As a result of the Deficit Reduction Act of 2005 ("DRA") a community spouse can easily qualify an institutionalized spouse for Medicaid benefits by utilizing a Medicaid Compliant Annuity ("MCA"). The purpose of the MCA is to eliminate excess countable resources - the spend-down amount. In designing the MCA, the only issue facing the community spouse is for how long he or she should schedule the monthly payments - the income stream. Why is that an issue?
Under DRA, in order for an immediate annuity to be deemed "Medicaid compliant," the community spouse must be able to show that the annuity (1) is actuarially sound, (2) is irrevocable, (3) is non-assignable, (4) has equal monthly payments, and (5) names the state Medicaid program as the primary beneficiary of any residual benefits to the extent that Medicaid benefits were provided to the institutionalized spouse. It is the last element that causes all the problems.
If the community spouse maximizes the stretch, by purchasing the longest possible MCA, it is possible that he or she may not survive the entire term, causing the unpaid monthly payments to go to the state Medicaid program as part of the Medicaid pay-back. On the other hand, if the community spouse opts to minimize the stretch by purchasing a very short MCA - 12 months, the risk of a Medicaid pay-back is very remote, but he or she will give up any opportunity to divert monthly income from the institutionalized spouse. Which way is better? Well, it depends on when the community spouse passes away.
To illustrate, assume that a Florida community spouse, Alice, is 82 years old, has a home, car, basic furniture and personal property, a prepaid funeral arrangement, a joint savings account with her husband in the amount of $250,000.00, and $650.00 of monthly social security income. Her husband, Tom, is 83 years old, resides in a nursing home which charges $6,000.00 per month, and has monthly social security and pension income of $1,500.00. Based on the eligibility requirements of the Florida Medicaid Program, Alice is allowed to retain the family home, the car, all the furniture and personal property, her prepaid funeral arrangements, and $109,560.00 of cash. Tom, on the other hand, is allowed to retain his personal property and prepaid funeral arrangement, $2,000.00 of cash, and $35.00 from his monthly income for his personal needs. In light of the protected cash - $111,560.00, Alice and Tom have a spend-down amount of $138,440.00.
By purchasing a $138,440.00 MCA, Alice can immediately qualify Tom for Florida Medicaid benefits. At 82 years of age, Alice has a Florida Medicaid life expectancy of 8.11 years or 97 months. Thus, she wanted to purchase a 97 month MCA, it would pay her $1,486.00 per month ("Plan A") - having a total pay-out of $144,142.00. In the alternative, if she wanted to purchase a 12 month MCA, it would pay her $11,598.97 per month ("Plan B") - for a total pay-out of $139,187.64.
Assuming Alice's monthly maintenance needs allowance is $2,300.00, if Alice opts for Plan A she would have total monthly income of $2,136.00, entitling her to receive $164.00 from Tom - the income diversion. Tom's monthly Medicaid co-pay to the nursing home would be $1,301.001. In the alternative, if Alice opts for Plan B, she would have total monthly income of $12,248.97 and would not be entitled to an income diversion from Tom. Tom's monthly Medicaid co-pay to the nursing home would be $1,465.002.
Finally, assuming that Alice opts for an MCA, and passes away after receiving 60 monthly payments, under Plan A Florida's Medicaid program would be entitled to recover the remaining 37 monthly payments to recoup the Medicaid payments that were made on behalf of Tom. In the alternative, under Plan B, Florida's Medicaid program would have no right to recover anything from the MCA in that Alice received all the monthly payments during her lifetime. Would a 60 month MCA have been the way to plan?
Note: In Florida, if Alice wanted to, she could have purchased a Balloon Style MCA, rather than a level-pay, allowing her to receive a large income diversion from Tom. Florida and California are the only states that still allow Balloon Style MCAs to be used in Medicaid/Medi-Cal planning.
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1 This figure was determined by reducing Tom's monthly income of $1,500.00 by the $164.00 that will be diverted to Alice to supplement the monthly maintenance needs allowance, and then deducting Tom's personal needs benefit of $35.00 from the resulting figure.
2 This figure was determined by reducing Tom's monthly income by his personal needs benefit of $35.00.
