Home > Blog > Actuarially Sound: Different Meanings in Different States

Actuarially Sound:  Different Meanings in Different States Gold pocket watch and calendarOne of the most important aspects of a Medicaid Compliant Annuity (“MCA”) is the “actuarially sound” requirement.  In most states, this means that the owner of the annuity must receive his or her investment back within his or her Medicaid life expectancy.  The Medicaid life expectancy is determined by either the life expectancy table published by the Chief Actuary of the Social Security Administration, or by a state’s own life expectancy table.  This general definition of “actuarially sound” does not require a minimum term for MCAs, only that the annuities cannot exceed a certain term based on the owner’s age and life expectancy.

Three unique states, however, do require a minimum term.  North Dakota, Oregon, and Washington all place additional restrictions on the actuarially sound requirement for MCAs to be valid.  The additional requirements are as follows:

  • North Dakota – The annuity must be within 85% of the individual’s Medicaid life expectancy.[1]
  • Oregon – The annuity must be within 12 months of the individual’s Medicaid life expectancy.[2]
  • Washington – The annuity must have a term that is not less than five years if the life expectancy of the annuitant is at least five years, or have a term equal to the life expectancy of the annuitant, if the actuarial life expectancy of the annuitant is less than five years.[3]

These three different interpretations of “actuarially sound” all have one thing in common – they place a restriction on how short a MCA may be.  This throws a wrench in many typical planning strategies utilized by KFS, and leaves fewer options available to the senior residents of these states and the attorneys and agents trying to assist them through the Medicaid qualification process.

What does Actuarially Sound mean for ND, OR, and WA?

A major obstacle this poses for these states is that the typical Individual Gifting/MCA plan is not a viable option.  This planning strategy takes into consideration the client’s cost of care, income, state divestment penalty divisor, and total countable assets.  In order for the plan to be used correctly – and therefore successful – the term of the annuity must be based upon the numbers described above, not the life expectancy of the client.  The annuities used in these cases will most always be short-term annuities that will not coincide with the client’s life expectancy.

For example, consider an 80-year old female in Oregon receiving $1,000 per month from Social Security and has $75,000 in countable assets.  Her private pay rate is $8,000 per month.  When utilizing the Individual Gifting/MCA plan, based on the given figures, we can determine that she would need a 5-month annuity term in order for the gifting plan to be successful.  However, due to the rule in Oregon that the annuity must be within 12 months of the applicant’s life expectancy, and our applicant’s North Dakota life expectancy is 9.58 years/114.96 months, the shortest we would be able to structure her annuity while complying with Oregon regulations is 102 months.  Thus, the Individual Gifting/MCA plan is not an option.  To understand more about how the calculations in the Individual Gifting/MCA plan work, check out this recent blog post on the subject.

Although the Individual Gifting/MCA plan is not a feasible strategy, unmarried applicants in these states still have an opportunity to accelerate their eligibility and save something for their beneficiaries in the process.  The Stand-Alone MCA plan spends down a single client to the appropriate asset limit through the purchase of a MCA, the term of which is based on the client’s life expectancy – similar to traditional spousal planning.  The income generated from the MCA then goes toward the client’s Medicaid co-pay.  At first glance, this may seem ludicrous.  What is the point of putting the client’s excess assets into an annuity when the annuity’s income will simply go to the nursing home anyway?  Consider the following points to understand how this may be more beneficial than simply doing nothing:

  • The client achieves immediate Medicaid eligibility.
  • Once the client is eligible, the State pays for the balance of the care, up to the Medicaid reimbursement rate. The Medicaid rate is typically thousands of dollars less per month than the private pay rate – the rate the client would pay if they did nothing.
  • After the client passes away, and with the State being the primary beneficiary, the State is entitled to recover any remaining benefits of the annuity up to the amount the state paid on behalf of the institutionalized individual – after this, the contingent beneficiary, most likely family, will be entitled to any remaining benefits.
  • The shelf life of the client’s assets is therefore extended, leaving a greater amount of assets available to the contingent beneficiaries for a longer period of time than if the client were to exhaust all assets on the private-pay rate.

Consider the same woman noted above.  After accounting for her Oregon Individual Resource Allowance, we put the excess assets of $73,000 into a MCA structured over 114 months, her entire Oregon Medicaid life expectancy.  She is immediately eligible for Medicaid, and she will receive $658.88 per month from her MCA, plus her $1,000 of Social Security benefits, for a total income of $1,658.88.  After subtracting her Oregon monthly personal needs allowance of $60.00, her co-pay to the nursing home is $1,598.88.  Assuming the Medicaid reimbursement rate is $5,000 per month at the facility she resides at, the State is paying $3,401.12 per month for her care.

After month 12, she passes away.  With the State paying $3,401.12 per month for her care, and the State being the primary beneficiary on the MCA up to the amount of benefits paid on behalf of the institutionalized individual, the State is entitled to $40,813.44.  After making 12 payments of $658.88, the MCA has remaining benefits of $65,093.44.  After the State has recovered the amount it is entitled to, there is a sum of $24,280 remaining for the contingent beneficiaries.  Had this client not proceeded with the Stand-Alone MCA plan, the entire $73,000 would have been exhausted in 10 months, leaving nothing for her beneficiaries.  For a more detailed look at the economic effect this type of planning can have for your clients and their families, read KFS Benefits Planner Aaron Kempen’s blog on the subject.

Will these restrictions ever change?

Though it’s hard to speculate whether or not these “actuarially sound” limitations will ever be lifted in these states, KFS is here to support our Northern brethren, standing behind any litigation surrounding the actuarially sound requirements.  In light of the recent Zahner v. Secretary Pennsylvania Department of Human Services (DHS) victory, we feel we can prove the three states’ laws are more restrictive than federal law and in that there is no minimum term requirement for the annuities in question, short-term annuities are permissible.  To understand more about the effect these limitations have on Medicaid annuity planning in North Dakota, Oregon, and Washington, and to learn more about what can be done for applicants in those states, contact KFS today!

 

[1] North Dakota Medicaid Policy Manual, Section 510-05-70-45-30

[2] Oregon Administrative Code 461-145-0022

[3] Washington Administrative Code 388-561-0201