The length of time an annuity contract is in force for has no bearing on Medicaid eligibility, according to the U.S. Court of Appeals for the Third District.

The decision was reached by two judges who overturned a lower court ruling. A third appellate court judge dissented, opining that the duration of the contract does matter.

At issue were a 14-month annuity purchased by one plaintiff and a 12-month annuity purchased by another plaintiff. The plaintiffs say the annuities were to cover costs during a period of Medicaid ineligibility.

The Pennsylvania Department of Health and Human Services (DHS) classified the contracts as resources for purposes of determining Medicaid eligibility for the respective plaintiffs. The DHS asserted that the annuity contacts were not investment products because, when the broker’s fees were included, the cost of the contracts exceeded the rate of return.

A district court ruled in favor of the DHS, saying the sole purpose of the annuity contracts was to shield assets from the calculation of Medicaid eligibility.

Two of the three appellate court judges agreed to overturn the decision. They based their decision on a federal statute: In order for an annuity to be included within the safe harbor for not being considered a resource for Medicaid eligibility, an annuity must “(1) name the State as the remainder beneficiary, (2) be irrevocable and nonassignable, (3) be actuarially sound, and (4) provide for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments.”

The judges further pointed to the lack of a requirement for a minimum period of time that the annuity contract must be in force for. Rather, the contract must simply be commensurate with a reasonable estimate of the beneficiary’s lifespan. The intent is that the contract is being purchased for the beneficiary’s benefit and not for the purpose of passing along assets to heirs. Finally, the majority opined that annuities do not have to provide a rate of return nor should fees be included when calculating the rate of return.

The dissenting appellate judge described the annuities as not being for a “legitimate economic purpose and were not actuarially sound.” Her rationale was the lack of a meaningful return and the short time period of the contracts.

Source: Zahner v. Secretary Pennsylvania Dept. of Human Services, United States Court of Appeals for the Third Circuit.