When one spouse requires nursing-home care, the couple may discover that they own too many countable assets for Medicaid—but cannot afford to pay privately for many years.
A Medicaid-compliant annuity may help in certain cases. It is especially useful when one spouse enters a nursing home while the other continues living in the community.
What is a Medicaid-compliant annuity?
A Medicaid-compliant annuity, or MCA, is usually a single-premium immediate annuity.
The purchaser pays an insurance company a lump sum. The company immediately returns the money through fixed monthly payments over an approved period.
The transaction converts a countable asset into an income stream.
It does not make the money disappear, and it is not intended primarily as a long-term investment. It changes how the money is classified for Medicaid purposes.
How can it help a married couple?
Consider Robert and Linda from Part 2. They have approximately $148,000 in excess countable resources after their initial Medicaid calculation.
After paying legitimate expenses, they might use part of the remaining excess to purchase an MCA payable to Linda.
Before the purchase, the money is held as a countable resource. After a properly structured purchase, the annuity may no longer be considered an available asset. Linda instead receives fixed monthly income.
Because Linda is the community spouse, her income generally is not considered available to Robert for determining his Medicaid eligibility.
The MCA may therefore:
- Help Robert satisfy Medicaid’s asset test
- Provide Linda with monthly income
- Reduce the amount immediately spent on nursing-home bills
- Protect Linda from being left without adequate financial support
Is there a minimum or maximum MCA amount?
There is no federal minimum amount of wealth required to purchase an MCA. The insurance company may impose a minimum premium, such as $5,000 or $10,000.
There is also no simple federal maximum. The appropriate amount depends on:
- The couple’s excess countable assets
- The annuitant’s age
- Medicaid-recognized life expectancy
- The required payment term
- State Medicaid rules
- The spouse’s monthly living expenses
- Insurance-company contract limits
A starting calculation may be:
Countable assets − spouse’s permitted allowance − applicant’s permitted allowance − approved expenditures = potential excess assets
The entire excess should not automatically be placed into an MCA. Other permitted expenditures and the community spouse’s need for accessible emergency funds should be considered first.
What makes the annuity Medicaid-compliant?
Federal law generally requires the annuity to be:
- Irrevocable: It cannot be canceled for a refund.
- Nonassignable: The payment stream cannot be sold or transferred.
- Actuarially sound: The term must fit within the annuitant’s Medicaid-recognized life expectancy.
- Immediate: Payments cannot be improperly deferred.
- Equal-paying: Payments must be made in substantially equal amounts.
- Without balloon payments: A large final distribution cannot be reserved for the end.
- Properly designated: The state must generally be named as a remainder beneficiary in the required position.
A regular commercial annuity does not automatically meet Medicaid requirements.
What happens after the annuitant dies?
If the annuitant dies before the contract has paid out completely, the state may have a right to reimbursement from the remaining balance, up to the amount Medicaid paid.
Special priority rules may apply when there is:
- A surviving spouse
- A minor child
- A blind or disabled child
An MCA does not guarantee that all unused money will pass to the children. Its principal purpose is often to preserve income and financial stability for the spouse remaining at home.
Can a single person use an MCA?
A single applicant may sometimes use an MCA as part of a Medicaid spend-down or penalty-period strategy. Its benefits are more limited because the annuity payments generally belong to the applicant.
Most of those payments must ordinarily be contributed toward nursing-home care after permitted deductions.
A single person generally cannot place excess savings into an MCA, keep the monthly payments for personal use and have Medicaid pay the nursing home.
Single-person strategies require precise coordination of the annuity term, nursing-home expenses, income and Medicaid application date.
Does an MCA avoid the five-year lookback?
Not automatically.
A correctly structured annuity may be treated as an exchange for fair value rather than a gift. But if the contract fails to meet Medicaid requirements, its purchase may be treated as an improper transfer.
An error involving the owner, annuitant, payment period or beneficiary designation can cause a penalty period.
Important disadvantages
An MCA involves serious tradeoffs:
- The transaction generally cannot be reversed.
- The principal is no longer available as a lump sum.
- The state may receive some remaining funds after death.
- The payments may affect Medicaid’s income calculation.
- State interpretations vary.
- The strategy is less advantageous for many single applicants.
- An ordinary annuity may not be Medicaid-compliant.
Families should not purchase an MCA solely on the recommendation of an insurance salesperson. An elder-law attorney should examine the complete contract before it is funded.
The bottom line
A Medicaid-compliant annuity does not hide money or provide free nursing-home care. It converts countable assets into a regulated income stream.
For married couples, it may help the nursing-home spouse qualify for Medicaid while providing income to the spouse who remains at home. For single applicants, the benefits are narrower because most annuity income must generally be used toward care.
The strategy must be designed under the rules of the applicant’s state and coordinated with the income limit, asset allowance and five-year lookback.
-Phan Hoàng Anh-
Source: Federal Medicaid annuity and transfer rules under 42 U.S.C. §1396p.
The article above is for general educational purposes and do not constitute legal, tax, insurance or financial advice.