RETIREMENT ACCOUNTS AND ANNUITIES. January 27, 2015 I. THE STARTING POINT: THE ROAD TO MEDICAID ELIGIBILITY.

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1 RETIREMENT ACCOUNTS AND ANNUITIES January 27, 2015 By: Jeffrey A. Asher, Esq. ROBINSON BROG LEINWAND GREENE GENOVESE & GLUCK P.C. (212) (212) (fax) I. THE STARTING POINT: THE ROAD TO MEDICAID ELIGIBILITY. People are living longer. The number of persons aged 65 and over is expected to double by the year 2030 and the fastest-growing segment of the population consists of people who are 85 and older. Many experts are concerned that aging issues have already reached a critical point now that the baby boom generation has begun to reach the age of retirement. For some, aging will bring continued health, enjoyable retirement, and financial freedom. For others, aging will bring mental disability, terminal illness, and poverty. For all, aging will bring an increased complexity to life. As I say to my clients, there are generally three (3) ways to pay for long-term care: First, through Long-Term Care insurance or other benefits under insurance policies. To the extent, however, that insurance benefits are not available or not sufficient to meet the client s needs, then, second, out of the client s own pocket. To the extent, however, that the client has no resources with which to pay his/her long-term care costs, or to the extent that the client, through proper planning, is able to shield assets that would otherwise be considered available resources, then Medicaid and other government benefits would be available to help pay the client s long-term care costs. 1

2 II. THE WHY, WHEN, HOW, AND WHAT OF ANNUITIES AS PART OF MEDICAID ELIGIBILITY. A. Why and When to Pay Attention to Annuities as Part of the Medicaid Plan. For the Medicaid Applicant/Recipient ( A/R ), it mostly all boils down to a question of assets. First, you divide the assets into available resources and exempt assets. Exempt assets are, subject to certain rules, the A/R s primary residence, certain burial funds, the A/R s life estate interests, the A/R s retirement funds, such as IRAs, 401(k)s, and pensions, etc. Available resources are everything else that is not an exempt asset. For the A/R, there are different ways of converting an available resource into an exempt asset, but one way is to use the available resource to purchase an annuity. Another way is to take an already existing annuity (non-qualified or qualified, which terms are discussed below) and make it exempt. Understand, however, that we are only discussing the available resource (or annuity, as the case may be) as principal. Once removed as an available resource, we still have to consider its impact on the A/R s income. For a Community Spouse, the purchase of an annuity may convert an available resource into an income stream. The difference is this: If the asset is an available resource, then it is counted toward the calculation of the Community Spouse s obligation to contribute toward the Institutionalized Spouse s care. On the other hand, if the asset is converted into an income stream, then it is no longer considered an available resource of the Community Spouse, but is now calculated as part of the Community 2

3 Spouse s requested contribution of 25% of his/her income in excess of the minimum monthly maintenance needs allowance. B. What is an Annuity? 1. What is an Annuity? An annuity is a financial product that pays out income to the contract owner, which income is based usually on some measurement of time and the amount originally invested into the annuity. Many annuities are designed to provide a steady income stream. For this reason, annuities are sometimes a smart investment for retirement purposes. Annuities may pay out over a set number of years or over the lifetime of the investor, depending on the type of annuity contract purchased. Annuities may be guaranteed (in what are called fixed annuities), in that payments are the same each period, regardless of the principal value of the annuity itself. Or, annuity payments may fluctuate (in what are called variable annuities), in that payments are determined by the performance of the investments owned within the annuity. 2. Component Parts of an Annuity. a. Owner. An annuity owner owns, or holds, the annuity contract. The annuity contract is between the owner and the company that issued the annuity. The owner is usually the one who purchases the annuity contract or, invests the funds in the annuity contract. However, an owner can transfer an annuity 3

4 contract, which makes the subsequent holder the new owner even though he/she did not make the original investment. b. Annuitant. The annuitant is the person on whose life, age, health, etc., the payout of the annuity contract both the amount and duration of the payout is based. Just like with life insurance, the annuitant must be an individual. In the case of a joint annuity, the annuitants can be two individuals (typically, spouses). c. Term. A Term Certain Annuity is one which provides for periodic payments for a fixed number of years. Upon the expiration of the term, the annuity terminates. For example, a ten-year term certain annuity means that annuity payments are guaranteed for ten years. Even if the owner dies during the term of the annuity, his/her named beneficiary(ies) would continue to receive the annuity payment for the balance of the ten years. Presumably, the annuitant received a return of his/her investment, plus a portion of the earnings, over the course of the term. A Life-Only Annuity makes guaranteed payments throughout the owner s lifetime, but terminates upon the owner s death. With a Life- Only Annuity, there is no death benefit available to the owner s loved ones (e.g., spouse and/or children). Once the owner dies, the rest of the Life-Only Annuity is gone. A Joint Life Annuity is structured the same as with a Life-Only Annuity but both spouses are the annuitants. This means that while there is 4

5 still no death benefit, the annuity payments will continue for so long as at least one spouse lives. d. Rate. The annuity rate, rate of interest, rate of return of investment, etc., all of which amounts to how much the annuity pays out, is determined by the annuitant s age, health, life expectancy, etc., depending on the annuity contract. With a fixed annuity, it is the rate guaranteed to the owner. With a variable annuity, it is the rate by which the annuity pays out, which is determined by the investments within the annuity. 3. Types of Annuities. There are two basic types of annuities: immediate annuities and deferred annuities. An immediate annuity begins payments upon the owner making the initial investment. A deferred annuity delays annuity payments until the owner is ready to begin taking withdrawals. While the annuity payments are deferred, the money with which the annuity contract was purchased is invested for the benefit of the annuity owner. Subject to certain rules, a deferred annuity may be converted to an immediate annuity at any time. This is the typical scenario for a retirement annuity one where the initial purchase is invested until the owner s retirement, at which point the plan is converted into some sort of income stream and payments are received. Tax-deferred annuities may be further broken down into two groups: Qualified Tax-Deferred Annuities and Non-Qualified Tax-Deferred Annuities. 5

6 Qualified Tax-Deferred Annuities are typically part of an employment related retirement plan, such as a 401(k) or 403(b), or an individual s retirement plan, such as an individual retirement account ( IRA ) or a Simplified Employee Pension Plan ( SEP Plan ). Provided that certain tax rules and requirements are satisfied, (a) pre-tax income may be contributed into a Qualified Tax-Deferred Annuity, and (b) contributions into a Qualified Tax-Deferred Annuity may be wholly or partially deductible on the contributor s (e.g., individual or employer) income tax returns. Generally, withdrawals can be taken from a Qualified Tax-Deferred Annuity, such as an IRA, without penalty, upon the participant reaching the age of 59 ½, or by persons with certain disabilities and/or hardships, but periodic distributions must be taken by the participant upon him/her reaching the age of 70 ½. Non-Qualified Tax-Deferred Annuities are not part of an employment related retirement plan and may be purchased by any individual or entity. Contributions are not deductible for income tax purposes. While the investment within the annuity may grow tax-deferred the account owner is not taxed on the earnings inside of the annuity (contracts owned by non-natural persons are taxed annually as ordinary income to the owner) earnings are only taxed when the account owner elects a withdrawal from the account. C. How to Use Annuities to Qualify for Medicaid. Section of 18 NYCRR provides that [a]ll income and resources available to the applicant/recipient during the period for which eligibility is being 6

7 determined will be identified, but only such income and/or resources as are found to be available may be considered in determining eligibility for Medicaid. 1 Section of 18 NYCRR defines resources as property of all kinds, including real and personal property, in the control of a Medicaid A/R or anyone acting on his/her behalf. 2 A Medicaid A/R whose available non-exempt resources exceed the resource standards will be ineligible for Medicaid coverage until he/she incurs medical expenses equal to or greater than the excess resources. 3 This means that if a Medicaid applicant or recipient has non-exempt assets of more than the resource standard which is currently $14,850 then he/she will be ineligible for Medicaid coverage until he/she incurs medical expenses equal to or greater than the excess resources in other words, spends down his/her excess resources or gives away his/her excess resources. However, any transfer of assets for less than fair market value made by a Medicaid applicant or recipient (or his/her spouse) within or after the look-back period will render the person ineligible for nursing facility services. 4 Section (c)(2) of 18 NYCRR govern transfer of assets made by a Medicaid applicant or recipient (or his/her spouse) on or after August 11, Section 366.5(e) of the Social Services Law govern transfers made on or after February 8, NYCRR (b) NYCRR (a) and (b)(1) NYCRR (b) NYCRR (c)(2). 7

8 One way to exempt an available resource is to invest it into an annuity. For example, an unmarried A/R has excess resources of $110,000. The A/R would normally have to spend down the $110,000 to below $14,850 to become eligible for Medicaid benefits. However, the A/R could otherwise invest the $110,000 in an annuity contract. Doing so, as long as the annuity satisfies the conditions for a Medicaidqualified annuity (see discussion below), will convert the otherwise available resource of $110,000 into an income stream to the A/R that would not render the A/R ineligible for Medicaid benefit, but would only have implications in the A/R s income budgeting. In the case of a married A/R, using the same example above, the Community Spouse could use the $110,000 to purchase an annuity that would provide a monthly income for the Community Spouse. In this case, the Community Spouse's income would not normally count toward the A/R s Medicaid eligibility, the couple would not have to spend down the $110,000 to make the A/R eligible for Medicaid benefits, and the Community Spouse will receive a steady stream of income. The only disadvantage is that the Community Spouse, to satisfy his/her obligation to contribute to the A/R s care, might have to satisfy his/her 25% income contribution. D. The Rules and Requirements of a Medicaid-Qualified Annuity. Effective August 1, 2006, for an annuity contract purchased by an A/R (or the A/R s spouse) on or after February 8, 2006, the State must be named as a remainder beneficiary in the first position. If the A/R or the A/R s spouse fails or refuses to name the State as the remainder beneficiary of an annuity purchased on or after February 8, 8

9 2006, the purchase will be considered a transfer of assets for less than fair market value. In cases where there is a community spouse or minor or disabled child, the State must be named the remainder beneficiary in the second position, and named in the first position if such spouse or representative of such child disposes of any such remainder for less than fair market value. If an annuity is purchased by or on behalf of an A/R, the purchase will be treated as a transfer of assets for less than fair market value unless the annuity is: 1. an annuity described in Sections 408(b) or 408(q) of the Internal Revenue Code ( Code ); or 2. purchased with the proceeds from an account described in Sections 408(a), 408(c), or 408(p) of the Code; a simplified employee pension within the meaning of Section 408(k) of the Code; or a Roth IRA described in Section 408A of the Code; or 3. the annuity is: a. irrevocable and non-assignable; b. actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration); and c. provides for payments in equal amounts during the term of the annuity with no deferral and no balloon payments made. 9

10 E. Inclusion of Annuity as Countable Resource and Computation of Life Expectancy. 1. Medicaid Reference Guide. As a condition of eligibility, all persons applying for Medicaid coverage of nursing facility services, including requests for an increase in coverage for nursing facility services, must disclose a description of any interest he/she, or his/her spouse, may have in an annuity. The disclosure of interest in an annuity is required regardless of whether the annuity is irrevocable or counted as a resource. Additionally, for annuities purchased by an SSI-related A/R or the A/R s spouse on or after February 8, 2006, the State must be named as a remainder beneficiary in the first position for at least the amount of Medicaid paid on behalf of the institutionalized individual. In cases where there is a community spouse or minor or disabled child of any age, the State must be named the remainder beneficiary in the second position or named in the first position if such spouse or representative of such child disposes of any such remainder for less than fair market value. 5 The purchase of an annuity that does not name the State as a remainder beneficiary in the first position (or in the second position as explained above) will be treated as an uncompensated transfer of assets for SSI-related A/Rs. 6 If the individual has a choice between periodic payments and a lump sum, the individual must choose the periodic payments. The individual must apply 5 Medicaid Reference Guide, Page 452; see Social Services Law 366-a(10); see also 06 OMM/ADM-5. 6 Id. 10

11 for the maximum payment amount that could be made available over the individual s lifetime. By federal law, if the Medicaid A/R has a living spouse, the maximum income payment option that is available will usually be less than the maximum income payment option available to a single individual. This provision applies to all Medicaid A/Rs. 7 Once the amount of the periodic distributions is set, it does not need to be recalculated unless there is a reported change, such as changes in the market and/or withdrawals by the A/R in excess of his/her maximum distributions. 2. GIS 12 MA/025. Pursuant to GIS 12 MA/025 (which updated the life expectancy tables attached to 06 OMM/ADM-5), an Annuity is required to be actuarially sound based on the A/R s life expectancy, which life expectancy is computed using the Life Expectancy Tables attached to GIS 12 MA/ GIS 98 MA/024. GIS 98 MA/024 governs IRAs and other retirement funds. GIS 98 MA/024 defines retirement funds as annuities or work-related plans for providing income when employment ends (e.g., pension, disability or other retirement plans administered by an employer or union.). Other examples are funds held in an individual retirement account (IRA) and plans for self-employed individuals, sometimes referred to as Keogh plans. IRAs and these types of retirement funds are excluded from 06 11

12 OMM/ADM-5 because they fall within Section 408 of the Code. Under the Code, the Required Minimum Distributions ( RMDs ), in the case of IRAs, are based on the IRS Life Expectancy Tables. For an A/R over the age of 70 ½, whose spouse s age is within 10 years of the A/R s age, RMDs will be determined utilizing the IRS Life Expectancy Table III attached to Publication 590. For an A/R over the age of 70 ½, whose spouse s age is not within 10 years of the A/R s age, RMDs will be determined utilizing the IRS Life Expectancy Table II attached to Publication 590. GIS 98 MA/024 further provides that A retirement fund owned by an individual is a countable resource if the individual is not entitled to periodic payments but is allowed to withdraw any of the funds. The value of the resource is the amount of money that the individual can currently withdraw. Moreover, as advised in 90 ADM-36, retirement funds owned by an ineligible or non-applying Community Spouse is countable for purposes of determining the total combined countable resources of the couple. However, the retirement fund is not considered available to the Institutionalized Spouse. The retirement fund owned by the Community Spouse is counted first toward the maximum Community Spouse resource allowance. Additionally, A/Rs who are eligible for periodic retirement benefits must apply for such benefits as a condition of eligibility. If there are a variety of payment options, the individual must choose the maximum income payment that could be made available over the individual s life time... Once an [A/R] is receiving periodic 7 Medicaid Reference Guide, Page

13 payments, the payments are counted as unearned income on a monthly basis, regardless of the actual frequency of payment... Once an [A/R] is in receipt of or has applied for periodic payments, the principal in the retirement fund is not a countable resource. This includes situations where [an A/R] has already elected less than the maximum periodic payment and this election is irrevocable. In such situations only the periodic payment amount received is counted as income and the principal is disregarded as a resource. 4. FH# P, 11/4/2013 (Chemung County). This Fair Hearing decision summarizes the disparity between using the IRS Life Expectancy Tables for calculating RMDs or the Life Expectancy Tables attached to GIS 12 MA/025, or some other life expectancy tables, when calculating payouts from an annuity. A/R, married, made a Medicaid application for nursing home care. The A/R received Social Security Retirement income of $1,539.38/month and IRA RMDs of $783.17/month. On recertification (showing no changes to the A/R s income), DSS increased the A/R s NAMI from $1, to $1, with a one-month-only change in the NAMI to $4, to recoup income from prior months in the amount of $2, At the fair hearing, DSS admitted that it had been using the IRS Life Expectancy Tables to compute the A/R s RMDs since the A/R s original application, but on recertification determined that the A/R s IRA now needed to be maximized 13

14 pursuant to GIS 98 MA/024. So, DSS recomputed the A/R s maximum distribution pursuant to the Life Expectancy Tables pursuant to 06 OMM/ADM-5. The ALJ determined that [DSS] s reliance on the Life Expectancy Tables attached to 06 OMM/ADM-5 is an error of law. The ALJ further stated that [t]hat Life Expectancy Table is applicable to the annuities that are governed by 06 OMM/ADM-5. The [A/R] s Retirement Account is an annuity excluded from 06 OMM/ADM-5 because it falls within Section 408 of the [] Code and the cited 98 GIS. Under the [] Code the RMD of the [A/R] s Retirement Account should be based on the IRS tables. 5. Recent Decisions of Note. a. FH# P, 7/24/2013 (Oneida County). A/R, age 88, made a Medicaid application for nursing home care. DSS denied the A/R s application on the grounds that the A/R s annuities were countable resources because the A/R was not taking the maximum distributions therefrom. The A/R s life expectancy was calculated according to the IRS s Table S Based on Life Table 2000CM. The A/R s life expectancy was calculated at 4.81 years. Based on this, DSS calculated the maximum income distributions from the A/R s annuities as follows: Annuity #1: $27,770.34/4.81 = $5, annually, and Annuity #2: $9,065.00/4.81 = $1, annually. From these 14

15 annuities, the A/R was withdrawing $2, annually and $ annually, respectively. Because the A/R was not taking the maximum distributions, these annuities were considered available resources. Citing prior fair hearing decisions, the A/R s attorney argued that DSS should have used the IRS life expectancy tables to calculate RMDs. The A/R s attorney argued further that [h]ad this been done, the calculation of the [A/R] s payout would have been as follows : Annuity #1: $27,770.34/12.0 = $2, annually, and Annuity #2: $9,065.00/12.0 = $ annually. Since the A/R was withdrawing $2, annually and $ annually, respectively, the A/R s attorney argued that she was taking the maximum distributions and these annuities should not have been considered available resources. The ALJ decided that DSS used the correct life expectancy table because this is the correct table for individuals that are not married. The table presented by the [A/R] s attorney does not apply in the Appellant s case because she is a widow. In addition, the prior fair hearing decisions cited by the [A/R] s attorney is [sic] not applicable in this instance because the individual in these cases were married couples. However, and this is the interesting note in this case, having concluded that the A/R was not taking the maximum distributions available, the ALJ reasoned that since GIS 98 MA/024 mandates that once an individual is in receipt of or has applied for periodic payments, the principal in the retirement account is not a 15

16 countable resource. The ALJ stated, [DSS s] determination should not have been to deny [A/R] s application but, to approve it and [add] the shortfall to her income/nami. b. FH# N, 4/25/2013 (Onondaga County). A/R, age 91, unmarried, made a Medicaid application for nursing home care. Onondaga County DSS denied the A/R s application because the A/R failed to submit proof that he changed the first beneficiary of his annuity to DSS. At the fair hearing, the A/R s representative argued that the A/R would have gladly change the beneficiary as directed by DSS, but was advised by the A/R s attorney that he is in the process of creating a trust and will be putting items into the trust. DSS responded that the A/R could not create an SNT with the annuity since the A/R is over the age of 65 and already in a nursing home. The A/R s representative then argued that the A/R has a letter from the A/R s attorney indicating their intent to change the beneficiary of the [] annuity, which has been in pay status for about a year, to [DSS]. However, proof of that change of beneficiary was never produced. The ALJ determined that DSS was correct, in that the A/R never produced proof that the beneficiary was changed, even though given ample opportunity to do so. Interesting note: Who is at fault here? Why exactly did the A/R s application get denied? 16

17 c. FH# H, 9/30/2013 (Broome County). A/R, age 92, unmarried, made a Medicaid application for nursing home care. On June 24, 2005, A/R purchased an annuity for $120, The annuity was annuitized on March 28, 2010, resulting in monthly payments of $1, for a 10 year period. The beneficiaries of the annuity were A/R s three children. Broome County DSS determined a 13 month penalty period, based on the uncompensated transfer of available resources of $105,733.56, computed as follows: The annuity of $120, minus $14, which A/R received from the annuity. On August 20, 2012, the caseworker told the A/R s son in person that by changing the beneficiary of the annuity to NYS, Broome County DSS would remove the transfer penalty and accept the Medicaid application retroactive to the date of the A/R s application. On September 14, 2012, the caseworker sent the A/R s son a letter, which stated: Please accept this letter as written notification that the Department is required to offer you the opportunity to change the status of the Medicaid Coverage by changing the beneficiary of the annuity at [] to New York State in the first position. By doing this, the purchase of annuity will no longer be considered an uncompensated transfer of assets and [A/R] s eligibility will be re-determined. The Department subsequently also determined that the annuity was not actuarially sound since it provided for payments for 10 years but that the 17

18 A/R had a life expectancy of 4.47 years, pursuant to the Life Expectancy Tables attached to 06 OMM/ADM-5. At the fair hearing, the Department admitted that the information told to the A/R s son in the meeting on August 20, 2012 and in the correspondence dated September 14, 2012, was in error. The Department also admitted that the A/R s son was not informed of the Department s position until approximately November 9, 2012, when the caseworker retracted her previous statements and, for the first time, raised the issue that the annuity was not actuarially sound. The ALJ s decision was as follows: As noted above, the [Department] conceded that it gave [A/R s] son incorrect information... However, the Commissioner is obligated to ensure that New York state law is properly applied in all circumstances. Thus, despite the incorrect information given to the [A/R] s son, the provision requiring the annuity to have a term that is actuarially sound must still be applied to the facts in the [A/R] s case... The ten-year term chosen by the [A/R] is not actuarially sound. Therefore, the annuity does not meet the criteria to be considered a transfer with compensation. d. FH# Q, 3/27/2014 (New York County). A/R, age 74, married, made a Medicaid application for nursing home care. HRA denied the A/R s application because the A/R s countable resources of $293, (comprised solely of Retirement Annuities ) were in excess of the allowable Medicaid resource limit of $14,

19 At the fair hearing, the A/R s attorney presented evidence showing that these Retirement Annuities were traditional IRAs that were in mandatory distribution status. Thus, the A/R s attorney argued, the Retirement Annuities were not countable resources for purposes of determining the A/R s Medicaid eligibility. The ALJ s decision was to reverse HRA s decision and to direct HRA to re-determine the A/R s proper excess resource amount, including allowing the A/R an opportunity to establish that the Retirement Annuities are exempt from the calculation of the excess resources amount. Interesting note: The ALJ determined that HRA s History Sheet reports that, in addition to the A/R s residence, the A/R and his wife owned a coop apartment and HRA never considered the value of this apartment as an available resource. So, while HRA had to recalculate excess resources without including the value of the Retirement Annuities, the value of the A/R s coop apartment was now included as an available resource. Curious, depending on the calculation if the A/R did better or worse. e. FH# K, 3/28/2014 (New York County). A/R, age 67, unmarried, made a Medicaid application for nursing home care. HRA denied the A/R s application because the A/R had excess resources in the amount of $53,175.17, which included an annuity. At the fair hearing, A/R argued that she did not get any money from this annuity and that the account belonged to her daughter who lives in 19

20 Poland. However, A/R presented no evidence to show that the annuity belonged to her daughter. Moreover, HRA determined that the A/R was allowed to withdraw from the account; in fact, A/R testified at the fair hearing that she recently withdrew from the account. Because the annuity was not in pay-out status, the A/R was able to withdraw from the account, and there was no evidence to support A/R s argument that her daughter owned the account, the ALJ decided that HRA was correct in denying the A/R s Medicaid application. Interesting note: Someone obviously was not counseling the A/R or, at least, not counseling her properly. Believing these were persuasive arguments to treat the annuity as exempt, the A/R argued that the annuity (a) did not pay her any money, (b) was not in pay-out status, and (c) was owned by her daughter, even though she had no evidence to support her claim. Yet, instead of having her application completely denied, had she put the annuity into pay-out status, she could have at least had her application granted with a penalty period. f. FH# K, 2/27/2014 (Livingston County). A/R, age under 65, unmarried, made a Medicaid application for nursing home care. A/R has a disabled child, who resides in the community with his guardian/adult sister and her minor child, his guardian/adult brother, his brother s partner, and a minor cousin. 20

21 The A/R s income is comprised of $1,839.00/month in Social Security Disability income, and $1,800.00/month in annuity income from a settled malpractice law suit (dealing with a failed sterilization that resulted in pregnancy. Livingston County DSS determined that the A/R s Net Available Monthly Income is $3, At the fair hearing, the A/R s POA argued that the annuity income should be disregarded because the annuity was purchased with the settlement money for the A/R s care of her disabled son. However, the ALJ determined that the settlement was to the A/R as sole beneficiary and the disabled son had no claim in the A/R s action and was not entitled to any recovery. However, quoting the Medicaid Reference Guide at page ( The needs of any children under 21 years of age for whom the A/R is legally responsible, in his/her former family household are then considered. The A/R's income is used to bring such children s income up to the appropriate Medically Needy Income level or Medicaid Standard, whichever is higher. NOTE: The maintenance needs of children for whom the A/R is legally responsible, in his/her former family household are considered, regardless of their resources. ), the ALJ directed DSS to determine the level of the disabled son s monthly income and to allocate that portion of the A/R s monthly income to the needs of her disabled son up to the medically needy income level or Medicaid standard, whichever is higher. Then, to recomputed the A/R s NAMI. 21

22 g. FH# Q, 7/18/2013 (Erie County). A/R, unmarried, made a Medicaid application for nursing home care. Erie County DSS denied the A/R s application because the A/R had an uncompensated transfer of $45, The A/R owned an annuity worth $111, On April 10, 2011, the A/R was annuitized. On April 11, 2013, the beneficiary was changed to the Erie County DSS as assignee for the NYS Department of Health. The A/R provided DSS a letter from the annuity company, which stated The above referenced annuity contract was annuitized on April 10, 2011 with a life cash refund. This contract does not allow commutations and unfortunately the monthly distribution cannot be changed. DSS measured the A/R s life expectancy pursuant to the tables attached to GIS 12 MA/025, which calculated the A/R s life expectancy at 4.69 years. DSS then multiplied the monthly payment the A/R was receiving from the annuity - $1, by 12 months to arrive at $14, as the yearly amount being paid to A/R from the annuity. DSS then multiplied $14, by the A/R s life expectancy of 4.69 years and arrived at $66, as the amount that would be paid to the A/R from the annuity over her lifetime. DSS determined that the difference between the value of the annuity on April 10, 2011 (when it was annuitized) of $111, and the amount the A/R was projected to receive over her lifetime of $66,613.01, or $45,153.27, was an uncompensated transfer which resulted in a penalty period of 5.20 years. DSS also divided the value of the annuity on April 10, 2011 (when it was annuitized) of $111, by the A/R s life expectancy of 4.69 years and 22

23 arrived at $1, as the monthly payment that the A/R should have received had the A/R computed her life expectancy pursuant to the tables attached to GIS 12 MA/025. The ALJ agreed with DSS that the A/R would have to receive a monthly payment of $1, in order for the annuity to be actuarially sound based on the Life Expectancy Tables attached to GIS 12 MA/025, and that the A/R s actual monthly payments of $1, fell short. The amount of that shortfall was $45, Interesting Note: Compare this decision to FH# P, 7/24/2013 (Oneida County) (discussed above). In both fair hearing decisions, it was determined that both A/Rs failed to take the maximum distributions from their annuities. In FH# P it was decided that because GIS 98 MA/024 mandates that once an individual is in receipt of or has applied for periodic payments, the principal in the retirement account is not a countable resource, DSS should not have denied the A/R s application but should have approved it and added the monthly income shortfall to the A/R s NAMI. Whereas, in this fair hearing decision from Erie County, the DSS was correct to deny the A/R s application subject to a 5.20 month penalty period. The difference lies in the type of annuity(ies). In FH# P, the A/R owned IRAs which are governed by GIS 98 MA/024, whereas in FH# Q, the A/R owned nonretirement annuities which are governed by GIS 12 MA/

24 III. CLARK V. RAMEKER AND ITS IMPLICATION FOR MEDICAID QUALIFICATION. In Clark et ux. v. Rameker, et al., 134 S.Ct. 2242, 573 U.S. (2014), a unanimous 9-0 decision, handed down on June 12, 2014, the United States Supreme Court held that inherited IRAs are not retirement funds within the meaning of federal bankruptcy law. As such, inherited IRAs are not protected from creditors in bankruptcy. The question is whether Rameker will be used by Departments of Social Services to count inherited IRAs as countable resources of the A/R. In Rameker, the Court based its decision on the distinguishing features that differentiate a traditional IRA/Roth IRA from an inherited IRA, but also on the plain meanings given to the term retirement fund. As the Court noted, [t]he ordinary meaning of fund[s] is a sum of money... set aside for a specific purpose. 8 The Court further noted the definition of the word "retirement" is a " [w]ithdrawal from one's occupation, business, or office. " 9 Moreover, Section 522(b)(3)(C)'s reference to retirement funds is therefore properly understood to mean sums of money set aside for the day an individual stops working. 10 Compare this language to the language in GIS 98 MA/024, which defines retirement funds as annuities or work-related plans for providing income when employment ends (e.g., pension, disability or other retirement plans administered by an employer or union.), one will see that the definitions match rather closely S.Ct. at 2246 (citing American Heritage Dictionary 712 (4th ed. 2000)). 9 Id. (citing American Heritage Dictionary at 1489). 10 Id. 24

25 However, as the Court in Ramekar noted, inherited IRAs do not operate like ordinary IRAs. Unlike with a traditional IRA/Roth IRA, an individual may withdraw funds from an inherited IRA at any time, without paying a tax penalty. 11 With respect to traditional IRAs/Roth IRAs, [t]o ensure that both types of IRAs are used for retirement purposes and not as general tax-advantaged savings vehicles, Congress made certain withdrawals from both types of accounts subject to a 10 percent penalty if taken before an accountholder reaches the age of 59 ½. 12 These differences characterize a traditional IRA/Roth IRA as money that was set aside for the original owner s retirement, whereas an inherited IRA is for the benefit of the designated beneficiary. In the wake of the Ramekar decision, some states have enacted statutes (or already had statutes) that specifically protect inherited IRAs under state bankruptcy exemptions for federal bankruptcy purposes. For example, Arizona (Ariz. Rev. Stat (B)), Florida (Fla. Stat ), Missouri (Mo. Rev. Stat ), North Carolina (N.C. Gen. Stat. 1C-1601(a)(9)), Ohio (Ohio Rev. Code (A)(10)), South Carolina (S.C. Code ), Texas (Tex. Prop. Code ). 11 IRC 72(t)(2)(A)(ii) S.Ct. at 2246 (citing IRC 72(t)(1)-(2)). 25