Michigan Update: New Regulations for Tax-Qualified Annuities

As of January 1, 2017, Michigan has implemented some changes to its treatment of annuities purchased with tax-qualified funds. According to the Bridges Eligibility Manual, Section 401, entitled, Trusts – MA, annuities purchased with tax-qualified funds, “do not have to be irrevocable or actuarially sound, and do not have to provide for equal monthly payments.” Several states apply similar regulations, as the Deficit Reduction Act of 2005 gave preferential treatment to annuities purchased with tax-qualified funds.

Therefore, if an annuity is purchased with the proceeds from a traditional individual retirement account (IRA) under section 408(a) of the IRC, or certain accounts or trusts which are established by employers or certain association of employees under section 408(c) of the IRC, the annuity does not need to meet all the typical requirements of a Medicaid compliant annuity – namely, being irrevocable, actuarially sound, and providing equal monthly payments.

Irrevocable

Many misunderstand or misinterpret the meaning of “irrevocable” in the context of a single premium immediate annuity (“SPIA”). The irrevocability of a SPIA refers to the parties of the contract – the owner, annuitant, payee, and beneficiary(ies) – and not the ability to “cash out” the policy. Once these parties are assigned, they cannot be changed. A revocable SPIA, however, allows for changes to certain parties of the contract.

Actuarially Sound

The “actuarially sound” provision for a standard Medicaid compliant annuity requires the annuity return the principle within the life expectancy of the owner / annuitant. In that this is no longer being required by the State for tax-qualified annuities, clients have the ability to structure the annuity longer than their Medicaid life expediencies. It is important, however, not to exceed the IRS life expectancy table in order to meet a client’s RMD (“Required Minimum Distribution”). The life expediencies outlined in this table are typically substantially longer than those of states’ individual Medicaid life expectancy tables. You may find this table here.

Equal Monthly Payments

There is the potential to structure the immediate annuity with equal payments other than monthly, however payments would at least need to be made annually to meet a client’s RMD. Unequal payments are a little more complicated. So long as the payments made in every year meet the client’s RMD, there should not be a problem, however this may be difficult to calculate and this type of product would be rare. Balloon-style annuities would not meet an individual’s RMD, as the payments prior to the balloon coming due would be too small.

To be conservative, Krause Financial recommends an annuity with equal payments. We do, however, have the ability to structure the payments other than monthly – specifically quarterly, semi-annually, and annually.

Does the State Have to be Named as Beneficiary?

Michigan is unique in its treatment of the standard beneficiary requirements of MCAs. On a normal annuity purchased by a community spouse, the State of Michigan does not need to be named as a beneficiary in any capacity, if the annuity meets the actuarially sound requirement. The designation of the State as beneficiary is not specifically addressed in the change to Michigan’s treatment of tax-qualified annuities. However, it is the understanding of Krause Financial Services that the annuity does not have name the State as beneficiary, as is the policy with non-qualified annuities, as long as the annuity is actuarially sound.

Until this topic is more clearly defined by the State of Michigan, in order to plan conservatively, we recommend naming the State as the primary beneficiary on a tax-qualified annuity purchased by a community spouse if the annuity is not actuarially sound. Annuities purchased by an institutionalized individual still need to meet standard requirements for naming the State as beneficiary.

What Does This Mean for Michigan Annuities?

The changes to Michigan’s treatment of annuities funded with tax-qualified money provides new flexibility for those seeking Medicaid benefits, particularly in regard to frequency of payments and length of annuity. Contact Krause Financial today to learn more about how these changes affect planning with IRAs or other tax-qualified funds!