hhs amicus brief -- spousal annuities-hughes v. colbert 6th circuit
DESCRIPTION
Amicus brief filed by HHS in Hughes v. Colbert 6th CircuitTRANSCRIPT
No. 12-3765
IN THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
CAROLE HUGHES AND HARRY HUGHES,
Plaintiffs-Appellants, v.
MICHAEL COLBERT, in his official capacity, as Director of the Ohio Department of Job & Family Services,
Defendant-Appellee.
__________________________
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OHIO, EASTERN DIVISION
BRIEF FOR THE UNITED STATES
DEPARTMENT OF HEALTH AND HUMAN SERVICES AS AMICUS CURIAE ___________________
STUART F. DELERY Acting Assistant Attorney General MICHAEL S. RAAB 202-514-4053 HOWARD S. SCHER 202-514-4814 Attorneys, Appellate Staff Civil Division, Room 7239 Department of Justice 950 Pennsylvania Avenue, NW Washington, DC 20530-0001
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TABLE OF CONTENTS
Page
INTRODUCTION .................................................................................................... 1 STATEMENT ........................................................................................................... 3
1. Medicaid Resource Limits for Community Spouses .......................................................................................................... 3
2. Transfer of Assets ......................................................................................... 5
3. Treatment of Annuities ................................................................................. 6
4. The Present Litigation ................................................................................... 8
ARGUMENT ............................................................................................................ 9
1. The transfer of a community resource to purchase an annuity for the community spouse’s sole benefit, after the institutionalized spouse is institutionalized but before the institutionalized spouse’s Medicaid eligibility is determined, cannot be deemed an improper transfer under 42 U.S.C. § 1396r-5(f)(1) if it complies with § 1396p(c)(2)(B)(i) ................................ 9
2. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse is “for the sole benefit of the individual’s spouse” under § 1396p(c)(2)(B)(i) if the annuity is actuarially sound and its payments are based on, and made during, the community spouse’s life expectancy, and the annuity designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary ................................................................................. 14
3. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse that satisfies § 1396p(c)(2)(B)(i) must also satisfy § 1396p(c)(1)(F) but not § 1396p(c)(1)(G) .............................. 16
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4. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse that provides for payments based on, and made during, the community spouse’s life expectancy, but designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary to receive payments in the event of the community spouse’s early death, does not satisfy the letter of § 1396p(c)(1)(F) ........................................................... 18
5. Section 1396p(c)(1)(G) does not apply to an annuity purchased by or on behalf of the community spouse. .................................................. 22
CONCLUSION ....................................................................................................... 23
SIXTH CIRCUIT RULE 32(a) CERTIFICATION
CERTIFICATE OF SERVICE
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Cases: Morris v. Oklahoma Department of Human Services, 685 F.3d 925 (10th Cir. 2012)......................................................................... 10-11
Statutes: 42 U.S.C. 1396 et seq. ............................................................................................. 3 42 U.S.C. 1396a(a)(17) ........................................................................................... 3 42 U.S.C. 1396p ...................................................................................................... 7 42 U.S.C. 1396p(c) ........................................................................................... 5, 21 42 U.S.C. 1396p(c)(1)(F) ...................................... 2, 7, 9, 14, 16, 17, 18, 19, 20, 22 42 U.S.C. 1396p(c)(1)(G) ............................................. 2, 3, 7, 9, 16, 17, 18, 19, 22 42 U.S.C. 1396p(c)(2)(B)(i) ................... 1, 2, 5, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17 42 U.S.C. 1396p(d)(6)..................................................................................... 15, 17 42 U.S.C. 1396p(e)(1) ............................................................................................. 7 42 U.S.C. 1396p(e)(2)(B) ....................................................................................... 7 42 U.S.C. 1396r-5 ............................................................................................. 3, 10 42 U.S.C. 1396r-5(b)(1) - (2)(A)(i) ........................................................................ 7 42 U.S.C. 1396r-5(c)(1)(A)(i) ............................................................................... 11 42 U.S.C. 1396r-5(c)(1)(A)(ii) ................................................................................ 4 42 U.S.C. 1396r-5(c)(2) .......................................................................................... 5 42 U.S.C. 1396r-5(c)(2)(B) ..................................................................................... 4 42 U.S.C. 1396r-5(c)(4) ...................................................................................... 5, 7 42 U.S.C. 1396r-5(d)(2) .......................................................................................... 4
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42 U.S.C. 1396r-5(f)(1) .................................................. 1, 2, 6, 8, 9, 11, 12, 13, 14 42 U.S.C. 1396r-5(f)(2) ........................................................................................ 12 42 U.S.C. 1396r-5(f)(2)(A) ..................................................................................... 4 Deficit Reduction Act of 2005 (DRA), Pub. L. No. 109-171, § 6012 (2005) ....................................................................................... 7 Regulatons: 42 C.F.R. 435.916(a). ............................................................................................ 13
Miscellaneous:
Centers for Medicare & Medicaid Services’ State Medicaid Manual § 3258.9(B) .................................................................................................. 15, 17 § 3258.11 ............................................................................................................ 11 § 3262.4 .............................................................................................................. 12
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IN THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
No. 12-3765
CAROLE HUGHES AND HARRY HUGHES,
Plaintiffs-Appellants, v.
MICHAEL COLBERT, in his official capacity, as Director of the Ohio Department of Job & Family Services,
Defendant-Appellee.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF OHIO, EASTERN DIVISION
BRIEF FOR THE UNITED STATES
DEPARTMENT OF HEALTH AND HUMAN SERVICES AS AMICUS CURIAE ___________________
INTRODUCTION
A. On February 13, 2013, the Court invited the views of the Department of
Health and Human Services (HHS) on the following two questions:
1. Whether the transfer of a community resource to purchase an annuity for the community spouse’s sole benefit, which is done before the institutionalized spouse’s Medicaid eligibility is determined, can be deemed an improper transfer under 42 U.S.C. 1396r-5(f)(1), even though 42 U.S.C. 1396p(c)(2)(B)(i) allows the transfer.
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2. Whether the transfer of funds to purchase an annuity for the community spouse is subject to Section 1396p(c)(1)(F) and/or (G), or only Section 1396p(c)(2)(B)(i).
B. On April 9, the Court invited the government to address the following
questions:
1. Whether the transfer of a community resource to purchase an annuity for the community spouse’s sole benefit, which transfer is done after the institutionalized spouse is institutionalized but before the institutionalized spouse’s Medicaid eligibility is determined, can be deemed an improper transfer under 42 U.S.C. § 1396r-5(f)(1), even though § 1396p(c)(2)(B)(i) allows the transfer. 2. Whether the transfer of a community resource to purchase an annuity by or on behalf of the community spouse is “for the sole benefit of the individual’s spouse” under § 1396p(c)(2)(B)(i) if the annuity is actuarially sound and its payments are based on, and made during, the community spouse’s life expectancy, but designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary to receive payments in the event of the community spouse’s early death. 3. Whether the transfer of a community resource to purchase an annuity by or on behalf of the community spouse that satisfies § 1396p(c)(2)(B)(i)’s sole benefit provision must also satisfy § 1396p(c)(1)(F) and/or (G). 4. Whether the transfer of a community resource to purchase an annuity by or on behalf of the community spouse that provides for payments based on, and made during, the community spouse’s life expectancy, but designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary to receive payments in the event of the community spouse’s early death, satisfies § 1396p(c)(1)(F). 5. Whether § 1396p(c)(1)(G) applies to an annuity purchased by
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or on behalf of the community spouse. See 42 U.S.C. § 1396p(c)(1)(G) (“For purposes of this paragraph with respect to a transfer of assets, the term ‘assets’ includes an annuity purchased 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 under this subchapter * * * .” (emphasis added)).
We view Questions 1, 3, and 5 in the second request as covering the same
substantive matter as the two questions posed by the Court in the original request.
Accordingly, we address each of the questions posed by the Court in the second
request.
STATEMENT
1. Medicaid Resource Limits for Community Spouses.
The Medicaid program, enacted in 1965 as Title XIX of the Social Security
Act, is a cooperative federal-state public assistance program that provides medical
assistance to low-income individuals. See 42 U.S.C. 1396 et seq. The Medicaid
statute provides that a Medicaid state plan must include “reasonable standards * * *
for determining eligibility for and the extent of medical assistance under the [state]
plan,” and these standards must be consistent with the objectives of Medicaid and
take into account only such income and resources available as determined according
to standards prescribed by the Secretary. Id. § 1396a(a)(17).
In 1988, Congress enacted 42 U.S.C. 1396r-5 to address the allocation of
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income and resources between spouses when one spouse applies for Medicaid
coverage of long term institutional care and the other spouse continues to reside in
the community. To prevent impoverishment of the community spouse, the law
mandates that the community spouse be entitled to retain minimum portions of the
couple’s combined assets (or “resources”) and income up to maximum portions that
are adjusted annually and referred to in the statute as the “Community Spouse
Resource Allowance” (CSRA) and “Community Spouse Income Allowance.” 42
U.S.C. 1396r-5(d)(2) and (f)(2)(A).
To determine the portion of the couple’s combined assets that the community
spouse is entitled to retain, the “resources” of the two spouses, measured at the time
of the institutionalized spouse’s initial institutionalization, are first pooled to
determine the couple’s total resources, and this amount is then divided equally
between the spouses. 42 U.S.C. 1396r-5(c)(1)(A)(ii). The community spouse’s
share is then measured against the CSRA established by each state (which is based
on the minimum and maximum thresholds established by the statute). 42 U.S.C.
1396r-5(c)(2)(B). Before a Medicaid eligibility determination, any resources in
excess of the CSRA are considered available for use by the institutionalized spouse.
Ibid. Once the institutionalized spouse’s eligibility for Medicaid has been
established, the resources of the community spouse are no longer considered
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available for use by the institutionalized spouse. 42 U.S.C. 1396r-5(c)(4).
2. Transfer of Assets.
When an individual applies for Medicaid and seeks coverage for long term
care services and support, a state conducts a review to determine whether the
individual has engaged in transactions (such as making gifts) that have made income
or resources unavailable. 42 U.S.C. 1396r-5(c)(2). If, within specified time periods,
the institutionalized individual has transferred assets to a third party for less than fair
market value, there may be a penalty period imposed. If such a penalty period
applies, Medicaid will not pay the cost of long term care services provided to the
institutionalized individual during that period. See 42 U.S.C. 1396p(c). For a
married individual applying for Medicaid coverage of long term care services, the
review extends to the transactions of the individual’s spouse as well. Thus, a
transfer of assets to a third party for less than fair market value by the community
spouse may also result in a delay in Medicaid eligibility for the institutionalized
spouse. Ibid. Transfers of assets between spouses, however, are not subject to such
a penalty. Moreover, prior to a Medicaid eligibility determination, either spouse
may transfer an unlimited amount of resources to a third party where the third-party
transfer is for the sole benefit of either spouse, without penalty. Id.
§ 1396p(c)(2)(B)(i).
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As noted, after an institutionalized spouse is determined to be eligible for
Medicaid, the resources of the community spouse are no longer deemed available to
the institutionalized spouse. 42 U.S.C. 1396r-5(c)(4). Thus, in determining the
institutionalized spouse’s continued eligibility for Medicaid, resources of the
community spouse are not counted. With respect to resources held in the name of
the institutionalized spouse, if the total amount of those resources exceeds the
relevant limit, the institutionalized spouse may “as soon as practicable after the date
of the initial determination of eligibility” transfer excess resources held in the
institutionalized spouse’s name to the community spouse. Id. § 1396r-5(f)(1).
However, the institutionalized spouse may transfer to the community spouse
resources only up to the CSRA limit. Ibid.
3. Treatment of Annuities.
An annuity is a contract by which the annuitant purchases the right to receive
monthly payments for a specified period of time in exchange for the payment of an
amount of principal. The purchase of an annuity may involve converting a couple’s
resources into income, which would not affect an institutionalized spouse’s
Medicaid eligibility if the annuity is determined to be a fair market value-based
transaction. Even if resources above the CSRA are used for the purchase of the
annuity, the purchase would not affect Medicaid eligibility if the annuity is payable
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to the community spouse because of the exemption from penalty for transfers of
assets to third parties for the sole benefit of the community spouse. 42 U.S.C.
1396r-5(b)(1) - (2)(A)(i).
In 2005, Congress added new rules for evaluating whether annuities
purchased by Medicaid recipients and their spouses in anticipation of Medicaid
eligibility determinations constitute transfers of assets to third parties for less than
fair market value. Deficit Reduction Act of 2005 (DRA), Pub. L. No. 109-171,
§ 6012 (2005), codified as amendments to 42 U.S.C. 1396p. The DRA amendments
require the disclosure of any interest that an institutionalized or community spouse
has in an annuity, id. § 1396p(e)(1), and provide for notice to the state by the annuity
issuer of any changes in the interest or principal withdrawn, id. § 1396p(e)(2)(B).
To avoid being considered a transfer of assets to a third party for less than fair
market value which, as detailed above, may delay the institutionalized spouse’s
Medicaid eligibility (e.g., where it is not for the sole benefit of either spouse), an
annuity contract must name the state Medicaid agency as the remainder beneficiary.
Id. § 1396p(c)(1)(F). Moreover, an annuity in which the institutionalized spouse (as
opposed to the community spouse) is the annuitant must also meet certain
requirements set forth in Section 1396p(c)(1)(G) to avoid being considered a transfer
of assets to a third party for less than fair market value.
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4. The present litigation.1
Mrs. Hughes was residing in a nursing facility. Prior to becoming eligible for
Medicaid, she and her husband used resources in excess of the CSRA to purchase an
income-generating annuity for Mr. Hughes’s sole benefit. When Mrs. Hughes
applied for Medicaid benefits, the Ohio Department of Job and Family Services
(ODJFS) assessed a penalty for an “improper transfer of assets” based on the
purchase of the annuity. According to Ohio, Mr. Hughes took a jointly owned
resource that exceeded the CSRA and converted it into income for his sole benefit,
thereby making the resource no longer available to the couple for payment of Mrs.
Hughes’s care.
The Hugheses contend that the state’s position violated federal and state
Medicaid law. The state filed a motion to dismiss arguing, among other things, that,
while 42 U.S.C. 1396p(c)(2)(B)(i) authorizes transfers of assets to spouses, Section
1396r-5(f)(1) bars the transfer of assets to the community spouse in any amount
above the CSRA. In the state’s view, Section 1396r-5(f)(1) controls over any
provision that would otherwise allow a community spouse to take for himself more
than the CSRA while leaving the public to pay for the institutionalized spouse’s care
that the couple could have paid for themselves. The Hugheses countered that the
1 This discussion is based on the district court opinion. 8
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annuity was not an improper transfer because it met the requirements set out in
Section 1396p(c)(1)(F) and (G). The state disputed that the annuity met these
requirements and also contended that those provisions do not apply to an annuity
purchased for the sole benefit of a community spouse. The district court granted the
state’s motion to dismiss, holding that a transfer to a community spouse in excess of
the CSRA is an improper transfer, and that, to the extent that annuity purchases are
protected under federal Medicaid annuity laws, the protection extends only to
annuities purchased by or on behalf of an institutionalized spouse or Medicaid
applicant.
Argument 1. The transfer of a community resource to purchase an annuity for the community spouse’s sole benefit, after the institutionalized spouse is institutionalized but before the institutionalized spouse’s Medicaid eligibility is determined, cannot be deemed an improper transfer under 42 U.S.C. § 1396r-5(f)(1) if it complies with § 1396p(c)(2)(B)(i).
a. The transfer of a community resource by a Medicaid applicant to purchase
an annuity for the community spouse’s sole benefit, accomplished after the
institutionalized spouse is institutionalized but before the institutionalized spouse’s
Medicaid eligibility is determined, is not improper under 42 U.S.C. 1396r-5(f)(1) or
42 U.S.C. 1396p(c)(2)(B)(i). These two provisions operate at distinctly different
periods and thus do not conflict. Prior to an initial Medicaid eligibility
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determination, the Medicaid statute permits the transfer of assets from an
institutionalized spouse to the community spouse or a third party for the community
spouse’s sole benefit. Section 1396p(c)(2)(B)(i). The statute specifically exempts
from penalty any transfer from one spouse to another, or, from an individual to a
third party for the sole benefit of the individual’s spouse, and places no limit on the
value of the assets that can be transferred. Ibid. Although the express authorization
of transfers from institutionalized spouses to community spouses is limited in
Section 1396r-5 to amounts within the CSRA, this provision is operative only after
the institutionalized spouse has been determined to be eligible for Medicaid.
The facts here are nearly identical to those in Morris v. Oklahoma Department
of Human Services, 685 F.3d 925 (10th Cir. 2012). In Morris, a married couple used
a resource above the CSRA to purchase an annuity for the sole benefit of the
community spouse prior to the institutionalized spouse’s Medicaid eligibility
determination. The Tenth Circuit held that the transfer penalty should not apply to
qualifying annuities for the sole benefit of a community spouse purchased prior to a
Medicaid eligibility determination. The court concluded that Section
1396p(c)(2)(B)(i) (allowing transfer of an unlimited amount of resources between
either spouse and a third party for the sole benefit of either spouse, without penalty)
applies to spousal transfers occurring prior to an eligibility determination and
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Section 1396r-5(f)(1) (allowing a transfer from an institutionalized spouse to a
community spouse of resources only up to an amount equal to the CSRA, without
penalty) applies to spousal transfers occurring after an eligibility determination.
In HHS’s view, prior to an eligibility determination, transfers between spouses
or between either spouse and a third party for the sole benefit of either spouse as
provided in Section 1396p(c)(2)(B)(i) have little, if any, effect on Medicaid
eligibility because the assets of both spouses are pooled together and deemed to be
available to the institutionalized spouse. Section 1396r-5(c)(1)(A)(i). After the
institutionalized spouse is determined to be eligible for Medicaid, only resources
held in her name are counted and her continued Medicaid eligibility is dependent on
her having resources in her name below the relevant resource eligibility limit. If the
institutionalized spouse has resources above the relevant resource limit, Section
1396r-5(f)(1) provides a couple with the opportunity “as soon as practicable after the
date of the initial determination of eligibility” to transfer excess resources held in the
institutionalized spouse’s name to the community spouse so that the institutionalized
spouse has no more than her own resource allowance and the community spouse is
brought closer to the CSRA.
The Centers for Medicare & Medicaid Services’ State Medicaid Manual
supports the foregoing discussion. Section 3258.11 of the Manual contains
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instructions describing an institutionalized spouse’s ability to transfer unlimited
assets to a community spouse above the CSRA prior to an eligibility determination.
Section 3262.4, in turn, expressly states that Section 1396r-5(f)(1) applies only to
post-eligibility reallocation of resources. The agency has also taken the same
position in letters to state administrators and the public. See Addendum A (Letter to
Administrator of the Nevada State Welfare Division, dated August 31, 2001; Letter
to Director of Illinois Department of Public Aid, dated October 31, 2002; and Letter
to Michael Millonig Law Group, LLC, dated July 28, 2003).
b. The following discussion may be helpful to explain HHS’s interpretation
of the two provisions. Under the statute, an institutionalized spouse’s resources
must fall below a certain amount for the individual to qualify for Medicaid. To
determine whether the institutionalized spouse is Medicaid-eligible, it is necessary to
first determine the spousal resources at the time of institutionalization. The
community spouse is entitled to retain marital resources up to an amount determined
by state law – in accordance with the minimum and maximum amounts established
under Section 1396r-5(f)(2) – for his or her own use. That amount, the CSRA, is not
counted toward the institutionalized spouse’s Medicaid eligibility. The purpose of
the CSRA is to prevent the impoverishment of the community spouse. After
subtracting the CSRA, all other community resources are considered in determining
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whether the institutionalized spouse is eligible for Medicaid. To the extent the
remaining resources exceed the Medicaid limit, the institutionalized spouse must
“spend down” the remaining resources to qualify. For example, if a married couple
has $300,000 in community resources and the CSRA is $100,000, then $200,000
will be imputed to the institutionalized spouse. If Medicaid requires an individual’s
resources to fall below $5000, then to qualify the institutionalized spouse will have
to first spend down $195,000.
Section 1396r-5(f)(1) was designed to serve a limited and somewhat different
purpose than Section 1396p(c)(2)(B)(i). It is basically a “clean up” provision. If,
after the date of eligibility, assets within the CSRA remain in the institutionalized
spouse’s name, the institutionalized spouse may transfer those assets to (or for the
sole benefit of) the community spouse “as soon as practicable after the date of the
initial determination of eligibility.” 42 U.S.C. 1396r-5(f)(1). A failure to make such
a transfer would lead to the denial of Medicaid eligibility when it came time for the
institutionalized spouse’s first eligibility redetermination – which must take place at
least once every 12 months, see 42 C.F.R. 435.916(a). Working from the example in
the previous paragraph, if the $100,000 CSRA was held in a joint savings account,
the institutionalized spouse would have to transfer her interest in that amount to the
community spouse as soon as possible after she is determined eligible for Medicaid.
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If the institutionalized spouse does not, then the $100,000 will be imputed to her at
her first eligibility redetermination and will render her ineligible for Medicaid.
Section 1396r-5(f)(1), however, has nothing to say about the inter-spousal transfers
that are permissible before a determination of eligibility.
2. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse is “for the sole benefit of the individual’s spouse” under § 1396p(c)(2)(B)(i) if the annuity is actuarially sound and its payments are based on, and made during, the community spouse’s life expectancy, and the annuity designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary.
The transfer of a community resource to purchase an actuarially sound annuity
for a community spouse that provides payments commensurate with the community
spouse’s life expectancy, and that designates the institutionalized spouse as the
primary remainder beneficiary and the state as the contingent beneficiary, is a
transfer “for the sole benefit of the individual’s spouse” under 42 U.S.C.
1396p(c)(2)(B)(i). However, whether the annuity also complies with Section
1396p(c)(1)(F), based on these same facts, is addressed in our response to Question
4, below.
An annuity is a contract by which the annuitant purchases the right to receive
monthly payments for a specified period of time in exchange for the payment of an
amount of principal. The Medicaid statute contemplates that a couple may, without
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penalty, use its resources to purchase an annuity for fair market value. See 42
U.S.C. 1396p(d)(6) (permitting the Secretary to establish the terms for qualifying
annuities). Section 3258.9(B) of the State Medicaid Manual provides guidance for
determining whether an annuity is purchased for fair market value. An annuity
purchased by or on behalf of either the institutionalized or the community spouse is
considered a transfer of assets for fair market value so long as the annuity is, among
other things, actuarially sound and commensurate with the reasonable life
expectancy of the beneficiary. Ibid. Thus, an annuity is “for the sole benefit of” the
community spouse if the annuity provides for payment of the entire value of the
annuity, plus interest, to the community spouse within that person’s expected
lifetime.
Similarly, the transfer of a couple’s resources to a third party for the purchase
of an annuity for the sole benefit of a community spouse is a transaction subject to
42 U.S.C. 1396p(c)(2)(B)(i). That provision exempts from penalty transfers of
assets “to the individual’s spouse or to another for the sole benefit of the individual’s
spouse.” Ibid. (emphasis added). In the case of a purchase of an annuity for the sole
benefit of the community spouse, the entity selling the annuity is “another” within
the meaning of the statute, i.e., the third party to which the resources are being
transferred.
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For the foregoing reasons, 42 U.S.C. 1396p(c)(2)(B)(i) exempts as a transfer
to a third party for the sole benefit of a community spouse the transfer of resources
to purchase by or on behalf of the community spouse an annuity in which the
income generated by the annuity is payable to and for the sole benefit of the
community spouse during her lifetime. While Section 1396p(c)(1)(F) mandates that
the state be a remainder beneficiary of the annuity, among the broader rules of
determining whether an annuity purchase is for fair market value (see responses to
Questions 3 and 4, infra), where the state is placed in the remainder designation line
does not affect whether the purchased annuity is for the “sole benefit of” the
community spouse. Thus, if the annuity designates the institutionalized spouse as
the primary remainder beneficiary and the state as the contingent beneficiary in the
event the community spouse dies before the end of the annuity period, the annuity
will still be considered to be for the sole benefit of the community spouse.
3. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse that satisfies § 1396p(c)(2)(B)(i) must also satisfy § 1396p(c)(1)(F) but not § 1396p(c)(1)(G).
A transfer of funds to purchase an annuity for the community spouse is
subject to Sections 1396p(c)(2)(B)(i) and 1396p(c)(1)(F), but for reasons explained
below (in addressing Question 5), not Section 1396p(c)(1)(G). A transfer of funds
to purchase an annuity for the sole benefit of a community spouse is a transaction
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that is subject to the general provision, Section 1396p(c)(2)(B)(i), which permits the
transfer of unlimited assets from an institutionalized individual to a third party for
the sole benefit of the individual’s spouse. Such a transaction is also subject to
section 1396p(c)(1)(F), which specifically addresses annuities and provides that an
annuity naming the state as a remainder beneficiary will not be subject to penalty.
Such a transaction is not subject to Section 1396p(c)(1)(G), which applies only to
annuities for which the institutionalized spouse is the annuitant.
The purchase of an annuity can convert a couple’s resources into income. But
the Medicaid statute contemplates that result, allowing a couple, without penalty, to
use the couple’s resources for the purchase of an annuity for fair market value. See
Section 1396p(d)(6). Section 3258.9(B) of the State Medicaid Manual further
confirms this result. Thus, an annuity purchased by or on behalf of either the
institutional or the community spouse is not considered a transfer of assets for less
than fair market value, as long as it is (inter alia) actuarially sound and
commensurate with the reasonable life expectancy of the beneficiary. Ibid.
Under Section 1396p(c)(2)(B)(i), an institutionalized individual may transfer
funds to a third party for the purposes of purchasing an actuarially sound annuity for
the sole benefit of the individual’s spouse, provided that the income generated from
such an annuity is payable only to and for the sole benefit of the community spouse
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and no other party during that spouse’s lifetime. Section 1396p(c)(1)(F) includes an
additional requirement for annuities by requiring that the state be named as a
remainder beneficiary in the first or second position. If the community spouse does
not survive the annuity’s terms, the state, rather than a third-party beneficiary, is
paid the remaining payments up to the total amount of Medicaid assistance paid on
behalf of the institutionalized spouse. Ibid. Section 1396p(c)(1)(G) provides
additional requirements for the transfer of funds to purchase an annuity without
penalty, but this provision, by its terms, applies only to annuities “purchased by or
on behalf of an annuitant who has applied for medical assistance” and does not apply
when a community spouse is the annuitant. See Addendum B (July 27, 2006 State
Medicaid Directors Letter Enclosure concerning treatment of annuities under the
DRA, section II.B and C).
4. The transfer of a community resource to purchase an annuity by or on behalf of the community spouse that provides for payments based on, and made during, the community spouse’s life expectancy, but designates the institutionalized spouse as the primary beneficiary and the state as the contingent beneficiary to receive payments in the event of the community spouse’s early death, does not satisfy the letter of § 1396p(c)(1)(F).
The transfer of a community resource to purchase an annuity for a community
spouse is subject to 42 U.S.C. 1396p(c)(1)(F). Section 1396p(c)(1)(F) states that a
purchase of an annuity shall be treated as the disposal of an asset for less than fair
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market value unless either (i) the state is named as the remainder beneficiary “in the
first position,” or (ii) the state is named as the remainder beneficiary “in the second
position after the community spouse or minor or disabled child.” 42 U.S.C.
1396p(c)(1)(F). If an annuity purchased by or on behalf of a community spouse
does not name the state in the “first position” and instead names the state in the
second position after the institutionalized spouse, the annuity fails to comply with
the letter of the statute.
Section 1396p(c)(1)(F), added in the 2005 DRA, imposes an additional
requirement (on top of the requirements that apply to transfers of assets in general)
for annuities purchased for the sole benefit of a spouse, to ensure that those annuities
do not confer a remainder benefit to any party other than a community spouse, a
minor or disabled child, or the state (as specifically provided in the statute). Under
this provision, if the state is named as a remainder beneficiary in the first position or
in the second position after a community spouse or a minor or disabled child, the
purchase of that annuity is not considered a transfer of assets for less than fair
market value. This provision ensures that if either an institutionalized or community
spouse annuitant does not survive the annuity’s terms, the state, rather than a third-
party beneficiary or heir, other than those specified in the preceding sentence, will be
paid the remaining annuity payments up to the total amount of Medicaid assistance
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paid on behalf of the institutionalized spouse.
An annuity that names the institutionalized spouse in the first position and the
state in the second does not comply with the letter of Section 1396p(c)(1)(F), but
because the state will likely benefit regardless of whether the institutionalized
spouse or state is named first in a community spouse’s annuity, there seems to be no
obvious reason to treat the two spouses differently. Designating an institutionalized
spouse as the primary remainder beneficiary and the state as a contingent beneficiary
for an annuity purchased by or on behalf of a community spouse would likely reduce
Medicaid’s costs for the services delivered to the institutionalized spouse. If an
annuity purchased for a community spouse designates the institutionalized spouse as
the primary remainder beneficiary and the community spouse dies before the end of
the annuity period, the remaining value of the annuity transfers from the deceased
community spouse to the surviving institutionalized spouse and will affect the
institutionalized spouse’s Medicaid eligibility. If the institutionalized spouse
receives the remainder in income installments, Medicaid’s payment for the
individual’s services will be reduced by the same amount of the annuity income
received (i.e., the individual will have to contribute the income to the cost of his or
her services). If the remainder is received as a lump sum payment, the payment
received by the institutionalized spouse will be counted against the eligibility limit.
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If the amount is greater than the resource limit, Medicaid will no longer be
responsible for paying for the individual’s services because she will lose eligibility
for Medicaid.
Regaining eligibility will be dependent on the individual spending the lump
sum, and because of the restrictions on transfers to third parties under Section
1396p(c) (and without any longer having a community spouse), the individual will
likely end up using at least a portion of the payment to pay for her services.
Additionally, with the state named as a contingent beneficiary, if the
institutionalized spouse predeceases the community spouse and the community
spouse dies before the end of the annuity period, the state as the contingent
beneficiary receives the remaining value of the annuity to cover the amount of
Medicaid assistance paid on behalf of the institutionalized spouse during her
lifetime. The scenario just described contrasts sharply with the situation in which
the institutionalized spouse is the annuitant, names the community spouse as the first
remainder beneficiary, and then predeceases the community spouse, in which case –
more likely than not – the state will not benefit at all.
Thus, there may be good reasons not to penalize individuals – through a
period of past ineligibility or recoupment – where the community spouse has
previously designated an institutionalized spouse as the primary remainder
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beneficiary and the state as a contingent beneficiary. As just explained, there is no
(or very little) harm to the state where the institutionalized spouse is named as the
primary beneficiary. In fact, HHS’s understanding is that some states permit such
annuities, and in HHS’s view such annuities are not inconsistent with the policies
underlying Section 1396p(c)(1)(F).
5. Section 1396p(c)(1)(G) does not apply to an annuity purchased by or on behalf of the community spouse.
Section 1396p(c)(1)(G), like Section 1396p(c)(1)(F), sets forth certain
requirements that an annuity purchase must meet to avoid being considered a
transfer of assets to a third party for less than fair market value. But it does not
apply to an annuity purchased by or on behalf of a community spouse. By its
express terms, it refers to “an annuity purchased by or on behalf of an annuitant who
has applied for medical assistance,” which refers to an institutionalized spouse
annuitant (since that is the individual “who has applied for medical assistance” under
the Medicaid program). Section 1396p(c)(1)(G). This interpretation is also
reflected in agency guidance, which makes clear that Section 1396p(c)(1)(G) applies
only to a purchase of an annuity by or on behalf of an institutionalized spouse
annuitant and “does not apply to annuities for which the community spouse is the
annuitant.” Addendum B ¶ 2(C) (emphasis in original).
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CONCLUSION
For the foregoing reasons, the Court’s decision should reflect an analysis in
accordance with the answers provided above.
Respectfully submitted,
STUART F. DELERY Acting Assistant Attorney General MICHAEL S. RAAB 202-514-4053 /s/ Howard S. Scher HOWARD S. SCHER 202-514-4814 Attorneys, Appellate Staff Civil Division, Room 7239 Department of Justice 950 Pennsylvania Avenue, NW Washington, D.C. 20530-0001 JUNE 2013
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Sixth Circuit Rule 32(a) Certification
Pursuant to Fed. R. App. P. 32(a)(7)(C) and Sixth Circuit Rule 32(a)(7)(C), I
hereby certify that this brief is double spaced (except for extended quotations,
headings, and footnotes) and is proportionately spaced, using Time New Roman
font, 14 point type. Based on a word count of my word processing system, this
amicus brief contains fewer than 7,000 words. It contains 5,094 words excluding
exempt material.
/s/ Howard S. Scher Howard S. Scher Counsel for the Amicus Curiae, U.S. Dep’t of Health and Human Services
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Certificate of Service
I hereby certify that on this 28th day of June, 2013, I caused the foregoing
Brief for the United States Department of Health and Human Services as Amicus
Curiae to be filed by way of the ECF filing system. In addition, I also caused the
Amicus Brief to be served on counsel for the parties by way of the Court’s ECF
notification system.
/s/ Howard S. Scher Howard S. Scher Counsel for the Amicus Curiae, U.S. Dep’t of Health and Human Services
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ADDENDUM A
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ADDENDUM B
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Enclosure
Section 6012
Changes in Medicaid Annuity RulesUnder the
Deficit Reduction Act of 2005
Centers for Medicare & Medicaid ServicesCenter for Medicaid and State Operations
July 27, 2006
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Enclosure Highlights—Section 6012
I. Application RequirementsA. Disclosure of Interest in an AnnuityB. Requirement to Name the State as a Remainder Beneficiary C. Applications for Coverage of Long-Term Care Services in 1634 States D. Consideration of Income and Resources from an Annuity
II. Evaluation and Treatment of Purchases of Annuities and Certain Transactions Related to Annuities on or after February 8, 2006
A. Annuity-Related Transactions Other than Purchases.B. Requirement to Name the State as a Remainder Beneficiary on Annuities C. Annuities Purchased by or on Behalf of an Annuitant Who Applied for
Medical Assistance
III. Effective Date
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The Deficit Reduction Act of 2005 (DRA), P.L. 109-171, adds new requirements to the Medicaid statute with respect to the treatment of annuities purchased on or after the date of enactment, February 8, 2006, as well as certain other transactions involving annuities that take place on or after the date of enactment. The DRA amends section 1917 of the Social Security Act (the Act) which pertains to Liens, Adjustments and Recoveries, and
Transfers of Assets. The DRA adds new provisions to section 1917, which include:
• The requirement 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 requirement to name the State as a remainder beneficiary in annuities in which the applicant or spouse is the annuitant; and • Provisions for the treatment of the purchase of certain annuities as a transfer for less than fair market value.
I. Application Requirements
A. Disclosure of Interest in an Annuity
Section 6012(a) of the DRA adds a new section 1917(e) to the statute. Under the new section 1917(e)(1), all States, including those with “1634 agreements”, 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 equivalent 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.
If the State wants to limit its action to denial of payment for long-term care services, it must still ensure that enough information regarding the income and/or resources related to an annuity has been collected and verified in order to establish Medicaid eligibility under existing rules. The DRA does not provide applicants an option to withhold information about annuities that may impact the computation of resources or income. If the State cannot collect enough information about an annuity to allow the
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State to establish Medicaid eligibility, the State should deny eligibility entirely based on the applicant’s failure to cooperate in accordance with the State’s existing policies.
In cases where an unreported annuity is discovered after eligibility has been established and after payment for long-term care services has been made, the State should take appropriate steps to terminate payment for long-term care services as discussed above, including appropriate notice to the individual of adverse action. The State should also consider whether other steps should be taken including, if appropriate, possible civil and criminal charges, and potential recovery of benefits which were incorrectly paid.
B. 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 remainder beneficiary.
• 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.
C. Applications for Coverage of Long-Term Care Services in 1634 States
States that have entered into an agreement under section 1634 of the Social Security Act must ensure that any individual eligible for medical assistance under that agreement who wishes to receive coverage of long-term care services completes an application which includes the disclosure required under the new section 1917(e)(1) and the statement required under the new section 1917(e)(1) and (2). Failure to complete an application form that meets these requirements will not affect the individual’s eligibility for Medicaid; however, the individual will not be eligible for coverage of long-term care services unless the appropriate form is completed and signed.
D. 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 (see II. Evaluation and Treatment of Purchases of Annuities and Certain Transactions On or After February 8, 2006 below for further information about treating the purchase of an annuity as a transfer of assets), 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.
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II. Evaluation and Treatment of Purchases of Annuities and Certain Transactions Related to Annuities On or After February 8, 2006
A. 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 divorce of a remainder beneficiary, and other similar circumstances. Changes which occur based on the terms of the annuity which existed prior to February 8, 2006, and which do not require a decision, election or action to take effect are likewise not subject to the DRA.
For example, if an annuity purchased in June 2001 included terms which require distribution to begin five years from the date of purchase, and payouts consequently begin, as scheduled, in June 2006 this will not be considered a transaction subject to the DRA, since no action was required, post-enactment, to initiate the change. Lastly, changes which are beyond the control of the individual, such as a change in law, a change in the policies of the issuer, or a change in the terms based on other factors, such as the issuer’s economic conditions, are not considered transactions that cause the annuity to be subject to the terms of the DRA.
B. Requirement to Name the State as a Remainder Beneficiary on Annuities
Section 6012(b) of the DRA adds a new section 1917(c)(1)(F) which provides that the purchase of an annuity shall be treated as a disposal of an asset for less than fair market value unless the State is named as a remainder beneficiary. Unlike the new section 1917(c)(1)(G) added by section 6012(c) of the DRA (discussed in detail below), section 1917(c)(1)(F) does not restrict application of its requirements only to an annuity purchased by or on behalf of an annuitant who has applied for medical assistance for nursing facility or other long term-care services. Therefore, we interpret section 1917(c)(1)(F) as applying to annuities purchased by an applicant or by a spouse, or to transactions made by the applicant or spouse.
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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. Under the new section 1917(e) (see section I.B. above) the State must notify the issuer of the annuity of the State’s right as the preferred remainder beneficiary. 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 market value. We interpret the statute to mean that the full purchase value of the annuity will be considered the amount transferred.
C. 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 sub-paragraph (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. 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 the annuity meets any of the following conditions:
1. The annuity is considered either:• An individual retirement annuity (according to Sec. 408(b)) of the Internal Revenue Code of 1986 (IRC), or• A deemed Individual Retirement Account (IRA) under a qualified employer plan (according to Sec. 408(q) of the IRC).
OR
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2. The annuity is purchased with proceeds from one of the following: • A traditional IRA (IRC Sec. 408a); or • Certain accounts or trusts which are treated as traditional IRAs (IRC Sec. 408 §(c)); or• A simplified retirement account (IRC Sec. 408 §(p)); or • A simplified employee pension (IRC Sec. 408 §(k)); or • A Roth IRA (IRC Sec. 408A).
OR
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.
To determine that an annuity is established under any of the various provisions of the Internal Revenue Code that are referenced in items 1. and 2. above, rely on verification from the financial institution, employer or employer association that issued the annuity. The burden of proof is on the institutionalized individual or his or her representative to produce this documentation. Absent such documentation, the purchase of the annuity will be considered a transfer for less than fair market value which is subject to a penalty. We interpret the statute to mean that the full purchase value of the annuity will be considered the amount transferred.
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. These tables may be accessed at http://www.ssa.gov/OACT/STATS/table4c6.html.
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 transferred, 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.
III. Effective Date
These provisions apply to purchases of annuities, and certain transactions related to annuities, that occur on or after the date of enactment of the DRA, February 8, 2006.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
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notify applicants and recipients of the State’s rights regarding annuities purchased after the date of enactment.
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