Federal Government Agrees That Non-Assignable Annuities Should Be Treated As Income

The Deficit Reduction Act ("DRA"), which was enacted in 2006, specifically provides that a non-cancellable, non-assignable immediate annuity is to be treated as a stream of income rather than as an available resource for Medicaid eligibility purposes.  Some states, however, have taken an aggressive posture in attempting to claim that despite the stated prohibitions, these types of annuities may have value in the secondary market, and thus should be treated as a resource.

Connecticut has been among the most aggressive states in challenging the validity of a number of commonly used Medicaid planning strategies.  In the pending case of Lopes v. Starkowski, Connecticut has denied a Medicaid application on the grounds that an immediate annuity purchased by the community spouse -- Mrs. Lopes -- is in fact a resource rather than an income stream, and thus the state claims that Mrs. Lopes has "excess resources" that renders her husband ineligible for Medicaid.

The facts here are straightforward.   After Mr. Lopes' long-term care insurance benefits ran out, Mrs. Lopes purchased an immediate pay annuity from The Hartford for about $167,000.  This sum represented the approximate amount by which Mrs. Lopes' assets exceeded Connecticut's Community Spouse Resource Allowance ("CSRA").  The annuity is paying Mrs. Lopes monthly income of $2,340.83 per month for a term of six years.

While such an annuity would ordinarily be assignable -- and thus deemed an available resource under the DRA -- at the time she purchased the annuity Mrs. Lopes signed a specific assignment restriction that specifically prohibits Mrs. Lopes from assigning any of her rights under the contract to any third party.  Such an assignment prohibition would seemingly make Mrs. Lopes' annuity fully DRA compliant.

Connecticut, however, saw it differently, and claimed that they had found a third party -- Peachtree Funding -- that might be willing to purchase Mrs. Lopes' annuity income stream for a lump sum.  On that basis, Mr. Lopes' Medicaid application was denied.

Mrs. Lopes subsequently filed suit in Federal court challenging Connecticut's denial of her husband's Medicaid application.  The District Court granted summary judgment in Mrs. Lopes' favor, holding that because the annuity is non-assignable, it is to be considered an income stream rather than a resource.  The state appealed the District Court's decision, and the case is now before the Second Circuit Court of Appeals.

What's especially interesting about this case is that the Second Circuit asked the U.S. Department of Health and Human Services ("HHS") to submit an amicus curiae ('friend of the court") brief summarizing the federal government's position as to the treatment of a non-assignable, immediate pay annuity.  In its brief, HHS stated unequivocally that such an annuity should be treated as a stream of income rather than a resource, and that so long as the appellate court were to hold that Mrs. Lopes' annuity was in fact non-assignable, then "the district court's decision should be affirmed."

One would hope that the Second Circuit pays heed to HHS' position and confirms that a properly structured non-cancellable, non-assignable immediate annuity is to be treated as an income stream rather than a resource for Medicaid eligibility purposes.

Click here to see the HHS brief in its entirety.