Deficit Reduction Act outlines Different Rules for Retirement Annuities vs. Non-Retirement Annuities
A Medicaid Compliant Annuity (“MCA”) is an immediate annuity that converts excess countable resources into an income stream (i.e. a MCA converts excess assets to income). A Non-IRA MCA must contain all the following requirements in order to be DRA compliant:
Equal Payments (no deferral or balloon payments)
Name the State Medicaid Agency as Beneficiary, unless there is a community spouse, disabled child or minor child
However, annuities purchased with retirement accounts do NOT need to meet all of these requirements. The Deficit Reduction Act of 2005 outlined different language for annuities purchased with pre-tax dollars vs. post-tax dollars is outlined below. The language highlighted in yellow applies to all annuities (retirement & non-retirement annuities), the language highlighted in green applies to retirement annuities, and the language in blue only applies to non-retirement annuities. You'll notice there is an "or" in between the green and red sections.
Annuity Related provisions of 42 U.S.C. 1396p(c)(1) (as Amended by the Deficit Reduction Act of 2005 and the Tax Relief and Health Care Act of 2006)
(F) For purposes of this paragraph, the purchase of an annuity shall be treated as the disposal of an asset for less than fair market value unless:
(i) the State is named as the remainder beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the INSTITUTIONALIZED INDIVIDUAL under this title; or
(ii) is named as such a beneficiary in the second position after the community spouse or minor or disabled child and is named in the first position if such spouse or a representative of such child disposes of any such remainder for less than fair market value.
(G) For purposes of this paragraph with respect to a transfer of assets, the term “assets” includes an annuity purchased by or on behalf of an annuitant who has applied for medical assistance with respect to nursing facility services or other long-term care services under this title unless--
(i) the annuity is--
(I) an annuity described in subsection (b) or (q) of section 408 of the Internal Revenue Code of 1986; or
(II) purchased with proceeds from--
•(aa) an account or trust described in subsection (a), (c), (p) of section 408 of such Code;
•(bb) a simplified employee pension (within the meaning of section 408(k) of such Code); or
•(cc) a Roth IRA described in section 408A of such Code; or
(ii) the annuity--
(I) is irrevocable and non-assignable;
(II) is actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration); and
(III) provides for payments in equal amounts during the term of the annuity,
with no deferral and no balloon payments made.
In light of the above, if a MCA is purchased with pre-tax/IRA dollars (an IRA MCA), the annuity must name the State Medicaid agency as beneficiary; however, the IRA MCA does NOT need to be actuarially sound, make equal payments, etc. An IRA MCA can be structured so that it is longer than life expectancy, NOT actuarially sound, make a balloon payment, etc. A summary of the requirements are below: