In most states retirement accounts and retirement annuities are treated differently for Medicaid purposes. A retirement account will traditionally be considered under the retirement asset rules, and applied to eligibility accordingly. A retirement annuity will traditionally be considered under the annuity rules, and applied to eligibility accordingly. In short, the investment vehicle is first considered, and then the tax status of the funds held inside.

A retirement account will either be considered a countable resource or exempt asset, sometimes depending on whether the required minimum distributions are being taken and whether the account is owned by the Medicaid applicant or the community spouse. A retirement annuity usually must abide by some, but not all, of the legislation outlined in the Deficit Reduction Act of 2005 ("DRA"). It is well-known throughout the elder law community that the legislation of DRA provides preferential treatment to annuities consisting of qualified retirement assets; but to what extent?

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. However, it does usually need to designate the state Medicaid agency as a beneficiary. Only a limited number of states do not require tax-qualified annuities to designate the state Medicaid agency as a beneficiary.

In the matter of Entz vs. Reed, Index No. 2009-10454 (Sup. Ct Monroe County, March 9, 2010), a woman residing in a New York nursing home, receiving Medicaid benefits, purchased an immediate annuity consisting of tax-qualified funds from her deceased husband's IRA. The tax-qualified annuity did not designate the state Medicaid agency as a beneficiary. Thus, the New York Medicaid office terminated the woman's Medicaid, reasoning that the annuity purchase was an uncompensated transfer. The petitioner raised the following issues:

Whether the Department incorrectly treated an annuity contract owned by an IRA as an available resource;

Whether an annuity contract owned by an IRA must name the Department as beneficiary to the extent of benefits paid in order to not be treated as an available resource; and

Whether the agency's determination is contrary to federal law.

In New York, if a Medicaid applicant or community spouse is receiving required minimum distributions from his or her IRA, the account will be considered an exempt resource for Medicaid eligibility purposes. The petitioner has an IRA, which then purchased an annuity as an investment asset. The petitioner was receiving amounts from that annuity that sufficiently met the minimum distribution requirements. It was decided that the IRA itself is exempt from being treated as a resource and is free to purchase any investment provided that the IRA makes the required monthly distributions, which is exactly what was occurring.

The resulting decision was that there was no further requirement that the IRA owned annuity must also name the state as beneficiary. The divestment penalty period was reversed, and benefits for the petitioner were reinstated without interruption. Furthermore, a similar decision was recently made in Wisconsin on a case that had very similar facts. Is this the new trend?

The contents of this article may greatly vary depending on the state of application. As such, please check your state rules or consult with a representative of Krause Financial Services for further clarification on how annuities are treated for Medicaid purposes in your state.