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Medicaid-compliant annuities are fixed immediate annuities that allow applicants to meet Medicaid’s asset criteria by reducing his or her non-exempt assets, thus making them eligible for Medicaid benefits, such as long-term care. For married couples, Medicaid-compliant annuities enable the healthy spouse to continue receiving supplementary income.
Medicaid annuities help spouses of Medicaid recipients continue to pay their bills in retirement.
In order to qualify for Medicaid, a person must spend almost everything he or she has. But if one spouse doesn’t require long-term care, this can leave the healthy spouse impoverished, too.
Medicaid annuities enable the healthy spouse to receive a source of income to supplement Social Security when the other spouse needs Medicaid for long-term care.
The rules of these annuities are very strict and must be followed precisely, so it is strongly recommended that you consult an expert in elder-care law when purchasing a Medicaid-compliant annuity.
Medicare Doesn’t Cover Long-Term Care
The cost of medical care in retirement can derail even the best laid plans. This is particularly true when it comes to long-term care.
Although many may assume Medicare, the federal program that provides health care coverage for people aged 65 and over, will cover health care costs in retirement, there is usually a large gap between what Medicare does and does not pay for. That includes long-term care, which is not covered by Medicare.
This is despite the fact that the U.S. Department of Health and Human Services estimates that someone turning 65 has a nearly 70 percent chance of needing some kind of long-term care services in their remaining years.
And long-term care is expensive. The average national cost for a semi-private room in a nursing home is more than $7,500 a month, according to the Genworth Financial Cost of Care Survey 2019. That’s more than $90,000 a year. Even a sizable retirement nest egg will vanish under the weight of those kinds of costs.
|Assisted Living Facility||$4,051|
|Home health aide||$4,385|
|Adult day health care||$1,625|
According to the American Association for Long-Term Care insurance, the average cost for long-term care insurance for a couple who are both 60 years old is $3,400 a year. The association says 30 percent of people between the ages of 60 and 69 who apply for this insurance are declined coverage.
In 2018, approximately 350,000 Americans purchased some type of long-term care insurance. The majority of these policies are linked to other products, such as annuity long-term care riders.
Annuities and Medicaid Requirements for Long-Term Care Coverage
Fortunately, Medicaid does cover long-term care. In fact, Medicaid is the largest provider of long-term care in the nation.
But Medicaid is the government health insurance program for the poor. This means you must have almost no assets or income to qualify for coverage. This includes retirement savings and annuities.
Medicaid is the specific rules in your state may differ administered by states, so. But generally, annuities are useful in providing income for a spouse who isn’t seeking Medicaid coverage for long-term care.
It’s also important to note that annuity payments are counted as income and will affect eligibility based on income limits and that not all annuities are Medicaid-compliant.
The best type of annuity for this purpose is the single premium immediate annuity (SPIA). These fixed annuities are the least complicated, and they provide for specific, predictable payments that can comply with Medicaid rules. Variable annuities, on the other hand, do not have specific, guaranteed returns and are not always Medicaid-compliant.
Limits on Assets and Income; You Just Can’t Give It Away
Although each state has its own rules, most states limit a Medicaid-covered individual to $2,000 in “countable,” or non-exempt, assets. People whose financial resources are valued at more than $2,000 are required to spend down their assets to become eligible for Medicaid.
But under the rules, you can’t just give away your assets to become Medicaid eligible.
In fact, the government has what’s called a “lookback period,” meaning it reviews what happened with assets in the five years leading up to the Medicaid application.
During that period, any assets that were given away or sold for less than fair market value are considered to have been available for payment of expenses that otherwise would have been covered by Medicaid. Consequently, the government delays Medicaid eligibility for the period those assets could have been used to pay for nursing home care.
Exceptions for the Healthy Community Spouse
As strict as the rules are, the government does make allowances for a spouse who doesn’t require Medicaid for long-term care. These spouses are referred to as community spouses, as they continue to live in the community.
These allowances are designed to prevent what the government refers to as spousal impoverishment. In other words, the government does not require a healthy spouse to descend into poverty in order to provide nursing home care for a partner.
The government counts everything except personal belongings, the primary home and household items and a vehicle as assets.
The expanded limits for the healthy spouse are referred to as the community spouse resource allowance, or CSRA. In some states, the healthy spouse may keep an amount equal to half of the couple’s total countable assets up to the maximum cap.
For example, if the couple had $150,000 in assets and the cap in that state was $128,640, the healthy spouse could keep up to $75,000, or half of the couple’s assets. Some states do not have this restriction and allow the healthy spouse to keep an amount up to the cap. In those states, the healthy spouse in this scenario could keep up to $128,640, if that was the state’s cap.
The healthy spouse could use some of any excess assets to purchase a Medicaid-compliant annuity to transform the assets into income. However, some states have additional rules for these annuities, and some states don’t permit them at all.
And if the healthy spouse later requires nursing home care, the annuity income must be used to pay for it.
Spousal Income Limits
Keep in mind, Medicaid also limits the income the healthy spouse may receive from the person receiving care. The maximum monthly needs income allowance for 2020 is $3,216. There is also a monthly housing allowance of $634.13. These limits apply in all states except Alaska and Hawaii, which have higher caps.
The healthy spouse may keep all his or her own income, regardless of the caps.
You Can Keep Your House and Get Medicaid
The rules exempt between $595,000 and $893,000 in equity in homestead property from being considered as part of assets and subject to depletion before Medicaid eligibility.
Medicaid also has income limits, but they apply only to the Medicaid recipient.
Medicaid-Compliant Annuity Requirements
Annuities can help convert assets to income for the spouse who is not covered by Medicaid. But the government has strict rules that govern this.
In 2005, as part of the Deficit Reduction Act (DRA), Congress tightened the requirements for qualifying for Medicaid.
According to the Centers for Medicare and Medicaid Services, the Deficit Reduction Act of 2005 introduced rules that “discourage the improper transfer of assets to gain Medicaid eligibility and receive long-term care services.”
As a condition of eligibility for coverage of long-term care services, Medicaid applicants are required to disclose any interest in an annuity.
To be Medicaid-compliant, annuities must name the state as the primary remainder beneficiary (or as the second remainder beneficiary after a community-based spouse or minor or disabled child) for at least the value of the Medicaid assistance provided.
In other words, the annuity contract must specify that if the annuity holder dies, the state would be the beneficiary for the amount of money up to the value of the care funded by Medicaid. The state would be next in line behind the surviving spouse who lives locally or a minor or disabled child of the annuity holder.
If the annuity does not name the state as a remainder beneficiary in the proper position, the annuity must be treated as a “transfer of assets for less than fair market value.” The full purchase price of the annuity would be subject to penalty and count against Medicaid eligibility.
- No changes may be made to its terms.
- It can’t be put in someone else’s name and cannot be sold or otherwise transferred to a third party, such as a factoring company, which purchases the rights to annuity payments.
- Actuarially sound
- It provides payments only for the specific, estimated life span of the annuity holder and no longer.
The law also requires the payments to be in equal installments during its entire term, with no deferral or balloon payments. And the payments are counted as income subject to caps set by Medicaid for eligibility.
Non-Compliant Annuities and Medicaid
If the Medicaid applicant has an annuity inside a qualified retirement plan, known as a qualified annuity, that annuity is not counted as an asset that limits Medicaid eligibility. However, the Internal Revenue Service mandates that once the holder of a qualified annuity reaches the age of 72, he must withdraw a minimum amount each year. This is known as a required minimum distribution (RMD). Medicaid rules require that RMD withdrawals be turned over to the nursing home to cover costs.
Annuities purchased with after-tax dollars outside of qualified retirement plans are known as non-qualified annuities.
In general, if the rules for Medicaid compliance weren’t followed when a non-qualified annuity was purchased, it is counted when determining Medicaid eligibility. However, a non-qualified annuity can be transferred to the healthy spouse without running afoul of Medicaid rules or creating tax problems.
If the owner of a non-qualified annuity doesn’t have a healthy spouse, he or she may assign the annuity to a Medicaid Trust. This allows the annuity holder to keep the income payments and start the five-year look-back period for Medicaid eligibility.
26 Cited Research Articles
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- American Association for Long-Term Care Insurance. (2019). Long-Term Care Insurance Facts-Data-Statistics-2019 Report. Retrieved from http://www.aaltci.org/long-term-care-insurance/learning-center/ltcfacts-2019.php#top
- Benz, C. (2018, August 20). 75 Must-Know Statistics About Long-Term Care: 2018. Retrieved from https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed
- Centers for Medicare & Medicaid Services. (2008, January 8). Important Facts for State Policymakers Deficit Reduction Act. Retrieved from https://www.cms.gov/Regulations-and-Guidance/Legislation/DeficitReductionAct/downloads/TOAbackgrounder.pdf
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- Elder Law Answers. (2019, March 4). Medicaid’s Attempt to Ensure the Healthy Spouse Is Not Impoverished: The CSRA. Retrieved from https://www.elderlawanswers.com/medicaids-attempt-to-ensure-the-healthy-spouse-is-not-impoverished-the-csra-12497
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- Gale, W. & Harris, B. (2019, April 26). Social Security Isn’t the Only Retirement Crisis. Look at Medicare and Medicaid. Retrieved from https://www.barrons.com/articles/social-security-isnt-americas-only-public-retirement-crisis-51556271004
- Genworth Financial. (2019). Cost of Care Survey 2019. Retrieved from https://www.genworth.com/aging-and-you/finances/cost-of-care.html
- Gunnarsson, H.W. (2011, November). Attention estate planners: new Medicaid asset transfer rules finally adopted. Retrieved from https://www.isba.org/ibj/2011/11/lawpulse/attentionestateplannersnewmedicaida
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- Hopkins, J. (2019, December 18). Why The SECURE Act Makes 2020 The Year Of Missed RMDs From IRAs. Retrieved from https://www.forbes.com/sites/jamiehopkins/2019/12/18/why-the-secure-act-makes-2020-the-year-of-missed-rmds-from-iras/#cf4f9924827d
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