States forced to conform to DRA annuity requirements

By Kevin Wedmore

A2Z Annuity Marketing


I receive a lot of calls from agents around the country with horror stories about how either local or state Medicaid personnel are looking at annuities as they are used in Medicaid planning. The truth is that many caseworkers, supervisors, or even directors, are clueless or careless in how they apply the rules, as written in the Deficit Reduction Act of 2005 (DRA), signed into law on February 8, 2006.

First, I must point out that the DRA did not eliminate the use of annuities in Medicaid planning. As many rulings and court opinions have stated, if Congress wanted to eliminate the use of annuities in Medicaid planning, it could do so at any time. The DRA only refined the use of annuities by putting in further stipulations that must be met in order for an annuity to be a non-available resource. The two major points are that all annuity payments must be equal and contain no balloon payments, and the state must be named in the primary position for an annuity on the Medicaid applicant so that the state may recover from future annuity payments to the extent it has paid for care on behalf of the Medicaid recipient. A third rule, that the look-back period be extended to five years, also has a bearing on how we use annuities, however it is not specific to annuities, but to all transfers.

Some states have tried to take these rules further by trying to count a properly executed annuity as an asset by stating that it is an available resource. Their basis is that an income stream from an annuity has a current value; that is, that there are companies who will purchase annuity payment streams at a discount value. In all situations, when these cases go to court, the eventual legal outcome is that the state cannot change the rules that the U.S. Congress has established, and that the state cannot count the annuity as an available resource. I will cite some of the cases below, however it should be noted that I am not an attorney and only present these cases as a matter of public record.

Two states where the argument of asset availability has been heard are New Jersey and Pennsylvania. One such case is represented below:

In a short, non-precedential decision, the Third Circuit affirmed the district court's decision ruling in favor of a Medicaid applicant. See 595 F.Supp. 2d 607. The Circuit Court agreed that a DRA compliant annuity cannot be treated as a resource. Consistent with its prior holding in James v. Richman, the State's argument that a secondary market for annuities makes them available is "fundamentally flawed" where there are impediments to transfer of the annuity. Perhaps more significantly, the court agreed that DRA creates an annuity exemption that cannot be narrowed by state law. "The eligibility requirements established by the states may be more liberal than those of the Federal government, but they may not be more restrictive." Apparently the Third Circuit is more inclined than the Tenth Circuit (e.g., Hobbs v. Zenderman) to require State compliance with federal law. Weatherbee v. Vechhio, 2009 U.S. App. LEXIS 24939, Appeal No. 09-1399 (November 12, 2009). Click here to see the full case.

By looking at the Weatherbee case, one can see that the State of Pennsylvania argued that an annuity in the case should be considered available since there is a secondary market for such annuities. The U.S. District Court for the Western District of Pennsylvania ruled in favor of the purchaser of the annuity that the annuity in question did meet the requirements of the DRA and that although a secondary market does exist, the language of the DRA makes it clear that an annuity, if properly structured, is not a countable resource but an income stream and does not have to be sold. The Appelate Court upheld the decision.

As I mentioned, other states have tried the same approach. Where the courts have ruled, they have ruled that annuities meeting the guidelines established under the DRA are acceptable and that individual states cannot set their own rules. Some states continue to count annuities since no court action has been taken. One of those states is Utah, which is still forcing applicants to prove a negative -- that no one is willing to purchase their annuity by asking the applicant to submit letters from annuity purchasers declining to purchase their specific annuity. They are not alone.

Other states have tried different tactics. For example, one state requires all Medicaid applications where an annuity is involved to automatically be sent to the state director's office for review. The tactic is clear -- intimidation and delay. So, the state says if your client did any retirement planning and secured an income stream via an annuity, they should be penalized. Again, we are likely to see favorable rulings that if the annuity meets the guidelines, it must be accepted.

The DRA, while being specific about annuities that are written on the Medicaid applicant, does not provide as clear of guidance for those annuities written on the community spouse. While it is universally understood that the income of the community spouse (including that from an annuity) is not available to pay for services provided to the institutionalized spouse, what that income stream must look like is being applied differently in various states. For example, Florida rules state that an annuity purchased for the benefit of the community spouse does not have to provide substantially equal payments and can include balloon payouts. Other states, Florida included, do not require that the state be named in the beneficiary designations, while others have interpreted the DRA to say that a community spouse's annuity must name the state in the secondary position behind the spouse. Other states are requiring that the state be named in the primary position, even if the annuity is written on the community spouse.

Regardless of what is happening in your state with annuity rules and regulations as they apply to Medicaid, planning is still necessary in order to assure that your clients do not have to spend every dime they have accumulated on nursing home costs. A number of consumer articles have been written and published in credible sources such as the Wall Street Journal and Newsday, explaining not only the legal justifications for doing Medicaid planning, but also the ethical considerations for taking such action. The Congress of the United States obviously still concurs. Their rules are clear: Annuities remain a viable planning tool. Are you equipped to help your clients with this process?

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