Medicaid-Compliant Annuity

Medicaid is a joint state and federal program designed to provide health coverage for low-income adults, children and people with disabilities. Each state manages its own program based on certain federal requirements, which means some rules and regulations will differ by state.

For some elderly adults, Medicaid can offer health coverage that includes long-term care. However, to be eligible for the program, there are strict requirements that limit assets and income. Annuities can offer a solution for some individuals to reach these eligibility thresholds while still allowing them to receive income.

In order to qualify for Medicaid, individuals must meet asset and income limits prior to the 5-year look-back period, which begins at the time of their Medicaid application. Transferring assets into a non-compliant product, transferring to another person or selling assets for less than their worth within this look-back period will disqualify the application and start a penalty period of ineligibility. The length of this penalty period will be determined by the specific rules of the state Medicaid program.

In most states, to be financially eligible for Medicaid, you cannot own more than $2,000 in assets. However, 11 states have different requirements.

Many people will need costly long-term or nursing care but do not have their own expensive long-term care insurance policy. Before an applicant can be approved for Medicaid, they must first spend down their assets. Medicaid rules dictate that an applicant cannot give assets away or sell them for less than fair market value without making themselves ineligible for a limited time.

A Medicaid-compliant annuity is one solution to this problem. By turning assets into a series of income payments, Medicaid will no longer count the annuity assets, but the income from the annuity will be counted toward Medicaid’s income limit.

Not all annuities meet the requirements to be a Medicaid-Compliant Annuity, so it is vital to work closely with a qualified financial advisor or insurance agent who has experience with these types of products. Making a mistake that impacts your eligibility for Medicaid may not only delay your acceptance but could be extremely costly if you are forced to pay for care out of pocket.

Immediate Annuities: Immediate annuities are Medicaid compliant because they convert a lump sum of assets, which would otherwise be counted towards the asset limit, into a current stream of income. The payments may be structured as a set number of years or for the life expectancy of the annuitant. The irrevocable nature of the immediate annuity is important for the product to be compliant.

Deferred Annuities: Deferred annuities are not Medicaid compliant and will not offer the asset reduction benefits required to meet income limits. Deferred annuities continue to be considered assets even if they will become income annuities in the future. These annuities can be revocable and therefore remain as assets in the annuitant’s estate.

There are very strict guidelines for an annuity to maintain compliance with Medicaid rules. While there are general rules that apply in most states, unfortunately, there are no uniform rules across all states. It is important to work with an experienced advisor who can help you meet the specific requirements of your state.

If an annuity does not meet these rules, it will not be deemed compliant and will violate Medicaid’s look-back rules. Violations of the look-back provision will result in a penalty of Medicaid ineligibility, which is determined by each state’s Medicaid rules.

Medicaid eligibility also has an income limit, which generally restricts the applicant’s monthly income to $2,829 or less (2024), including Social Security. Additional planning with a qualified Medicare planner may be required to spend down assets or reduce income if either exceeds the applicable thresholds.

For example, the following estimates would create an immediate annuity generating roughly $2,829 per month for a single male.

Specific state rules govern what is considered countable as an asset or income and what limits apply to eligibility.

Countable assets typically include cash, stocks, bonds, investments, bank accounts, IRAs and real estate that is not a primary residence. Exemptions include personal belongings, furnishings, an automobile, certain irrevocable trusts (subject to limits) and the primary residence.

In 2024, the asset limit for most states is $2,000, and the monthly income limit is $2,829.

For individuals who are not married, the income and asset calculations are straightforward. All of an individual’s countable assets and monthly income are added up to determine eligibility against the respective asset and income limits.

When considering a Medicaid-compliant annuity, the assets being transferred must reduce the total countable assets enough to fall below the asset limit, while not creating excessive income above the threshold. If the annuity results in income that exceeds the limit, additional spending or distribution of assets may be necessary.

All assets of a married couple are considered jointly owned. The non-applicant spouse is allowed to retain 50% of the couple’s assets, up to a maximum of $154,140. Additionally, the non-applicant spouse can retain 100% of the couple’s assets up to a limit of $30,828.

When only one spouse is applying for Medicaid, the non-applicant spouse’s income is excluded from eligibility calculations. Only the applicant’s income matters for determining eligibility, which makes annuities particularly useful in this scenario. Joint assets can be converted into income for the non-applicant spouse, and this income will be disregarded in the calculations for the applicant’s income eligibility.

If the applicant earns most or all of the couple’s income, federal rules allow the applicant spouse to transfer a portion of their income to the non-applicant spouse. The Monthly Maintenance Needs Allowance (MMMNA) ranges from $2,555 to $3,852.50 in most states.

It is important to note that in New York, the non-applicant spouse might be required to contribute income under certain circumstances. This requirement is not common in most states and may have exceptions. If this situation applies, seeking expert counsel is essential to understand the specific regulations and ensure proper compliance.

When both spouses are applying for Medicaid, each completes their own application, and asset and income limits apply individually to each spouse (with some exceptions). For simplicity, each spouse can be considered a single entity, and the strategies for a single applicant generally apply to both.

Medicaid rules and application requirements can be complex. One of the biggest mistakes is attempting to navigate the process alone. Whether you are applying for yourself or someone else, this is not a process suited for a DIY approach. Seek professional help to ensure you get it right the first time.

Planning for Medicaid to cover long-term or nursing care is not a DIY process and attempting it on your own is unlikely to succeed. The rules and regulations governing your state’s Medicaid program and annuities are complex and can change annually. Risking ineligibility can be costly, given that the average cost of long-term or nursing care exceeds $100,000 per year in many states.

It is essential to work with a specialist who can navigate both the financial and non-financial eligibility requirements. Many people choose to employ both a financial advisor and an attorney to effectively ensure their assets, income and estate plan align with Medicaid eligibility criteria.