Enacted February 8, 2006, the Deficit Reduction Act of 2005 (DRA) is intended to save billions of dollars from mandatory government spending programs, including Medicaid during the next five years. One of the DRA's cost-cutting provisions changes eligibility rules for Medicaid long-term care coverage. As part of those Medicaid eligibility changes, section 6012 of the DRA provides changes for Medicaid annuity rules. The annuity rule changes are incorporated in amendments to Section 1917 of the Social Security Act relating to liens, adjustments, recoveries and transfer of assets.
Medicaid is a joint federal-state program established in 1965 under Title XIX of the Social Security Act. States must comply with the requirements imposed by Congress as a condition for receiving federal funds. The Centers for Medicare & Medicaid Services (CMS), an agency within the Department of Health and Human Services, implements the Medicaid program by issuing regulations, advisory communications, and letters to State Medicaid Directors as well as the CMS State Medicaid Manual. On July 27, 2006, CMS issued a series of communications to state Medicaid administrators with instructions for implementing the DRA's new Medicaid eligibility rules. Each state must operate its Medicaid program pursuant to a state plan reviewed and approved by CMS. States are permitted some flexibility in designing and administering their state plans and substantial variations exist among states concerning categories of individuals covered, scope of services as well as eligibility and income benefits. The states are currently amending their state plans to comply with the DRA for review and approval by CMS.
What impact does the DRA have on structured settlement annuities - and specifically those structured settlement annuities used to fund special needs trusts (SNT)? Neither the DRA legislation nor the CMS July 27, 2006 communications to State Medicaid administrators mentions structured settlements. To date, the impact of the DRA has received little attention within the structured settlement community. Neither NSSTA nor SSP has offered any educational programs about the DRA. Although NAELA and its members have produced excellent analysis, commentary and seminars about the DRA, NAELA has provided little guidance about the DRA's impact on structured settlements specifically.
On January 31, 2006, Nancy Veillon, Associate Commissioner for Income Security Programs for Social Security, sent a letter to attorneys Jay Sangerman and Roger Bernstein responding to their earlier letters on behalf of NSSTA seeking clarification of the Social Security Income (SSI) program's policy about structured settlements used to fund SNTs under Section 1917(d)(4)(A) of the Social Security Act. Ms. Veillon's letter, posted in the members-only section of NSSTA's website, concludes in part: "...if the beneficiary of a trust which is not a resource for SSI has no right to anticipate, sell or transfer the annuity payments, the payments from a structured settlement annuity that are irrevocably assigned to an SNT, are not income to the trust beneficiary when paid into the trust. Neither is the right of the trust to receive the payments a resource to the trust beneficiary." This correspondence, however, occurred prior to the enactment of the DRA and does not reference the DRA .
In an article titled "Preserving Public Benefits in Physical Injury Settlements: Special-Needs Trusts and Beyond" which appears in the Fall 2006 issue of the NAELA Journal, attorney John Campbell assumes the DRA's asset transfer rules for annuities are not applicable to structured settlement annuities used to fund SNTs. His reasoning appears to be based upon section 1396p(c)(1) which provides the DRA annuity provisions do not apply to annuities purchased by a third party with funds that never belonged to the applicant/beneficiary or community spouse. Structured settlements are purchased with assets belonging to a defendant or a qualified assignee and arguably therefore are not assets for section 1396(c)(1) transfer of assets provisions.
NAELA's preliminary analysis of the DRA, which appears in a June 20, 2006 special edition of the NAELA Journal addresses section 1396p(c)(1) as follows:
"f. The DRA provisions do not apply to annuities purchased by a third party on behalf of a Medicaid applicant/beneficiary or community spouse with funds that never belonged to the applicant/beneficiary or community spouse.
"Section 1396p(c)(1) does not apply to an annuity purchased by a third party with funds that never belonged to the applicant/beneficiary or community spouse. Since such funds never belonged to the applicant/beneficiary or community spouse, they are not assets of the community or the applicant and, hence, are not assets for purposes of [section] 1396p(c)(1)'s transfer of asset provisions."
Importantly, however, neither CMS nor the Social Security Administration (SSA), nor the courts has yet to address whether and how the DRA impacts structured settlements or, more specifically, structured settlements used to fund SNTs. Structured settlements may be treated differently than other third party transfers. One distinguishing factor is - factoring. Both the Internal Revenue Code and 46 state statutes address the transfer of structured settlement payment rights (aka factoring). In the members only section of NAELA's website, attorney Donald M. McHugh writes a valuable article titled: "The Case for and Against Medicaid Annuities - an Update from March 2004 through January 2005." McHugh's article provides an excellent historical summary of how CMS, State Medicaid Administrators and the courts look at annuities, structured settlement annuities and factoring in the context of Medicaid. His article highlights the "saleable = countable" arguments used to characterize annuities as countable resources under the SSI resource rules. McHugh's article predates the DRA.
What follows is a summary of what CMS does say about annuities in its enclosure titled "Section 6012 Changes in Medicaid Annuity Rules Under the Deficit Reduction Act of 2005" sent on July 27, 2006 to state Medicaid administrators. "Quotations", bold print and italics are taken directly from the CMS July 27, 2006 enclosure - except for topic titles which appear in the CMS enclosure as normal print. Also, the CMS enclosure does include an "Introduction" topic title.
- Introduction: "The DRA adds new provisions to section 1917, which include:
- The requirements to disclose, in an application for long-term care services, information regarding any interest an applicant or community spouse may have in an annuity;
- The requirements to name the State as a remainder beneficiary in annuities in which the applicant is the annuitant; and
- Provisions for the treatment of the purchase of certain annuities as a transfer for less than fair market value."
- Disclosure of Interest in an Annuity
- "Under the new section 1917(e)(1), all States ... are required to
alter their applications for medical assistance for long-term care
services, including applications for recertification, to include a
disclosure and description of any interest the applicant or the
community spouse may have in an annuity. This disclosure is a condition
for Medicaid coverage of long-term care services described in section
1917(c)(1)(C)(i), which include:
- Nursing facility services;
- A level of care in any institution equivilent to that of nursing facility services; and
- Home and community-based services furnished under a waiver of section 1915(c) or (d)."
- "This disclosure requirement applies regardless of whether or not an annuity is irrevocable or is treated as an asset."
- "If the
individual, spouse or representative refuses to disclose sufficient
information related to any annuity the State must either:
- Using the authority of new section 1917(e)(1) described above, deny or terminate coverage of long-term care services only; or
- Using existing Medicaid program authority, deny or terminate eligibility for Medicaid entirely based on the applicant's failure to cooperate."
- "The DRA does not provide applicants an option to withhold information about annuities that may impact the computation of services or income."
- "Under the new section 1917(e)(1), all States ... are required to alter their applications for medical assistance for long-term care services, including applications for recertification, to include a disclosure and description of any interest the applicant or the community spouse may have in an annuity. This disclosure is a condition for Medicaid coverage of long-term care services described in section 1917(c)(1)(C)(i), which include:
- Requirement to Name the State as a Remainder Beneficiary
- "Under new sections 1917(e)(1) and (2), all States must also include in the application for long-term care services, including the application for recertification, a statement that names the State as a remainder beneficiary on any annuity purchased on or after February 8, 2006 by virtue of the provision of medical assistance for institutional care."
- "The State must also notify the issuer of any annuity disclosed for
purposes of section 1917(c)(1)(F) of the State's rights as a preferred
- The State may require the issuer to notify it regarding any changes in disbursement of income or principal from the annuity; and
- The issuer of an annuity may disclose information about the State's position as remainder beneficiary to others who have a remainder interest in the annuity."
- "Under the DRA an annuity must name the State as the remainder beneficiary in the first position for the total amount of medical assistance paid on behalf of the annuitant, unless there is a community spouse and/or a minor or disabled child. A child is considered disabled if he or she meets the definition of disability found at section 1614(a)(3) of the Act. If there is a community spouse and/or any minor or disabled child, the State may be named in the next position after those individuals. If the State has been named after a community spouse and/or a minor or disabled child, and any of those individuals or their representatives dispose of any of the remainder of the annuity for less than fair market value, the State may then be named in the first position."
- "As a remainder beneficiary, the State may receive up to the total amount of medical assistance paid on behalf of the individual, including both long term care services and community services."
- "The State should require verification from the issuer that the State is named as a remainder beneficiary in the correct position. States should also require the issuer to notify the State if and when there is any change in the amount of income or principal being withdrawn."
- "If the State is not named as a remainder beneficiary in the correct position, the purchase of the annuity will be considered a transfer for less than fair value. We interpret the statute to mean that the full purchase value of the annuity will be considered the amount transferred."
- Consideration of Income and Resources from an Annuity
- "The State may take into consideration the income or resources derived from an annuity when determining eligibility for medical assistance or the extent of the State's obligations for such assistance."
- "This means that even though an annuity is not penalized as a transfer for less than fair market value .... it must still be considered in determining eligibility, including spousal income and resources, and in the post-eligibility calculation, as appropriate."
- "In other words, even if an annuity is not subject to penalty under the provisions of the DRA, this does not mean that it is excluded as income or resource."
- Annuity-Related Transactions Other than Purchases
- "Section 6012(d) specifies that the provisions of the DRA apply to transactions, including purchases, which occur on or after the date of enactment. In addition to purchases, certain transactions which occur on or after that date would make an annuity, including one purchased before that date, subject to the provisions of the DRA. Such transactions include any action taken by the individual that changes the course of payments to be made by the annuity or the treatment of the income or principal of the annuity. These actions include additions of principal, elective withdrawals, requests to change the distribution of the annuity, elections to annuitize the contract and similar actions taken by the individual on or after February 8, 2006. Such transactions result in all provisions of the DRA being applicable to the annuity."
- "For annuities purchased prior to February 8, 2006, routine changes and automatic events that do not require any action or decision after the effective date of enactment are not considered transactions that would subject the annuity to treatment under these provisions of the DRA. Routine changes could be notification of an address change or death or death or divorce of a remainder beneficiary, and other similar circumstances."
- "Lastly, changes which are beyond the control of the individual, such as a change in the law, a change in the policy of the issuer, or a change in the terms based upon other factors, such as the issuer's economic conditions, are not considered transactions that cause the annuitant to be subject to the terms of the DRA."
- Annuities Purchased by or on Behalf of an Annuitant Who Applied for Medical Assistance
- "Section 6012(c) of the DRA amends section 1917(c)(1) by adding a new subparagraph (G) which provides that the purchase of an annuity on or after February 8, 2006, by or on behalf of an annuitant who has applied for medical assistance with respect to nursing facility services or other long-term care services, shall be treated as a transfer of assets for less than fair market value unless the annuity meets certain criteria. Unlike the new section 1917(c)(1)(F) discussed above, this requirement does not apply to annuities for which the community spouse is the annuitant. This requirement is in addition to those specified in 1917(c)(1)(F) pertaining to the State's position as a remainder beneficiary."
- In addition to certain retirement annuities, "an annuity purchased
by or on behalf of an annuitant who has applied for medical assistance
will not be treated as a transfer of assets if ... 3. The annuity meets
all of the following requirements:
- The annuity is irrevocable and non-assignable; and
- The annuity is actuarially sound; and
- The annuity provides payments in approximately equal amounts, with no deferred or balloon payments."
- "When evaluating whether or not an annuity meets the conditions listed in 3. above, use the methodology for determining actuarial soundness that is found in the State Medicaid Manual Chapter III, Section 3258.9 B. However, do not use the actuarial life expectancy tables published in that section. Instead, use the current actuarial tables published by the Office of the Chief Actuary of the Social Security Administration".
- "Note that even if an annuity is determined to meet the requirements above, and the purchase is not treated as a transfer, if the annuity or the income stream from the annuity is tranferred, except to a spouse or to another individual for the sole benefit of the spouse, child or trust as described in 1917(c)(2)(B), that transfer may be subject to penalty."
- Effective Date
- "These provisions apply to purchases of annuities, and certain transactions related to annuities, that occur after ... February 8, 2006.
- The CMS enclosure concludes with the following directives to the States:
- "States must take all reasonable steps to implement these provisions as soon as practicable.
- States should consider if pending applications need to be supplemented to collect information regarding annuities, or if this information is already specifically collected to determine income and resources.
- States should also consider how to best notify applicants and recipients of the State's rights regarding annuities purchased after the date of enactment."
- Unless and until CMS or the SSA provides further guidance:
- It is uncertain whether and to what extent the DRA impacts structured settlement annuities;
- Plaintiff attorneys, special needs attorneys, structured settlement professionals, personal injury settlement planners and annuity providers should proceed cautiously when recommending, designing and implementing structured settlement annuities for Medicaid recipients (or potential recipients) and their community spouses.
- Language in the July 27, 2006 CMS communication, including such terms as "any interest", "any annuity", and "purchased by or on behalf of", appears sufficiently broad to encompass structured settlement annuities.
- The DRA, including implementation by CMS and State Medicaid administrators, is expected to generate many legal challenges including challenges related to structured settlements.
- NSSTA and SSP should include the DRA among their educational and lobbying priorities and seek clarification from CMS about whether and how the DRA impacts structured settlements.
- In cooperation with NAELA and NAMSAP, NSSTA and SSP should seek greater uniformity and consistency generally among the various federal and state laws and regulations that define and impact structured settlements.
- Knowledge leaders within the various structured settlement stakeholder communities should address the DRA structured settlement issues.
- Additional information and commentary about the DRA will appear in Release 41 of "Structured Settlements and Periodic Payment Judgments" available from Law Journal Press in the Spring of 2007.
- Please post your comments below.