Congressional Bill Limits Use of Annuities in Medicaid Planning

Originally published by Michael Cohen.

The House of Representatives has a proposed bill (HR 1771) that would change long established rules for the use of single premium immediate annuities in planning for the protection of a well-spouse (commonly referred to as the “community spouse”) if his or her spouse needs care in an institution such as a nursing home (commonly known as the “institutionalized spouse”).

Presently, when there is an institutionalized and community spouse and where the couple’s income exceeds the monthly limit (presently $2980.50) from non-countable resources (typically, Social Security, pensions, wages and annuities that have annuitized) and the couple has resources that need to be “spent down” to achieve Medicaid eligibility, it is a common strategy to simply purchase a single premium immediate annuity (“SPIA”) that complies with the Medicaid rules. A SPIA is an annuity whereby a lump sum is paid up front and then paid out in level installments of principal and interest for a term less than the life expectancy of the person on whom the annuity is based to be in compliance with the Medicaid rules so that the annuity does not count. The object of the strategy is to have the government (through Medicaid) help pay for a portion of the care costs of the institutionalized spouse. So, for example, if the institutionalized spouse has Social Security income of $1500 per month and the community spouse has teachers retirement income of $2500 a month and the couple had $300,000 of countable resources, then normally the couple would have to “spend down” to $119,220 (which is the maximum protected resource unless there is expansion usually in cases where the combined countable income is less than $2980.50).  So, a common planning technique is to simply purchase a SPIA that is Medicaid compliant in the name of the community spouse instead of spending down since the SPIA would not count. Thus, in the example above, if the community spouse bought a $200,000 SPIA that is Medicaid compliant, then the countable resources would be only $100,000 (thus below the limit) and the institutionalized spouse would only have to give up his or her income (in our example, $1500) as a co-payment in a worst case scenario. Since the cost of care for a nursing home is generally $5000 to $6000 in the D-FW area, the saving would probably be $3500 to $4500 a month in this example.

HR 1771 would change the law so that one-half of the monthly income generated by the SPIA in the name of the community spouse would count as a resource for the institutionalized spouse (presently the income only counts for the person who receives the income). This would result in a larger co-payment by the institutionalized spouse and a decrease in the available income to the community spouse. It would also decrease the ability of the community spouse to plan for their own future care needs. If the bill passes, it is likely strategies will change. For example, the single premium immediate annuity might be bought in the name of the institutionalized spouse and name the community spouse as the beneficiary. Another option would be to structure the annuity in the name of the spouse with a longer life expectancy. So, even if HR 1771 passes, single premium annuities will be used in planning – the strategies would simply change and the amount saved would likely be less.

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