Inconvenient Questions - 2

This is the second S2KM blog post reviewing an important new article titled "The DRA of 2005 - What Havoc has Congress Wrought?" written by Sylvius H. von Saucken, a partner in The Garretson Law Firm, which von Saucken presented at the SSP 2007 Annual meeting.

In his article and SSP presentation, von Saucken addressd two questions:

• Do these DRA annuity rules apply to structured settlement annuities, including those paid to a community spouse, and if so, how?

• Do these DRA annuity rules impact structured settlement annuities irrevocably assigned to special needs trusts (SNT), and if so, how?  Note: SNTs are sometimes referred to a supplemental needs trusts.  SNTs include self-settled (d)(4)(A) trusts and (d)(4)(C) pooled trusts.

A prior S2KM blog post (Inconvenient Questions - 1) summarizes von Saucken's analysis of provisions in the DRA that are most important for structured settlements. This blog post summarizes von Saucken's analysis of arguments for and against applying the DRA annuity rules to structured settlements - including structured settlement payment rights irrevocably assigned to a SNT. A third S2KM blog post (Inconvenient Questions - 3) will consider the relevance and importance of past "authority" from the Social Security Administration (SSA) and the Centers for Medicare & Medicaid Services (CMS) for the DRA structured settlement issues.

The DRA

The purpose of the DRA is to cut billions of dollars of mandatory government spending programs. The DRA targets Medicaid and annuities.

The DRA Annuity Rules:

• Apply to annuity purchases and certain transactions related to annuities that occur on or after February 8, 2006;

• Apply to persons who receive and/or apply for Medicaid benefits to pay for long-term care benefits including nursing home or other institutional care;

• Create three requirements potentially applicable to structured settlement annuities:

• Disclosure;

• State as beneficiary;

• Additional annuity design rules:

• Irrevocable;

• Non-assignable;

• Actuarially sound;

• Payments in equal amounts including no deferred or balloon payments.

For a more detailed summary of these DRA annuity requirements, see S2KM's earlier blog posts: Inconvenient Questions - 1 and The Deficit Reduction Act of 2005.

von Saucken's analysis of the DRA annuity rules highlights several critical interpretative challenges for structured settlements. Bottom line: there is little (if any) current direct authority about whether and how the DRA impacts structured settlement annuities, structured settlement factoring transactions or SNTs.

• Neither the DRA legislation (enacted February 8, 2006) nor the related CMS communication to state Medicaid directors (July 27, 2006) mentions structured settlements, settlement transfers or SNTs.

• The Omnibus Budget Reconciliation Act of 1993 (OBRA), which defines self-settled SNTs and pooled trusts, does not provide any statutory reference to annuities, structured settlements or settlement transfers.

• Because Medicaid is a joint federal-state program, individual states have some authority and flexibility to set their own rules which are frequently inconsistent with other states. This state authority and flexibility is especially strong in the 13 "non-SSI states".

• At the federal level, the SSA regulates SNTs and Social Security Income (SSI) and CMS regulates Medicaid. 
• Neither the SSA's Program Operating Manual System (POMS) nor the CMS State Medicaid Plan mentions structured settlements or settlement transfers. Note, however:

• On March 24, 2007, at the First Annual Meeting of the Academy of Special Needs Planners, Ken Brown, SSA's most senior policy maker and POMS draftsperson, spoke about SSI and SNTs.
• Brown did not mention the DRA.
• Brown did say, however: 1) SSA will publish new POMS during 2007; and 2) the 2007 POMS will address structured settlements.

• Medicaid is administered by state Medicaid agencies pursuant to State Medicaid Plans which CMS must approve.

• Within every state, there are local (county) Medicaid rules plus individual Medicaid case workers and administrative law judges who determine eligibility and interpret the various federal and state Medicaid rules.

• Medicaid laws do not always consider other federal and state laws and may, in fact, conflict with  structured settlement laws, products and business practices.

Why the DRA Annuity Rules Should Not Apply to Structured Settlements

von Saucken's article identifies one argument why the DRA's annuity rules should not apply to any structured settlement annuities plus a second argument why the DRA annuity rules should not apply to structured settlement payment rights irrevocably assigned to SNTs.

• Third Party Purchases - DRA's annuity rules do not apply to annuities purchased by third parties with funds that never belonged to the applicant or community spouse. Structured settlement annuities are purchased with assets belonging to a defendant or qualified assignee.  Since structured settlement recipients do not own structured settlement annuities, such annuities never belonged to the Medicaid applicant or community spouse. Therefore, they are not assets of the community spouse or the applicant and, hence, are not assets for purposes of the DRA's transfer of assets provisions.

• OBRA Exclusion - A second argument that favors excluding structured settlement annuities from the DRA annuity rules focuses specifically on structured settlement annuities irrevocably assigned to SNTs. OBRA created "safe harbor" exclusions from the Medicaid asset transfer rules for self-settled SNTs and pooled trusts. SSA POMS provide that once assets are transferred to a properly drafted and administered SNT, those assets are no longer required to comply with Medicaid eligibility or asset transfer rules. Payments that are assignable by law may be assigned to a SNT so long as the assignment is irrevocable. SNTs have their own Medicaid payback rules. Therefore, structured settlement annuities should not be required to meet any DRA annuity requirements so long as those structured settlement annuity payment rights are irrevocably assigned to a SNT.

Why the DRA Annuity Rules Might Apply to Structured Settlements

von Saucken also identifies arguments why the DRA's annuity rules might apply to structured settlements.

• The DRA provides the only federal statutory authority that addresses annuities in the context of Medicaid long term care eligibility.

• The DRA neither references nor excludes structured settlement annuities.

• The DRA's purposes include limiting Medicaid eligibility and eliminating abusive strategies for sheltering assets from Medicaid payback.

• The DRA specifically targets annuities as potentially abusive strategies.

• Response to Third Party Purchases Argument: when a structured settlement recipient irrevocably transfers annuity payment rights to a (d)(4)(A) (self-settled) SNT, the SSA views the payment rights as the recipient's own assets. This SSA characterization:

• Not only contradicts the "Third Party Purchase" argument summarized above;

• But also helps to prevent the irrevocable transfer of structured settlement payment rights to a SNT from being characterized for tax purposes as a "structured settlement factoring transaction"as that term is defined in IRC section 5891(c )(3)(A).

• Response to OBRA Exclusion Argument - Even when a structured settlement is irrevocably assigned to a SNT, the issue is not whether the DRA annuity provisions apply, but rather which DRA annuity provisions apply.
  • The DRA's disclosure requirements apply regardless of whether an annuity is irrevocable or is treated as a non-countable asset.

• If a Medicaid applicant, spouse or representative refuses to disclose sufficient information, the state must either deny or terminate Medicaid long term care services or deny or terminate Medicaid eligibility entirely.

• The DRA links the annuity disclosure requirement to the state as beneficiary requirement. According to CMS: "...All States must also include in the application for long-term care services...a statement that names the State as remainder beneficiary on any annuity purchased on or after February 8, 2006..."

• Requiring the state to be named as beneficiary does not eliminate or change the OBRA payback rules. The DRA requirement merely disallows a pre-DRA SNT Medicaid strategy that the National Association of State Medicaid Directors (NASMA) highlighted as abusive as early as 2003.

• This pre-DRA SNT strategy permitted Medicaid recipients to shield post-death annuity payments from the Medicaid payback rules by naming a family member as contingent annuity beneficiary;
• This strategy could be particularly abusive when it included long term certain payouts, deferred payments and/or balloon payments.

• As for the DRA's additional annuity design requirements, some ("irrevocable", "non-assignable", and "actuarially sound") existed pre-DRA based upon earlier SSA and/or CMS communications.  Others (no deferred or balloon payments) represent the type of annuity designs that are potentially most egregious.

• If the DRA annuity rules are not applied to structured settlement annuities irrevocably assigned to SNTs, these annuities will prolong and promote exactly the types of abusive sheltering techniques the DRA annuity rules are intended to terminate.

• State Medicaid agencies, who administer Medicaid, don't like annuities.  For example, the National Association of State Medicaid Directors (NASMD) attacked annuities, including structured settlement annuities, as abusive shelters in a 2003 report to CMS.

• If a federally-created loophole does continue to exist post-DRA for SNT structured settlement annuities, the states (who are trying to limit their Medicaid expenses) will likely target and address structured settlement annuities with new legislation or regulations.

von Saucken concludes his analysis of the DRA with a "Call for Action". He recommends more lobbying and education by the structured settlement industry to help CMS and the states connect the DRA rules to structured settlements.

Congratulations to Sylvius von Saucken and the SSP for highlighting the need for additional education and lobbying about these issues to help protect structured settlement recipients from potential tax problems and/or Medicaid disqualification.

For additional S2KM blog posts about the DRA, see:

• Inconvenient Questions - 1
• Inconvenient Questions - 3
• The Deficit Reduction Act of 2005

Release 41 of "Structured Settlements and Periodic Payment Judgments" (available May 2007) will include a new Chapter 15 titled "Government Benefits and Structured Settlements".