The Basics of Medicaid Compliant Annuities: A Practical Guide for Elder Law Professionals

AshBer aims to support attorneys and elder law professionals who work with clients facing long-term care expenses. Our goal is to ensure each plan meets Medicaid requirements and provides financial security for those involved. 

In addition to handling annuity applications we seek to provide clients with valuable information through monthly webinars. This month we discussed why Medicaid planning is a critical part of protecting a client’s financial future when long-term care becomes necessary. One of the most effective tools in this type of planning is the Medicaid Compliant Annuity (MCA). While the concept may seem straightforward, proper use of an MCA requires a clear understanding of the rules, timing, and calculations involved.

First let’s start with what a Medicaid Compliant Annuity is. A Medicaid Compliant Annuity is a single premium immediate annuity that complies with the Deficit Reduction Act (DRA). It must meet these five key conditions:

• Irrevocable

• Non-assignable

• Actuarially sound

• Provide equal monthly payments

• Name the state as the primary beneficiary

  
  

It’s important to understand that not all immediate annuities meet these conditions. A contract must be reviewed in detail to confirm it qualifies.

Now let’s discuss when Medicaid Compliant Annuities are utilized. MCAs are most often used in two situations: spend-down strategies for single applicants and income strategies for married couples with a community spouse. We’ll break each one of these scenarios down.

1. Gift and Annuity Spend-Down (Single Applicant)

This planning approach is common for applicants with low income but excess assets. In these cases, assets are divided between a gift and a Medicaid Compliant Annuity. The gift triggers a penalty period, during which Medicaid benefits are unavailable. The annuity then provides income to cover care during this period.

To structure this plan, the process includes:

• Calculating the income shortfall (cost of care minus gross income)

• Determining the burn rate (income shortfall plus state penalty divisor)

• Identifying the spend-down amount (assets minus resource allowance)

• Using that to calculate the penalty period

• Dividing assets into a gift and an annuity, ensuring the annuity term matches the penalty period

• Verifying income remains below the cost of care throughout the plan

  
  

Each step ensures the applicant remains financially stable while reaching Medicaid eligibility.

2. Community Spouse Planning

This scenario applies when the Medicaid applicant has a spouse still living at home. In these cases, the goal is to help the institutionalized spouse qualify for Medicaid immediately, while using the annuity to generate income for the spouse at home.

The process is similar, but there’s no gift or penalty period. The annuity simply transfers excess resources into an income stream for the community spouse, in full compliance with Medicaid rules.

Throughout the planning process, there are several compliance rules that cannot be overlooked:

• The annuity must not have a cash surrender value.

• It must be irrevocable in all policy provisions.

• It must not be assignable to another individual.

• There can be no life-only payment options.

• Inflation riders and balloon payments are not allowed.

• The term must be fixed and consistent with the penalty period when applicable.

  
  

If any of these are missed, the annuity could disqualify the client from receiving benefits.

Another important note: While a Medicaid Compliant Annuity must be an immediate annuity, not every immediate annuity is Medicaid compliant. Each contract needs to be checked for the specific DRA requirements.

Lastly, timing matters in these plans. For example, in a gift and annuity scenario, the annuity should be purchased just before the Medicaid application is submitted, with the first payment timed to begin at the start of the penalty period. The penalty and annuity term must begin and end together.

A typical seven-month plan might look like this:

• March: Annuity is purchased

• April: First annuity payment and Medicaid penalty period begin

• October: Final annuity payment is made, penalty ends

• November: Medicaid coverage begins

  
  

This alignment ensures no income gaps and a smooth transition into Medicaid.

As our special guest Todd Whatley stressed in our April 2025 webinar, Medicaid Compliant Annuities are highly effective when used correctly. Whether the goal is to spend down assets or provide income to a community spouse, the right annuity strategy can protect a family’s financial stability during a difficult time.

By understanding the rules, verifying contract details, and carefully planning each step, elder law professionals can deliver tremendous value to their clients. AshBer is here to assist with planning support, annuity illustrations, and case design strategies whenever needed.

To view this webinar or register for our next webinar click here.