THE NH DEPT. OF HEALTH and Human Services ("DHHS") recently released final regulations implementing RSA 167:4(IV), which was enacted by the New Hampshire Legislature in 2003 in an attempt to curtail the use of annuities in the Medicaid planning context. The final regulations make clear that annuities remain viable planning tools in New Hampshire, especially when used by the at-home spouse of a nursing home resident.

Federal law background

Annuities are used to convert accumulated assets that exceed the asset limits of the Medicaid program into a stream of income that will be either entirely non-countable (e.g., when received by the at-home spouse) or that will be below the permissible income limits for an individual.

Federal law prescribes the types of annuities that may be purchased without causing disqualification from Medicaid, and provides that so long as the term of the annuity is no longer than the annuitant’s actuarial life expectancy (using federally prescribed life expectancy tables), then the purchase of the annuity is considered to be a bona fide purchase of an asset benefiting the annuitant (as opposed to an attempt to shift wealth to a person other than the annuitant). Annuities that meet this definition are considered "actuarially sound."

States may not impose Medicaid disqualification based upon the purchase of an actuarially sound annuity. Federal law, however, is silent on the question of who may be named as the contingent beneficiaries of the annuity contract. With RSA 167:4(IV), the New Hampshire Legislature attempted to curtail the utility of annuities by providing that the state must be named as a contingent beneficiary, so that the state will receive the balance of the annuity contract upon the annuitant’s death to the extent of any Medicaid benefits paid on behalf of the annuitant during his or her life.

Impact on unmarried nursing home residents

Prior to the enactment of RSA 167:4(IV), annuities were useful for unmarried nursing home residents because they could be used to slow down the rate at which the individual’s assets would be consumed by the cost of nursing home care, and to thereby increase the possibility that a residue would be left for the individual’s heirs.

The individual could purchase an im mediate annuity using all but $2,500 of his or her assets and apply for Medicaid. As long as the annuity was actuarially sound, the purchase would be non-disqualifying for Medicaid purposes. The income received by the individual from the annuity would be countable income, but typically the monthly annuity payment would be far less than the monthly private pay cost of the nursing home. The annuity would be applied toward the nursing home bill along with the individual’s other fixed income sources, such as Social Security, and Medicaid would pay the balance according to the Medicaid reimbursement rates.

Using a modest example, if the individual had $70,000 in assets, the private pay cost of nursing home care would consume those assets in about one year. If the assets were converted to an annuity paying $500 per month, the annuity might last many years.

Prior to the enactment of RSA 167:4(IV), the individual could name the intended recipients of his or her estate as the contingent beneficiaries of the annuity. If the individual died before the annuity was exhausted, those individuals would receive the balance of the contract free of any Medicaid liens. RSA 167:4(IV) has diminished this opportunity for planning by requiring that the state be named as the contingent beneficiary with first priority. If the state has paid any Medicaid benefits on behalf of the annuitant, it must receive the balance of the annuity contract to the extent of the amounts paid on the individual’s behalf. If after the state is reimbursed any amounts remain in the contract, those excess funds can go to the individual’s intended estate beneficiaries.

Although the enactment of RSA 167:4(IV) greatly limits the utility of immediate annuities for unmarried nursing home residents, it does not entirely eliminate the possible benefits. Because the rate of Medicaid reimbursement for nursing home expense is lower than the private pay rate, recovery by the state may be less than what would have been paid privately from liquid resources. Typically, other planning methods would be explored first, but annuities may still be a useful tool of last resort.

Impact on married nursing home residents

In the Medicaid planning context, immediate annuities are more commonly used to preserve assets for the benefit of the at-home spouse of a nursing home resident. With the enactment of final regulations by DHHS implementing RSA 167:4(IV), we now have guidance indicating that this type of planning is unaffected by RSA 167:4(IV).

When a married individual enters a nursing home, the assets of both spouses are deemed to be available to the spouse in the nursing home for Medicaid eligibility purposes. The at-home spouse is allotted a resource allowance from this combined pool of assets, but typically there are excess assets that must be spent down before the nursing home resident will qualify for Medicaid.

If the at-home spouse purchases an actuarially sound immediate annuity, that purchase will be a non-disqualifying expenditure. Because income is not deemed mutually available between the spouses, the at-home spouse can receive the annuity payments without having to devote the income to the cost of his or her spouse’s nursing home care. The at-home spouse can also re-accumulate the income, since asset deeming stops once the nursing home resident spouse is eligible for Medicaid.

None of these advantages were challenged by the enactment of RSA 167:4(IV). However, it was unclear whether the at-home spouse would have to name the state as a contingent beneficiary to provide for recovery of the benefits paid on behalf of the nursing home resident spouse if the at-home spouse died prior to the expiration of the annuity.

The regulations enacted by DHHS in implementation of RSA 167:4(IV) provide that the state must be named as a contingent or secondary beneficiary only in contracts "owned by an individual applying for medical assistance..." N.H. Admin. Rules, He-W 656.04(a)(9)b. (the regulations can be found online at http://gencourt.state.nh.us/rules/he-w600.html.) The regulation appears clear in providing that the scope of RSA 167:4(IV) reaches only annuities purchased by an applicant for Medicaid, who would be the nursing home resident spouse. While there is little experience yet with DHHS on this provision, the expectation is that the at-home spouse can purchase an annuity and name family or other intended recipients of his or her estate as the contingent beneficiaries of the annuity.

Effective date

RSA 167:4(IV) became, by its terms, effective August 16, 2003. However, the final regulations indicate that it applies to annuities purchased by a nursing home resident applying for Medicaid on or after November 1, 2003.

Limited exception

As discussed above, where an unmarried Medicaid applicant is the owner of the annuity contract, RSA 167:4(IV) will ordinarily require that the state be named as a contingent beneficiary. However, the regulations provide limited exceptions for applicants who have minor or totally and permanently disabled adult children. Either of the latter categories of children may be named as contingent beneficiaries. The state must be named as a contingent beneficiary, as well, but the minor or disabled child or children will have priority if he, she or they survive the annuitant. The regulations also provide that a spouse of the applicant may have this priority, but this provision is of little utility, since a married Medicaid applicant will usually opt to have his or her spouse purchase the annuity, which will avoid the application of RSA 167:4(IV) altogether.

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