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Medicaid Annuity

The Medicaid-compliant annuity is a tool to remove excess resources which would make a person unqualified for Medicaid by converting cash assets into a monthly income stream. While plenty of companies offer immediate annuities, not just any immediate annuity will work, for Medicaid-qualification purposes, the annuity must be a “DRA Medicaid-compliant annuity.” Very few companies offer this because the interest rate is so low and structured over a short period of time (so not a lot of money is made by insurance company compared to other annuities).

This article explains what a DRA Medicaid-Compliant Annuity is and how they are treated by elder-law attorneys who handle medicaid planning matters to assist those looking to preserve their assets.

A DRA Medicaid-compliant annuity is:

  • a single premium immediate annuity (a/k/a SPIA) without deferral (and no balloon payments).
  • the annuity contract must make a payment within 1 year in order to be considered “immediate”
  • payments must be made in equal amounts (principal and interest),
  • The annuity must be actuarially sound (this means that the annuity must return the individual’s premium investment within the same individual’s life expectancy as set forth in Medicaid tables). So the structure is for a term at least slightly less than the Medicaid recipient’s life expectancy. “Actuarially Sound” was a standard set forth in HCFA Transmittal #64. The payment schedule can always be set for a time frame less than the recipient’s life expectancy.
  • irrevocable (not able to be reversed or amended). Can’t alter beneficiary, annuitant, payment frequency, or duration of payments.
  • non-assignable (cannot sell the policy on secondary market – e.g. no JD Wentworth or Peachtree Financial – and cannot assign payments to anyone other then the initial beneficiary).
  • State of Florida, Agency for Health Care Administration (AHCA) must be named as the beneficiary in first priority up to the amount Medicaid paid for the benefit of the Medicaid recipient. 

What does the Florida Medicaid Manual Actually Say about Medicaid Annuities?

1640.0609.03. Transfers to Annuities on or After 11-1-2007. Annuity purchase is considered a transfer of assets for less than FMV unless all the following requirements are met:

Must name State of Florida, Agency for Health Care Administration (AHCA) as the primary beneficiary, for the total amount Medicaid paid (except for when the individual has a spouse or or minor or disabled adult child, in which case, the state shall be named as secondary beneficiary after the spouse and/or minor or disabled child).

Must be irrevocable and nonassignable.

Annuity must make payments (including both principal and interest) to the individual in equal amounts during the term of the annuity, with no balloon or deferred payments.

Must be actuarially sound based on actuarial tables used by the Social Security Administration (see Appendix A-14).

If the above criteria are met, funds in the annuity are excluded as a resource and periodic payments are counted as income in the eligibility determination and patient responsibility.

If all of the above criteria are not met, consider all funds in the annuity a transfer without fair compensation, except when annuity is revocable or assignable:

When revocable: count as an asset the amount a purchaser would receive from the annuity issuer of the annuity was cancelled.

When assignable: count as an asset the amount of the annuity that could be sold on the secondary market.

EXCEPTION: IRAs, SEP, Roth IRA or other annuities established by employee are not considered under transfer of assets provisions and do not have to meet above criteria.

Community Spouse’s Annuity: Purchase of annuity by community spouse of ICP applicant will be considered a transfer of assets for less than FMV unless annuity meets below criteria:

Names AHCA as primary beneficiary (or secondary after any minor or disabled children)

Actuarially sound based on spouse’s age on the actuarial table used by SSA in Appendix A-14.

Community spouse annuities that are revocable or assignable will count as an asset, in the same manner as the applicant’s annuity would count as described above.

Annuities purchased by community spouse after approval of LTC Medicaid for applicant spouse are not evaluated for transfer of asset provisions.

Evaluating Annuities

Can refer to Appendix A-34 when evaluating annuities. DCF will send form CF-ES 2355 to the annuity issuer.

How to do handle non-compliant annuities for Medicaid planning?

There are two general types of annuities: tax-deferred annuities (TDA) and single premium immediate annuities (SPIA). Remember that most annuities, especially deferred ones, are accessible to the owner and therefore countable as resources.

Surrender: Pay a surrender charge and take the cash. Any gain is subject to income taxes but the proceeds can be sheltered via another Medicaid-compliant method to be determined by you and your Elder law attorney.

Transfer: Avoid paying income taxes if the annuity can be transferred or 1035 exchanged for another type of annuity (the second one being a Medicaid-compliant annuity). Surrender charges will likely apply.

Sell it (on secondary market): there are companies that specialize in purchasing annuities at a discount in exchange for a cash lump sum. 

So if you have a tax-deferred annuity and want to convert it to an immediate annuity, make sure company is familiar with DRA Medicaid Compliant Annuity standards discussed above. Because if any of the Medicaid-compliant standards are missing, the annuity will count as an asset and likely result in Medicaid disqualification.

Related Elder Law Attorney Articles

Examples of Annuity Medicaid Planning 

What is Half-a-Loaf Medicaid Planning?

How annuities spread out income taxes re: family caregiver agreements?

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