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Medi-Cal Compliant Annuities What is a Medi-Cal Compliant Annuity? A Medi-Cal Compliant Annuity is a planning tool offered by a limited number of insurance companies. The Medi-Cal Compliant Annuity was designed to convert a spend-down amount into an income stream. With the spend-down amount eliminated, the nursing home resident/Medi-Cal applicant becomes eligible for Medi-Cal benefits. Essentially, a Medi-Cal Compliant Annuity is a single premium immediate annuity with an added restrictions endorsement. The added endorsement makes the annuity irrevocable and non-assignable. What is the history behind a Medi-Cal Compliant Annuity? The history behind a Medi-Cal Compliant Annuity first began with the Omnibus Budget Reconciliation Act of 1993 wherein Congress delegated the Medi-Cal treatment of annuities to the Secretary of Health and Human Services. As a result, in November 1994, the Secretary of Health Care Financing Administration issued Transmittal 64, which was the Secretary's determination as to when an annuity purchase involved a transfer of assets for less than fair market value: "Annuities, although usually purchased in order to provide a source of income for retirement, are occasionally used to shelter assets so that individuals purchasing them can become eligible for Medi- Cal. In order to avoid penalizing annuities validly purchased as part of a retirement plan but to capture those annuities which abusively shelter assets, a determination must be made with regard to the ultimate purchase of the annuity (i.e., whether the purchase of the annuity constitutes a transfer of assets for less than fair market value). If the expected return on the annuity is commensurate with a reasonable estimate of the life expectancy of the beneficiary, the annuity can be deemed actuarially sound." The result of Transmittal 64 is that in order for an annuity to be Medi-Cal compliant it must be "actuarially sound." The actuarially sound test is easily satisfied by showing that the individual who purchased the annuity will receive back his or her entire investment within his or her Medi-Cal life expectancy. With implementation of the Deficit Reduction Act of 2005 ("DRA") in February of 2006 the actuarially sound test outlined in Transmittal 64 was continued, subject to several modifications: It clarified and codified the rules regarding when an annuity transaction is to be treated as a transfer for less than fair market value. It required that the state be named as remainder beneficiary (subject to the preferred interest of the community spouse and minor and disabled children) to the extent of benefits paid. It required that applicants for Medi-Cal funded long-term care disclose their interest in annuities. Generally speaking, the DRA rules now require that if an annuity is to be deemed "Medi-Cal compliant," it must: be irrevocable and non-assignable; be actuarially sound; provide for payments in equal amounts, with no deferral and no balloon payments; and name the state Medi-Cal program as the primary beneficiary to the extent that medical assistance benefits were provided to the institutionalized individual (certain exceptions may apply). Finally, to assist those individuals in determining whether an annuity is Medi-Cal compliant, in July 2006 the Centers for Medicare and Medi-Cal Services ("CMS") issued a letter to the state Medi-Cal Directors which provided guidance regarding CMS interpretation of the transfer and annuity provisions of DRA.
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