As an insurance agent or advisor, you’re likely familiar with Qualified Longevity Annuity Contracts, or QLACs. Interest in this product has surged in recent months due to the passing of the SECURE Act 2.0. This legislation modified the requirements of a QLAC, leading agents involved in long-term care planning to wonder how this annuity compares to a traditional Medicaid Compliant Annuity and whether it can be used to accelerate Medicaid eligibility for their clients.
What is a Medicaid Compliant Annuity?
The Medicaid Compliant Annuity (MCA) is a single premium immediate annuity. It is used as a spend-down tool used in crisis Medicaid planning by converting otherwise countable assets into an income stream to help those in a nursing home qualify for benefits. In most cases, income from the annuity starts within 30 days of the contract’s issue date. The owner has no access to cash and cannot surrender the contract after it is purchased.
So long as the annuity meets Medicaid’s requirements, it is not considered a divestment or an asset. It is only considered income to the owner once the payments begin. To be compliant, an MCA must:
- Be irrevocable
- Be non-assignable
- Provide equal payments
- Be actuarially sound
- Designate the state Medicaid agency as a beneficiary in the proper position
What is a Qualified Longevity Annuity Contract?
A Qualified Longevity Annuity Contract (QLAC) is a tax-qualified deferred income annuity in which the owner invests retirement funds in exchange for future income. Payments do not begin until the owner reaches a certain age, and the contract provides income to the owner for the rest of their lifetime. People can fund up to $200,000 into a QLAC. The owner does not have access to any cash value and cannot surrender the contract once it is purchased, similar to an MCA. Often referred to as “longevity insurance,” this product is designed to ensure seniors don’t outlive their income.
Under SECURE 2.0, payments from a QLAC can be deferred until age 85. In that QLACs are funded with tax-qualified dollars, this means the owner is exempt from taking Required Minimum Distributions (RMDs) on their account until the scheduled payments begin. With RMDs normally beginning at age 73, owners of a QLAC can benefit from delaying their RMDs for several additional years (though RMDs would still be owed on the client’s other retirement accounts).
Tax-Qualified Funds and Medicaid Compliant Annuities
Rules surrounding an MCA differ depending on the tax status of the funds. Those funded with non-qualified money must meet all the typical requirements noted above. However, the law provides some leniency when the annuity has been funded with tax-qualified money. The specific rules may vary by state, but in most cases, the annuity only needs to name the state Medicaid agency as beneficiary.
Most importantly, the actuarially sound requirement does not apply. Lifetime payouts on annuities are typically not considered actuarially sound because the owner does not usually receive their full investment amount back within their Medicaid life expectancy. But, if the annuity is funded with tax-qualified funds, agents may be able to bypass this requirement. Therefore, a QLAC, which is automatically structured with a lifetime payout, could be considered Medicaid compliant.
Can a QLAC be Used in Medicaid Planning?
The industry needs more experience and practical application in using QLACs to answer this question. MCAs were specifically developed to work within the confines of the Medicaid program. QLACs, however, are not designed for Medicaid planning purposes—it’s designed as a retirement investment and income strategy for seniors. The goal is to keep money in the QLAC as long as possible and provide income to a client in their elder years.
In theory, since tax-qualified annuities do not need to be actuarially sound, QLACs could have utility as a Medicaid planning tool so long as they name the state Medicaid agency as a beneficiary where required. However, their use cases may be limited.
With the state Medicaid agency being the primary beneficiary in most cases, keeping money in the annuity leaves it exposed to estate recovery. With a traditional MCA, our goal is to get the money out of the annuity in a reasonable timeframe to mitigate this risk. Ideally, the owner of an MCA outlives the term of the annuity, and they receive their original premium amount back. They then have liquidity and access to other investment options as they see fit. This is accomplished by structuring each MCA with a specific term (often five years or less) that aligns with the client’s specific case facts.
That said, there may be a few use cases for a QLAC in place of an MCA:
States Where IRAs are Exempt
In states where IRAs are exempt for Medicaid purposes and no beneficiary requirement would apply, clients can use a QLAC to reduce and delay their RMDs, especially if those payments would otherwise go to the nursing home.
An Alternative to the “Name on the Check Rule”
The “Name on the Check Rule” is a strategy used when an institutionalized spouse owns an IRA. Because ownership cannot be changed, the IRA is annuitized, and the community spouse is designated as payee. The goal is to shift the income to the community spouse so it does not become part of the institutionalized spouse’s Medicaid co-pay. The Deficit Reduction Act of 2005 also allows the community spouse to be named primary beneficiary ahead of the state Medicaid agency on the contract.
When working with an institutionalized spouse who is younger than the QLAC age threshold of 85, a QLAC may be useful in place of this strategy. Rather than shift income to the community spouse, the client can delay any income from the QLAC until they turn 85. The community spouse would also be named the primary beneficiary of the annuity.
This option makes the most economic sense when it is assumed that the institutionalized spouse will pass away before age 85 and before the QLAC’s lifetime payments begin. It is unclear whether insurance carriers who sell QLACs would allow a spouse to be named payee as we do with the “Name on the Check Rule.” If not, any payments from the QLAC would become part of the institutionalized spouse’s Medicaid co-pay.
How Should Agents Proceed?
Until there is more information and experience in using QLACs in Medicaid planning within the long-term care planning industry, a traditional MCA may make more sense for your clients. While there may be some strong use cases for QLACs in Medicaid planning, the nature of the contract and its lifetime payout requirement will always leave room for risk and uncertainty. If you’re considering using a QLAC in the context of Medicaid planning, we highly recommend you speak with an attorney in your state to discuss if and when this product may be appropriate for your client.