THE DEATH, AND POSSIBLE RESURRECTION, OF ANNUITIES

Before the latest revision to the New Jersey Medicaid regulations, the use of annuities in Medicaid planning for married individuals was common. The Regulations now provide that if an annuity is purchased with a couple’s assets, that part of the annuity that exceeds the “protected share” shall be treated as an available asset, disqualifying the Institutionalized Spouse from Medicaid.

To qualify for Medicaid, an individual can have no more than $2,000 in “countable assets.” Countable assets are cash or cash equivalents, assets that can easily be converted to cash. The spouse of an individual seeking Medicaid assistance can retain up to a maximum of $87,000 of the couple’s combined countable assets—called the Protected Share. In Medicaid terminology, the spouse who remains at home is called the “Community Spouse” (CS); the spouse who enters the long-term care facility is called the “Institutionalized Spouse” (IS).

Obviously, many couples aren’t happy with only being able to retain a maximum of $89,000 in countable assets. Having so little cash leaves the CS feeling vulnerable.

Though there are many planning options for single and married individuals seeking Medicaid assistance, annuities presented an excellent planning option for the protection of a large amount of assets. For example, say a couple had $200,000 too much in countable assets to qualify the IS for Medicaid. Before the new Regulations, the couple could have purchased an annuity in the name of the CS for $200,000 that was actuarially sound (meaning that it paid back principal and interest to the CS over a time period that was either equal to or less than her life expectancy), immediately payable (meaning it began making the payments immediately), and non-assignable (meaning that the CS could not give the annuity away).

Gifts have the potential of causing periods of ineligibility for Medicaid, but if the couple purchased an annuity, such as the one described above, the purchase would be deemed to be a purchase for fair market value. No penalty period would be imposed. Furthermore, because $200,000 was used to purchase an annuity that will now pay back income to the CS, the $200,000 in “assets” has been converted to a stream of income. The couple does not need to spend down the excess $200,000; the IS qualifies immediately.

The provision of New Jersey’s regulations that limits the use of annuities to the protected share is in contradiction to the model State Medicaid Manual (SMM) that the Health Care Finance Administration (HCFA) published in November 1994. HCFA—a division of the Department of Health and Human Services—is the federal agency responsible for administering the Medicaid program. The SMM was designed to be a model set of regulations for the various States. It is the Secretary of Health and Human Services interpretation of the Medicaid law and is, therefore, entitled to great deference.

The SMM provides that if an annuity is “actuarially sound,” the purchase of the annuity can be deemed to have been made for fair market value and, therefore, a purchase that does not result in a period of ineligibility. HCFA published life expectancy tables in the SMM that can be used to determine actuarial soundness. For example, according to the tables, an individual 80 years old has a 6.98 year life expectancy. Given this, if an annuity purchased by an 80 year old paid back principal and interest in 6.98 years or less, the annuity would be actuarially sound.

So how can New Jersey publish regulations that contradict HCFA’s manual? That’s a good question. The SMM is the Secretary’s interpretation of federal Medicaid law, and the State’s regulations can be no more restrictive than the federal law. According to a recent decision of a federal district court in Pennsylvania, entitled Mertz v. Houstoun, States may not be able to abolish the use of annuities in Medicaid planning.

Pennsylvania, like New Jersey, is fighting to kill the use of annuities in Medicaid planning. Recent Pennsylvania state court decisions have looked favorably upon Pennsylvania’s arguments against the use of annuities, but the Mertz decision did not.

In Mertz, Pennsylvania was denying Mrs. Mertz Medicaid because she had purchased an annuity in the name of Mr. Mertz, which the State claimed was a gift. The Court, however, indicated that Mrs. Mertz had a strong probability of success upon the merits of her case. The Court, relying upon HCFA’s SMM, said that because the annuity was actuarially sound, the Mertzes had effectively converted countable assets to income.

We will see if this decision affects New Jersey law.