The Third Circuit Court of Appeals upholds a community spouse's purchase of an actuarially sound annuity that converts excess resources into protected income. The community spouse was represented by the Pennsylvania ElderLawAnswers member firm of Marshall, Parker and Associates. James v. Richman(3rd Cir., No. 06-5092, Nov. 12, 2008).
When her husband entered a nursing home in August 2005, Josephine James purchased a $250,000 single premium immediate irrevocable annuity. The actuarially sound annuity included an endorsement that "[t]his Contract may not be surrendered, transferred, collaterally assigned, or returned for a return of the premium paid. This Contract is irrevocable and has no cash surrender value. An Owner may not amend this Contract or change any designation under this Contract."
The purchase of the annuity, combined with the purchase of an automobile, reduced the couples' resources to within Medicaid resource eligibility limits. But, when Mr. James subsequently applied for Medicaid, his application was denied. The Pennsylvania Department of Public Welfare (DPW) took the position that Mrs. James's annuity was an available resource because her right to receive income from it could be sold by her. In support of this position, DPW eventually produced a declaration from a finance company that expressed interest in purchasing the payments from Mrs. James's annuity for $185,000.
Mr. James asked a U.S. district court for a restraining order preventing the state from denying him Medicaid benefits. In March 2006, the U.S. District Court for the Middle District of Pennsylvania granted the restraining order and later granted Mr. James's request for an injunctionpermanently enjoining the state from denying him Medicaid benefits based on his purchase of the annuity. DPW appealed.
Relying on Medicaid law and Supplemental Security Income (SSI) regulations, the U.S. Court of Appeals for the Third Circuit finds that DPW cannot treat Mrs. James's annuity as an available resource. The court holds that in determining whether an annuity may be treated as a resource a state cannot use a methodology that is more restrictive than that used by SSI. Under 42 U.S.C. § 1396a(a)(10)(C)(i)(III), the court writes, "the Department can not treat as available resources any assets that the SSI regulations would not treat as available resources."
The court notes that although the power to liquidate property makes it available under SSI regulations, the SSI Program Operations Manual System (POMS) makes it clear that the "power to liquidate" is not simply the de factoability to accomplish a change in ownership of an asset, but must also include the power to do so without incurring legal liability. POMS SI 01110.115. Since, Mrs. James lacks the legal power to change ownership in her annuity without breaching the annuity contract, the annuity cannot be treated as an available resource, the court concludes.
Mrs. James -- Mr. James died during the pendency of the appeal -- was represented by Pennsylvania ElderLawAnswers member attorney Matthew J. Parker of Marshall, Parker and Associates. The above summary is an abbreviated version of firm principal Jeffrey A. Marshall's summary of the case.
Commenting on the case, Marshall notes that "the James annuity was purchased prior to the Deficit Reduction Act (DRA). In a post-DRA case,
Weatherbee v. Richman, USDC Western District of Pennsylvania, No1:07-cv-00134, DPW has taken the position that a provision in the DRA has given states the authority to effectively void the spousal income protections of 42 U.S.C. § 1396r-5(b)(1) as applied to annuities. This reading of the section seems strained and appears to be at odds with CMS's interpretation of this section. Given the Court's opinion in James, it seems increasingly unlikely that DPW will prevail in Weatherbee. In any event, post-DRA spousal annuities do have to comply with the DRA transfer and remainder beneficiary rules set out in 42 U.S.C. § 1396p(c)(1)(G) and 42 U.S.C. § 1396p(c)(1)(F)."
For an earlier ElderLawAnswers article on Pennsylvania's assault on annuities, click here.
For the full text of this decision in PDF format, go to: https://www.paelderlaw.com/pdf/JamesThirdCircuitOpinion.pdf.
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