouse is still working, and others with their own variations on these rules. The DRA does not change such rules. However, it appears to exempt any immediate annuity purchased within a qualified plan from the requirements that the annuity be actuarially sound, be non-assignable, and have uniform payments. It does not appear to exempt such annuities from the requirement that the state be made a remainderman up to the extent of Medicaid payments made on the annuitant's behalf.
Protect Current Annuities
Wisconsin ElderLawAnswers member Dale M. Krause warns that if an annuitant is currently receiving Medicaid benefits, on the next Medicaid review the Medicaid caseworker will insist that in order for the recipient to continue receiving benefits, the annuity beneficiary designations will have to meet the DRA's reimbursement requirements. Krause advises checking with the annuity company to make sure that the original beneficiary(ies) designations are irrevocable.
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