Medicaid compliant annuities can play an important role in long-term care planning for many married clients, but in recent years, restrictive state and local policies have often prevented clients from fully taking advantage of these federally regulated products.

Because a Medicaid compliant annuity is often the only means by which a healthy client is able to secure a stable income stream once his or her spouse requires state-sponsored Medicaid assistance, state-imposed restrictions in this area can force a Medicaid-reliant client into poverty.

To prevent this, a federal court recently stepped in to issue an injunction against the program that implements Ohio’s Medicaid policies, indicating that the tides might be turning and easing the path for clients who wish to use Medicaid compliant annuities in their long-term care planning.

The Ohio Controversy

A married couple typically purchases a Medicaid compliant annuity if the two spouses are in unequal health positions to ensure that the healthy spouse—known as the “community” spouse—has sufficient income, while allowing the second, less healthy spouse to qualify for Medicaid assistance in paying for long-term care expenses, typically within a nursing home.

Rather than treating the purchase of the annuity as an impermissible asset transfer effected in order to meet Medicaid’s means-tested eligibility requirements, if the requirements are satisfied, the federal Deficit Reduction Act (DRA) treats the purchase as a permissible exempt investment, and the annuity payout stream is shielded as the community spouse’s income.

In three separate instances, a community spouse had purchased a Medicaid compliant annuity so that his spouse, a nursing home resident, could qualify for Medicaid. Because several counties in Ohio had decided to treat Medicaid compliant annuities as impermissible asset transfers even if those annuities satisfied the strict federally mandated criteria, the Medicaid applications were denied.

In Ohio, a community spouse is entitled to retain half of the couple’s assets, up to a maximum dollar amount of around $117,000. The unhealthy spouse is required to spend down the remainder of the couple’s assets until only $1,500 remains. In order to accomplish this, the couple is permitted to buy certain types of immediate annuities without jeopardizing Medicaid eligibility.

The immediate annuities purchased in the Ohio case satisfied federal criteria but, because the Ohio program found that they did not satisfy state standards, the state found that the healthy spouses were required to use those funds to pay for the unhealthy spouses’ nursing home care, despite the fact that the funds were now invested in irrevocable annuities.

The judge in this case disagreed and, because the institutionalized spouses were at risk of eviction from the nursing home, issued an injunction ordering the state to reverse its decision and treat the annuities as permissible or risk disqualifying Ohio from the federal Medicaid program entirely.

The state quickly complied.

Medicaid Compliant Annuities: The Federal Rules

Medicaid compliant annuities allow the community spouse to use funds in excess of the Medicaid-permitted resource allowance to purchase an annuity that provides additional income for the remainder of his or her life expectancy.

In order to qualify as a Medicaid compliant annuity under the DRA, the terms of the annuity contract must satisfy certain criteria. The income from the annuity contract must be payable to the community spouse, the contract must be irrevocable and the payment term must be based on the life expectancy of the community spouse.

This is because, in a situation where one spouse requires long-term care and the other remains in the community, the assets of the community spouse are counted—up to a certain level—in determining whether the institutionalized spouse qualifies for Medicaid, but the income of that spouse is not counted.

Further, the state must be named as the remainder beneficiary on the contract, allowing it to receive up to the amount that it has paid for the institutionalized spouse’s long-term care.

Conclusion

While the federal court’s injunction does not end the controversy for all Ohio residents whose Medicaid compliant annuities have led to their application being denied, it is a step in the right direction.

The speed with which the Ohio program complied with the injunction and reversed the denied applications is, however, a step in the right direction for Medicaid-reliant clients.

Originally published on National Underwriter Advanced Markets. National Underwriter Advanced Markets is the premier resource for financial planners, wealth managers, and advanced markets professionals who provide clients with expert financial and retirement planning advice.

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