The State of Pennsylvania has decided that an irrevocable annuity owned by the Community Spouse is NOT an available resource in determining the Institutional Spouses eligibility for Medicaid. This is still an unresolved issue in New Jersey, more than TWO YEARS after the new federal Medicaid law was passed.

The federal Deficit Reduction Act of 2005 (DRA), which became effective on February 8, 2006, made major changes to the federal Medicaid law. One such major change in the federal law is in the treatment of annuities owned by the spouse of a Medicaid applicant (called the “Community Spouse” in the law) . Under the federal DRA, an annuity which is irrevocable and meets certain other requirements and which is owned by the Community Spouse is not counted in determining the eligibility of the spouse applying for Medicaid benefits. The favorable way that the federal DRA treats annuities is a major change in New Jersey. New Jersey has resisted the use of annuities in Medicaid eligibility planning for years. See, Estate of F.K. v. Division of Medical Assistance and Health Services, 374 N.J. Super. 126 (App.Div.), certif., den., 184 N.J. 209(2005); and Estate of A.B. v. Division of Medical Assistance and Health Services, 374 N.J. Super. 460. As a result, New Jersey has neither issued new state regulations implementing the legislative changes in the federal DRA nor incorporated the DRA into state regulations.

Unlike New Jersey, other states have not resisted the use of annuities in Medicaid planning. For example, the State of Pennsylvania has accepted annuities as a legitimate strategy in long-term care planning, permitted under the DRA. A recent case involving annuities and long-term care planning in Pennsylvania is Ross v. Department of Public Welfare, 936 A.2d. 552 (PA. 2007). In Ross, the wife entered a nursing home and, soon thereafter, her husband transferred $418,026.66 into a single premium immediate annuity. The annuity contract paid the husband $10,211.83 per month. The husband established the annuity in order to qualify his wife for Nursing Home Medicaid and to pass assets to his children. The husband was the sole owner of the annuity, and his three children are the sole beneficiaries. After the annuity purchase, the wife had no funds to pay the nursing home.

The husband filed a Medicaid application, and the agency determined that the annuity was an available resource. The husband filed an appeal on behalf of his wife, and an Administrative Law Judge (ALJ) denied the appeal. The ALJ determined that: (1) the language of the annuity did not interfere with the husband’s ability to sell his right to the income stream, thereby converting the annuity into immediate cash; (2) the present value of the income stream exceeds the resource limit; and (3) the annuity was purchased not only for the benefit of the husband and wife, but also as a way to pass assets to the children and qualify the wife for Medicaid benefits. On further appeal, the Department of Public Welfare (DPW) affirmed the ALJ’s decision. The husband and wife petitioned the court for review, claiming that the DPW erred.

The court agreed and reversed the DPW order. The court stated that under 42 U.S.C. §1396r-5, income and resources are treated differently, and that “no income of the community spouse shall be deemed available to the institutionalized spouse.” Therefore, “[t]he community spouse’s income does not affect the determination [of] whether the institutionalized spouse qualifies for Medicaid.” The court said that if the payment of income is made solely in the name of the community spouse, the income is income only to that spouse. In this case, since the payment of the income from the annuity is made solely in the husband’s name, the income is considered income only to the husband, and none of the income is deemed available to the wife. The court concluded that the DPW “improperly considered [the husband’s] income stream from an irrevocable and non-assignable annuity as an available resource … .”