Case Law Update – Federal Appeals Court Rules Short Term Annuities Are Not Resources Preventing Medicaid Eligibility

On September 2, 2015, in the case of Zahner vs. Secretary, Pennsylvania Department of Human Services, a federal appeals court ruled that annuities with certain characteristics, including nonassignability clauses, are not assets to be counted as resources” for purposes of Medicaid eligibility.

The Commonwealth of Pennsylvania (DHS) argued that the financial instruments purchased by the plaintiffs were not annuities because they were not purchased as investment products, but rather as a way to pay nursing home costs during periods of Medicaid ineligibility resulting from plaintiffs’ gifts to family.  The Court noted that Congress, in crafting the four-part test for annuities, decided that all annuities which met the four-part test were excluded as countable resources under Medicaid even if purchased to pay nursing home costs:

[W]e do not believe that the annuitant’s motive is determinative….Although we are sympathetic to the concerns the dissent and DHS outline, Congress must resolve them. Absent legislative change, it is clear that “Congress has not revised the Medicaid statute to foreclose this option.” “It is not the role of the court to compensate for an apparent legislative oversight by effectively rewriting a law to comport with one of the perceived or presumed purposes motivating its enactment.”

The ruling affirms the role of planning in achieving the most favorable result for the Medicaid applicant. “Financial planning is inherent in the Medicaid scheme,” the court wrote. The court also noted that using “an elder law attorney to develop a Medicaid eligibility plan … helps ensure that the annuities purchased are Medicaid-compliant, and thus helps reduce the risk of litigation.”

The ruling settled a question about whether some short-term annuities purchased by Medicaid applicants comply with federal law.  The court ruled that as long as the annuities comply with Medicaid’s “safe harbor” provisions, they will not preclude eligibility for benefits.  Annuities may violate Medicaid law’s requirement of being “actuarially sound” if they exceed the annuitant’s reasonable life expectancy, but not if they are shorter than life expectancy, according to the court. The ruling came from the U.S. Court of Appeals for the Third Circuit, which includes both New Jersey and Pennsylvania in its jurisdiction.

You can read the full opinion at the below link:

Zahner Opinion