Understanding the Only Medicaid-Approved Annuity Called a “SPIA”

Annuities have become popular retirement vehicles for creating lifetime income due to market volatility. There are two types of annuities – fixed and variable.

Most commercial/brokerage annuities are non-compliant for Medicaid purposes, which means they will be treated as a countable asset.  If the annuity is non-compliant, it will be rejected by Medicaid. This investment will then prevent an applicant from becoming eligible or will create a penalty period during which time an applicant will be ineligible for benefits.

For an annuity to be Medicaid-compliant, it must be a single-premium, immediate annuity that generates an income stream.

I’ve noticed over the years that many older individuals who come in for asset protection planning have annuities, but it is very rare to find one that is Medicaid-compliant, as Medicaid is rarely discussed when purchasing an annuity.

A Medicaid-compliant annuity must meet the requirements of the Deficit Reduction Act of 2005, together with the following five key requirements:

1. Be Irrevocable – No stream of payment or beneficiary changes can be made (non-compliant annuities allow changes).
2. Be Non-Assignable – Language in annuity prohibits transfer to 3rd party. Only the original annuitant can benefit.
3. Be Actuarially Sound – Must be equal to or less than the annuitant’s lifetime based upon the Medicaid life expectancy table(s). An annuitant must receive all payments during his/her lifetime.  Non-compliant annuities offer different periods of time or lifetime payments.  A lifetime rider will not pass the Medicaid test.
4. Provide Equal Payments – Payments must be the same amount each month for the entire term of the annuity. If the payment amount varies, the annuity will not pass the Medicaid test.
5. Name a Correct Beneficiary – The state of NJ must be named as the primary beneficiary up to the sum of money it has paid out in benefits prior to the applicant’s death, or to newly received assets while alive. There are only two exceptions. The exceptions are to name a minor disabled child or a community spouse as the primary beneficiary.

What Happens if You Own a Medicaid Non-Compliant Annuity?

If your annuity is non-compliant, you have three options: surrender, exchange or sell it.

For tax purposes, there are two types of annuities – tax-deferred and immediate.

Tax-deferred annuities sit and accumulate unpaid, and may pay dividends or interest or offer a guaranteed rate of return.  The annuitant has access to the cash value and can make withdrawals (subject to penalties, depending on the annuity’s terms).  If surrendered prior to maturity, the income and taxes must be paid, and funds received are treated as an asset.  You can use a 1035 tax exchange and transition this annuity to a Medicaid-approved annuity. Here is an important point. You can spread the income tax due over a period of years to avoid a large tax hit.  A 1035 tax exchange, however, does not negate any surrender charges.

Immediate annuities provide a stream of income over a specified term using a block of invested money.  If irrevocable and non-assignable, it is considered an investment in Medicaid.  If nothing can be done about this asset, meaning it cannot be assigned or sold, a hardship argument to Medicaid should be made since you can’t sell it; you can’t get or do anything for it.  Medicaid will likely still treat it as a resource and either assess a penalty period or deny the Medicaid application for exceeding the $2000 resource limit. See my discussion of Medicaid resources and financial eligibility for Medicaid (click here).

However, most immediate annuities are revocable and assignable, meaning you can sell them.  There is a secondary market for these immediate annuities. Once purchased, these annuities may or may not be surrendered, and the purchaser will have access only to their stream of income (monthly or quarterly payments), not to a lump sum.  Many families will sell their annuity to other family members once the value is established, but it isn’t done very often.

When valuing the annuity for sale, it is assumed that today’s dollars are worth more than future dollars. A purchaser will value the annuity based on its present value since payments would be in today’s dollars.  T-value software is what most secondary companies use to value annuities.  The present value is discounted because payments are made over time and in future dollars. The higher the discount rate, the less valuable to annuitize.

When valuing, you should obtain 2-3 offers to demonstrate that it is being sold at fair market value, to avoid a divestment penalty.

At Hanlon Niemann & Wright, we can assist our clients with the sale of their annuities by working with companies that issue immediate annuities.

For a low-cost consultation on Medicaid eligibility and the Medicaid application process, contact Fredrick P. Niemann at (732) 863-9900 or email him at fniemann@hnlawfirm.com.

 

 

 

 

Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright,  a New Jersey Applying for Medicaid Attorney

Medicaid Attorneys serving these New Jersey Counties:

Monmouth County, Ocean County, Essex County, Cape May County, Mercer County, Middlesex County, Bergen County, Morris County,
Burlington County, Union County, Somerset County, Hudson County, Passaic County