Ohio Forced to Embrace Compliant Annuities in Medicaid Planning

Medicaid compliant annuities are useful tools in long-term care planning for many married clients.  A married couple typically purchases a Medicaid compliant annuity if the two spouses are in unequal health positions to ensure that the healthy spouse—known as the “community” spouse—has sufficient income, while allowing the second, less healthy spouse to qualify for Medicaid assistance in paying for long-term care expenses, typically within a nursing home.  

Because a Medicaid compliant annuity is often the only means by which a healthy client is able to secure a stable income stream once his or her spouse requires state-sponsored Medicaid assistance, state-imposed restrictions in this area can force a Medicaid-reliant client into poverty.  Nonetheless, in recent years, restrictive state and local policies have often prevented clients from fully taking advantage of these federally regulated products.  Historically, Ohio has been peculiarly aggressive, sometimes bending the federal and state rules to erect substantial roadblocks to these planning alternatives.  

Federal law would appear to protect the use of Medicaid compliant annuities.  Rather than treating the purchase of the annuity as an impermissible asset transfer effected in order to meet Medicaid’s means-tested eligibility requirements, if certain requirements are satisfied, the federal Deficit Reduction Act (DRA) treats the purchase as a permissible exempt investment, and the annuity payout stream is shielded as the community spouse’s income.  

In order to qualify as a Medicaid compliant annuity under the DRA, the terms of the annuity contract must satisfy certain criteria. The income from the annuity contract must be payable to the community spouse, the contract must be irrevocable and the payment term must be based on the life expectancy of the community spouse.  Further, the state must be named as the remainder beneficiary on the contract, allowing it to receive up to the amount that it has paid for the institutionalized spouse’s long-term care.
The speed with which Ohio complied with the injunction and reversed the denied applications isa step in the right direction for Medicaid-reliant clients.

Notwithstanding the federal rules, in three separate instances, a community spouse in Ohio had purchased a Medicaid compliant annuity so that his spouse, a nursing home resident, could qualify for Medicaid. Several Ohio counties, however, decided to treat Medicaid compliant annuities as impermissible asset transfers even if those annuities satisfied the strict federally mandated criteria.  he Medicaid applications were denied.

The immediate annuities purchased in the Ohio case satisfied federal criteria, but, because Ohio found that they did not satisfy state standards, the state found that the healthy spouses were required to use those funds to pay for the unhealthy spouses’ nursing home care, despite the fact that the funds were now invested in irrevocable annuities.

A federal court, however, recently stepped in to issue an injunction against Ohio.  The federal judge disagreed with Ohio's interpretation of the rules, and, because the institutionalized spouses were at risk of eviction from the nursing home, issued an injunction ordering the state to reverse its decision and treat the annuities as permissible, or risk disqualifying Ohio from the federal Medicaid program entirely.

The state quickly complied.  

In Ohio, a community spouse is entitled to retain half of the couple’s assets, up to a maximum dollar amount of around $ 119,220 (eff. 1/1/2015). The unhealthy spouse is required to spend down the remainder of the couple’s assets until only $1,500 remains. In order to accomplish this, the couple is permitted to buy certain types of immediate annuities without jeopardizing Medicaid eligibility.