How Annuities Are Treated under New York State Medicaid

Applicants for nursing home Medicaid in New York State must disclose any interest they or their
spouse has in an annuity.[1]

Income from an Annuity

An annuity may be considered an income stream or an asset for purposes of Medicaid eligibility. The income stream from an annuity is considered an “available resource” under Medicaid rules; in other words, it counts as income when calculating an individual’s eligibility for Medicaid.

Purchasing an Annuity

As an asset, an annuity purchased [2] on or after February 8, 2006 is exempt under Medicaid rules if it is either

(1) an individual retirement annuity contract or endowment issued by an insurance company that is (a) not transferable, (b) has fixed premiums and (c) the entire interest is non-forfeitable by the owner; or

(2) a voluntary employee funded account that is established under, but is separate from, a qualified employer plan; or

(3) purchased with “qualified money,” i.e., the proceeds from an individual retirement trust or account described in IRC 408(a), (c), or (p); a simplified employee pension plan (i.e., an individual retirement annuity as described in IRC 408(k)); or a Roth IRA (as described in IRC 408A); or

(4) (a) irrevocable and non-assignable [3]; (b) actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration); [4] and (c) paid out in equal amounts during the term of the annuity with no deferral (i.e., payments must begin immediately) and no balloon payments.

If these requirements are met, the purchase of an annuity will not incur a penalty under Medicaid rules. However, if these requirements are not met, the purchase of the annuity will be treated as a transfer of assets for less than fair market value. In that case, the purchase price will count as an “available resource” that may render the applicant/recipient ineligible for Medicaid. The purchase must be refunded, and the proceeds spent down or otherwise disposed of; otherwise, the State will impose a penalty period during which the applicant/recipient will be considered ineligible for Medicaid. The length in months of the penalty period is determined by dividing the purchase amount by the Medicaid nursing home rate in the region where the applicant/recipient’s nursing home is located.

Medicaid Claims Against Annuities after Death

Also important from the point of view of estate planning, the applicant/recipient must name New York State as first beneficiary for at least the amount of Medicaid paid on behalf of the annuitant. (For annuities purchased on or after February 8, 2006, the applicant must be informed of the right of the State to be named remainder beneficiary.) If there is a spouse or minor child, the State will hold the second position; if the spouse or representative of the minor child disposes of the annuity for less than fair market value, the State must be named in the first position. If the applicant/recipient, or the applicant/recipient’s spouse, fails or refuses to name the State as the remainder beneficiary, the purchase will be considered a transfer of assets for less than fair market value. (In that case, the purchase price will count as an “available resource,” with consequences that have already been described; see “Purchasing an Annuity,” above.)In short, the State, upon the death of the annuitant or their surviving spouse, may recover from the annuity (if any assets remain) the amount of Medicaid paid on behalf of the annuitant. If the annuitant or the spouse don’t comply with this requirement by failing to name the State as beneficiary, they will incur a penalty period, being denied Medicaid coverage for a period of time depending on the purchase amount of the annuity. If the annuity is not considered exempt under Medicaid rules (see “Purchasing an Annuity,” above), or if it is disposed of for less than fair market value, the same consequences apply.

As the reader will see, the use of annuities in New York State Medicaid planning can be tricky. If you own an annuity, or are considering buying one as part of your long term care or estate planning, consult an experienced Elder Law attorney.

[1] Nursing home Medicaid applications filed on or after August 1, 2006, including requests for an increase in coverage for nursing facility services, must disclose a description of any interest the applicant/recipient or their spouse has in an annuity, regardless of whether the annuity is irrevocable or treated as an asset.

[2] In this context, “purchased” includes any action by the individual that changes the course of payment from the annuity, or that changes the treatment of the income or principal of the annuity. These transactions include additions of principal, elective withdrawals, requests to change the distribution of the annuity, elections to annuities the contract, and similar actions.

[3] In this context, a “non-assignable” annuity is one that qualifies for the marital deduction but for IRC 2056(d)(1)(A), and that does not allow the policyholder to assign or transfer the policy to a third party.

[4] “Actuarially sound” basically means that the anticipated return on the annuity’s principal and interest must not exceed the annuitant’s life expectancy.