PA Annuity - PA Care Management, Inc.

Medicaid Annuity Report

March 2007

Pennsylvania Care Management, Inc.

The Pennsylvania lawyer’s trusted source for Medicaid Annuities

www.paannuity.com

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James v. Richman Decision                                      Amended Annuity Provisions

In this Issue:

The DRA ERA Begins: Annuities Offer Planning Options

DRA Annuities: Understanding the Federal & Pennsylvania Rules

_________________________________________________________________ The DRA Era Begins: Annuities Offer Planning Opportunities

Written By: Matthew J. Parker, CELA* President of Pennsylvania Care Management

The era of the Deficit Reduction Act (DRA) finally arrived in Pennsylvania on March 3, 2007. On that date, the Department of Public Welfare published its “Statements of Policy” implementing the DRA provisions for payment of long-term care services. http://www.pabulletin.com/secure/data/vol37/37-9/353.html.

The DRA law is so confusing that it has taken Pennsylvania more than a full year to figure out how it intends to comply with its requirements. DPW’s rules are extremely complicated and many are unique to Pennsylvania.

Under the new law, annuities have become a fundamental planning tool for individuals and couples who want to qualify for Medicaid long-term care benefits. For several years, Pennsylvania Care Management has been helping Pennsylvania lawyers obtain the most appropriate Pennsylvania-specific annuities for their clients. We are fully prepared to help you meet your client’s need for DRA-compliant annuities.

This newsletter is intended to help Pennsylvania legal counsel understand the implications of the new law and how DRA compliant annuities can protect your client’s financial security.

Our first issue contains two articles by Jeffrey A. Marshall, CELA* author of Elder Law In Pennsylvania. Jeff’s first article gives you some of the basics of Pennsylvania’s new annuity rules. Future articles will provide illustrations. We welcome your comments about these articles and suggestions for future issues of the newsletter.

Pennsylvania Care Management is the Pennsylvania lawyer’s trusted source for Medicaid annuities. Please contact us at webmail@paannuity.com or 570-326-1890. Our experts can help you provide your clients with annuities that conform to Pennsylvania’s unique Medicaid laws and regulations.

Matthew J. Parker, CELA*

President

Pennsylvania Care Management, Inc.

www.paannuity.com

570-326-1890

*Certified as an Elder Law Attorney by the National Elder Law Foundation under authority of the Pennsylvania Supreme Court. Attorney Parker is a licensed insurance producer and President of Pennsylvania Care Management, Inc. which specializes in assisting Pennsylvania lawyers in the purchase of DRA compliant annuities for their clients.

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DRA Annuities: Understanding The Federal and Pennsylvania Rules

Written By: Jeffrey A. Marshall, CELA*

As a result of the Deficit Reduction Act of 2005 (DRA), annuities have become an increasingly useful planning tool for clients seeking to protect their resources from the costs of long-term care. The new law effectively authorizes the use of annuities to gain immediate eligibility for Medicaid if the transfer and remainder interest provisions of the law are met.

The Department of Public Welfare’s Operations Memorandum on Annuities may be open to criticism,^{^[1]} but it clearly authorizes the use of annuities to accelerate Medicaid/LTC eligibility.

Federal and state approval of annuity-based planning means lawyers need to understand how annuities can be used to benefit clients who are in need of long-term care. This article is intended to provide the Pennsylvania lawyer with a basic overview of the federal and state treatment of DRA compliant annuities.

Prior to the DRA, annuities were frequently employed to protect the assets of married couples.^{^[2]} Annuities would convert the excess resources of a community spouse to exempt income. On the other hand, annuities were rarely used in planning for unmarried individuals. For unmarried persons, assets could usually be better protected through the use of “half a loaf” transfer planning or other techniques.

Under the DRA, annuities continue to be a vital planning option for married couples. And, due to the DRA’s strict new restrictions on asset transfers, annuity-based planning has now become more significant for unmarried individuals.

1      Federal Law

Congress and Federal regulators have historically given preferential treatment to annuities. In OBRA 93, Congress delegated the Medicaid treatment of annuities to the Secretary of HHS.^{^[3]} Transmittal 64 to the State Medicaid Manual contained the Secretary’s determination as to when an annuity purchase involves a transfer of assets.^{^[4]}

Annuities, although usually purchased in order to provide a source of income for retirement, are occasionally used to shelter assets so that individuals purchasing them can become eligible for Medicaid. In order to avoid penalizing annuities validly purchased as part of a retirement plan but to capture those annuities which abusively shelter assets, a determination must be made with regard to the ultimate purpose of the annuity (i.e., whether the purchase of the annuity constitutes a transfer of assets for less than fair market value). If the expected return on the annuity is commensurate with a reasonable estimate of life expectancy of the beneficiary, the annuity can be deemed actuarially sound.^{^[5]}

Transmittal 64 established that an actuarially sound immediate annuity could be purchased without a transfer penalty.^{^[6]} The DRA continues this rule subject to several modifications:

(1)It clarifies and codifies the rules regarding when an annuity transaction is to be treated as a transfer for less than fair value.^{^[7]}

(2)   It requires that the state be named as remainder beneficiary (subject to the preferred interest of the community spouse and minor and disabled children) to the extent of benefits paid.^{^[8]}

(3) It requires that applicants for Medicaid funded long-term care disclose their interest in annuities.^{^[9]}

The DRA also gives special treatment to annuities purchased with the proceeds of certain retirement plan accounts. The new law’s asset transfer provisions do not apply to such “qualified annuities.” However, retirement plan qualified annuities are still subject to the DRA’s disclosure and remainder beneficiary provisions.

The new annuity rules apply to any annuity purchased after February 7, 2006 or involved in a transaction after that date. A copy of the annuity sections of the DRA, as amended by the Tax Relief and Health Care Act of 2006, are posted at www.paannuity.com. (Click on “News and Events” on the left hand side of the home page).

In July, 2006, CMS^{^[10]} issued a letter to state Medicaid Directors which provided some guidance regarding CMS interpretation of the transfer and annuity provisions of the DRA. The CMS letter is available at http://paannuity.com/pdf/cms_transfer_of_assets.pdf.

2      State Guidance

DPW’s Operations Memorandum (“Ops Memo”) on the subject of annuities is available at http://paannuity.com/_ops_memo.html.The Ops Memo lays out DPW’s interpretation of the rules regarding when the purchase of an annuity will be penalized as a transfer. The Ops Memo also addresses the issue of when an annuity is to be treated as a resource rather than as income.

A denial of Medicaid long-term care (“Medicaid/LTC”)^{^[11]} benefits may result if an annuity is treated as either a transfer or as an available resource. Thus, for Medicaid planning purposes, the ideal annuity is one which will not be an available asset and whose purchase will not involve a penalized transfer of assets. The Ops Memo sets out the path to be followed to meet these objectives.

The DPW annuity policy applies to applicants, recipients and spouses of applicants and recipients who purchase an annuity or make a transaction involving an annuity on or after February 8, 2006.

2.1 State Transfer Rules - DRA Compliant Annuities

Under the Ops Memo, DPW will treat an annuity as a transfer of assets for less than fair market value unless the annuity meets all of the following DRA requirements:

(1)       The annuity is irrevocable and non-assignable;

(2)       The annuity is actuarially sound;

(3)       The annuity provides for payments in equal amounts, with no deferral and no balloon payments made; and

(4)       The annuity names DPW as the beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the applicant/recipient (or 2nd position if the applicant has a community spouse, a minor child, or a disabled child).

We refer to annuities that meet these requirements as ”DRA Compliant Annuities.” An annuity that meets these four tests is deemed to have been purchased for fair market value with no transfer penalty applied.

            2.2 State Resource Rules

The Ops Memo also provides guidance as to when the state intends to treat an annuity as an available resource.^{^[12]}

A.        Annuity Owned by the Applicant/Recipient of Medicaid/LTC:

            A DRA compliant annuity owned by an applicant/recipient for Medicaid/LTC that names DPW as the beneficiary in the first position will be counted as income (and not as a resource) to the applicant/recipient. There is no limit on the purchase price of the annuity.

B.        Annuity Owned by the Community Spouse.

A DRA compliant annuity of the community spouse will be treated as either income or a resource depending upon the aggregate income of the community spouse.

            (1) If the annuity provides the community spouse with monthly income that, when combined with all the other available income to the community spouse, is no greater than the Community Spouse Monthly Maintenance Needs Allowance (CSMMNA),^{^[13]} the annuity is to be treated as income to the community spouse.

            (2) If the annuity provides the community spouse with monthly income that, when combined with all the other available income to the community spouse, exceeds the CSMMNA, the annuity is to be treated as an available resource.

Acting in compliance with the Ops Memo, a Medicaid/LTC applicant (and spouse, if applicable) should be able to purchase one or more annuities that will allow immediate eligibility for benefits. Some conservative strategies are clearly permissible under the Pennsylvania rules. Other techniques, such as combining annuities with divestments, may be more aggressive. The client, with advice from legal counsel, can decide which approach is most appropriate to that client’s particular goals and circumstances.

In later issues of this newsletter, I will be providing some illustrations of the use of annuities in Medicaid planning

*Attorney Marshall is Certified as an Elder Law Attorney by the National Elder Law Foundation under authority of the Pennsylvania Supreme Court. He is Managing Attorney of the Law Firm of Marshall, Parker and Associates with offices in Williamsport, Jersey Shore, Wilkes-Barre, and Clarks Summit, PA. He can be contacted at webmail@paelderlaw.com.

_____________________________________________________________________

PCM

Pennsylvania’s trusted source for Medicaid Annuities

49 East Fourth Street, Williamsport, PA 17701

570-326-1890

www.paannuity.com

webmail@paannuity.com

______________________________________________________________________

If you would like to be added or removed from our mailing list, please e-mail PCM at webmail@paannuity.com.

______________________________________________________________

^{^[1]} See Using Annuities Under the Deficit Reduction Act, by Jeffrey A. Marshall, Pennsylvania Bar Association Elder Law Section Newsletter, Winter, 2007, http://www.paannuity.com/James_Winter_07.html.

^{^[2]} See, Mertz v. Houstoun, 155F.Supp 2d 415 (E.D. Pa. 2001); James v. Richman, United States District Court for the Middle District of Pennsylvania, Civil Action No. 3 :05-CV-26472006, WL 3387183 (M.D.Pa. Nov. 21, 2006).

^{^[3]} 42 U.S.C. § 1396p(d)(6).

^{^[4]} See CMS, State Medicaid Manual, Part III, Eligibility, § 3258.9B.

^{^[5]} Id.

^{^[6]} Pennsylvania's Department of Public Welfare (DPW) unsuccessfully contested this treatment in a federal court case involving an annuity purchased by the community spouse. See, Mertz v. Houstoun, 155F.Supp 2d 415 (E.D. Pa. 2001). Trying another route, DPW unsuccessfully sought to claim that the annuity payments received by a community spouse were an available resource. James v. Richman, United States District Court for the Middle District of Pennsylvania, Civil Action No. 3 :05-CV-26472006, WL 3387183 (M.D.Pa. Nov. 21, 2006). DPW has appealed the decision in James to the 3^rd Circuit Court of Appeals). Prior to those federal cases, DPW had more success in state Commonwealth Court in Dempsey v. Department of Public Welfare, 756 A.2d 90 (Pa. Commwlth. 2000).

^{^[7]} 42 U.S.C. '1396p(c)(1)(G).

^{^[8]} 42 U.S.C. '1396p(c)(1)(F).

^{^[9]} 42 U.S.C. '1396p(e)(1). Disclosure is required regardless of whether the annuity involves a penalized transfer, is irrevocable, or is treated as an asset. The state must notify the issuer of the annuity of the state’s preferred status. The state may require issuers to notify the state of any change in the amount of income or principal being withdrawn.

^{^[10]} CMS is the federal agency in charge of administering the Medicare and Medicaid Programs.

^{^[11]} DPW uses the terms MA/LTC and Medicaid/LTC interchangeably. The terms apply to long-term care nursing facility services and other long-term care services such as home or community-based waiver services, but not to regular Medicaid. See 42 U.S.C. § 1396p(c).

^{^[12]} This discussion refers to annuities in non-retirement accounts. Qualified retirement annuities are given special treatment.

^{^[13]} The Community Spouse Monthly Maintenance Needs Allowance (CSMMNA) is defined in section 1924(d) of the Social Security Act (42 U.S.C.A. § 1396 r-5(d)), regarding the treatment of income and resources for certain institutionalized spouses. See also, 55 Pa.Code § 181.452(d)(2), and DPW Statements of Policy, March 3, 2007 http://www.pabulletin.com/secure/data/vol37/37-9/353.html.

For further information, please contact:

Matthew J. Parker, Esq., CELA*    mparker@paannuity.com

Patti Jo Turner, BSEd          pturner@paannuity.com

Pennsylvania Care Management

49 East Fourth Street
Williamsport, PA 17701
570-326-1890

webmail@paannuity.com

* Certified as an Elder Law Attorney by the National Elder Law Foundation.