Texas Medicaid Annuity Strategy

Another great planning strategy—under certain circumstances—could be the purchase of an annuity. However, please note that this planning is complicated and that you cannot do this for the sole purpose of qualifying for Medicaid benefits.

An annuity payment is usually considered income, not a resource, under the Texas Medicaid program. Medicaid allows two general types of annuities:

1. Periodic payments for returns of prior services (commonly known as a pension); or
2. A contract or agreement for an amount to be paid at regular intervals.

Before the Deficit Reduction Act (DRA) of 2005, annuities were treated differently for Medicaid purposes. In this book, we will focus our attention on “post-DRA” annuities. When an annuity meets the post-DRA terms and conditions:

1. The annuity will not count as a resource;
2. Transfers to the annuity are not considered a transfer of assets; and
3. The monthly payments are considered unearned income.^[1]

The Texas Health & Human Services Commission divides annuities into:

1. Employment-related annuities,
2. Retirement-related annuities, and
3. Other annuities:
   1. Other compliant annuities and
   2. Other non-compliant annuities.

Employment-Related Annuity (ERA)

An ERA is an annuity that represents a return on prior services performed for an employer. Most people know of this as a pension or a retirement plan, both of which are payable on a monthly basis. Examples of this include Teacher Retirement, the Ford Motor Pension, and the Federal Employee Retirement System (FERS). An ERA is always treated as a resource, not income.

Retirement-Related Annuity (RRA)

An RRA is an annuity that was “purchased by or on behalf of an annuitant in an institutional setting.”^[2] If your mother purchased the annuity before February 8th, 2006, then the annuity will be treated as income. If your mother purchased or plans to purchase an annuity on or after February 8th, 2006, then it could be either a resource or income. Proceeds of the following annuities are considered income:

1. RRAs that are described in subsection (b) or (q) of § 408 of the Internal Revenue Code of 1986. These include the following:
   1. §408(b): Individual Retirement Annuity and
   2. §408(q): §457 Deferred Compensation Deemed IRA.
2. RRAs that are purchased with proceeds from:
   1. §408(a) Traditional IRA,
   2. §408(c)(p) SIMPLE IRA,
   3. §408(k) SEP-IRA, or
   4. §408A ROTH IRA.

The State of Texas does not need to be named as the primary beneficiary of the annuity in order for it to qualify. Other annuities purchased after February 8th, 2006 are considered a resource.

All Other Compliant Annuities (AOCA)

All other compliant annuities can be broken down into two different categories:

1. Those purchased by a Medicaid applicant with a community (non-institutionalized) spouse and
2. Those purchased by a Medicaid applicant without a community spouse.

With a Community Spouse

An AOCA purchased with a community spouse will be treated as a resource unless all of the following conditions are met. The annuity must:

1. Be in the name of the person who is institutionalized;
2. Provide for equal payments throughout its duration;
3. Be irrevocable and non-assignable;
4. Not have any balloon payments or deferral payments;
5. Have a principal investment that is guaranteed to return to the community spouse within his or her lifetime (use the Social Security Administration Online Period Life Table); and
6. Have a particular remainder beneficiary, depending on who is the annuitant, which is the owner or holder of the annuity.
   1. Institutional Spouse is the Annuitant: The primary beneficiary can be the community spouse, a minor, or a disabled child—as long as the State of Texas is the secondary beneficiary.
   2. Community Spouse is the Annuitant: The primary beneficiary can be a minor or a disabled child. However, if there are no minor children or disabled children, then the State of Texas must be the primary beneficiary for the total amount paid on behalf of the institutionalized individual.

Without a Community Spouse

An AOCA purchased without a community spouse will be treated as a resource unless all of the following conditions are met. The annuity must:

1. Be in the name of the person who is institutionalized;
2. Provide for equal payments throughout its duration;
3. Be irrevocable and non-assignable;
4. Not have any balloon payments or deferral payments;
5. Have a principal investment that is guaranteed to return to the institutionalized spouse within his or her lifetime (use the Social Security Administration Online Period Life Table);
6. List the State of Texas as the primary beneficiary for the total amount paid on behalf of the institutionalized individual.

All Other Non-Compliant Annuities

If your mother purchases an annuity that does not comply with the above criteria, then:

• If revocable: The annuity is a countable asset, valued at current fair market value.
• If irrevocable: The purchase is considered a transfer of assets with an amount equal to the purchase price of the annuity, but the annuity itself is not considered a countable asset.

IRA Annuities Planning

If your mother or her spouse has an IRA in the State of Texas, you can place the whole account in an annuity, including a deferred annuity, and it will not be considered a resource for Medicaid. This annuity will not be considered a transfer of assets or a resource for Medicaid eligibility. The deferred status means that no income will come out of the annuity. Also, the State of Texas does not need to be the primary beneficiary. This is a strategy created because the law has thus far been undefined and will likely be changed in the future.

Pre-DRA Annuities