The Million Dollar Question: IRA Beneficiaries in Medicaid Planning

In the majority of states an IRA is countable for both the institutionalized individual and community spouse.  In order to protect the IRA from a Medicaid spend-down and qualify the institutionalized individual for Medicaid benefits, a tax-qualified Medicaid Compliant Annuity may be purchased.  Two options exist to fund a tax-qualified Medicaid Compliant Annuity and avoid immediate income taxation, outlined here.

The Deficit Reduction Act of 2005 gave preferential treatment to annuities that consist of tax-qualified funds.  In the majority of states an immediate annuity that has a tax-qualified status is not required to be irrevocable, non-assignable, provide equal monthly payments, or be actuarially sound.

The Million Dollar Question: Does the State have to be a beneficiary of IRA Medicaid Annuities?

Only a limited number of states do not require tax-qualified annuities to designate the state Medicaid agency as a beneficiary.  However, the rules can at times be confusing and/or misleading.  Many state Medicaid manuals list their rules in a similar format; we’ll use Illinois as an example:

Part One of Medicaid Annuity Rules

The purchase of an annuity by or on behalf of an institutionalized person or the spouse of that person shall be treated as a transfer of assets for less than fair market value unless:

• The annuity names the State of Illinois as the remainder beneficiary in the first position for up to the total amount of medical assistance paid on behalf of the institutionalized person; or
• The annuity names the State of Illinois in the second position after the community spouse or minor child or child with a disability and is named in the first position if the spouse or a representative of the child disposes of any remainder for less than fair market value.

Part Two of Medicaid Annuity Rules

The purchase of an annuity by or on behalf of an institutionalized person shall be treated as a transfer of assets for less than fair market value unless:

• The annuity is considered either:
  • An individual retirement annuity described in section 408(b) of the Internal Revenue Code (26 USC 408(b)); or
  • A deemed individual retirement account (IRA) under a qualified employer plan described in section 408(q) of the Internal Revenue Code (26 USC 408(q)); OR
• The annuity is directly purchased with proceeds from one of the following:A traditional IRA described in section 408(a) of the Internal Revenue Code (26 USC 408(a));
  • Certain accounts or trusts treated as traditional IRAs under section 408(p) of the Internal Revenue Code (26 USC 408(p));
  • A simplified employee pension described in section 408(k) of the Internal Revenue Code (26 USC 408(k)); or
  • A Roth IRA described in section 408A of the Internal Revenue Code (26 USC 408A of the Internal Revenue Code (26 USC 408A); OR
• The annuity meets all the following requirements:
  • Was purchased from a commercial financial institution or insurance company authorized under federal or State law to issue annuities;
  • Is actuarially sound and based on the estimated life expectancy of the person (as determined under current actuarial tables published by the Office of the Chief Actuary of the Social Security Administration).  Period certain annuities that pay out over a term less than the person’s expected life shall be treated as actuarially sound;
  • Is irrevocable and non-assignable; and
  • Pays benefits in approximately equal periodic payments no less than quarterly, with no deferred or balloon payments.

You’ll see the preferential treatment is provided through the uses of the OR’s in part two of the above rules, indicating bullets one, two and three are applied severally, not jointly.  However, you’ll note that the beneficiary designation requirement is not included within the OR’s in part two of the rules.  Rather, it is in its entirely own section.