802 F.3d 497
3rd Cir.2015Background
- Three Pennsylvania residents (Claypoole, Sanner, Zahner) bought short-term annuities shortly after making gifts that triggered Medicaid transfer penalties; DHS treated the annuities as available resources and imposed additional periods of Medicaid ineligibility.
- Claypoole and Sanner purchased ELCO annuities (14 months and 12 months); Claypoole’s husband bought a MetLife annuity with a nonassignment clause. Each annuity had relatively short terms and broker fees.
- Plaintiffs sued DHS under 42 U.S.C. § 1983; the district court found the annuities were sham transactions (trust‑like/transfers for less than fair market value) and also held a Pennsylvania statute making all annuities assignable was preempted by federal Medicaid law.
- On appeal the Third Circuit affirmed preemption of the Pennsylvania anti‑assignment statute but reversed the district court’s holding that the ELCO annuities were resources, concluding they fall within the DRA ‘‘safe harbor.’n
- Key statutory framework: the Deficit Reduction Act (DRA) amended 42 U.S.C. § 1396p to exclude from assets certain annuities that (1) name the State as remainder beneficiary, (2) are irrevocable and nonassignable, (3) are actuarially sound, and (4) pay equal periodic payments with no deferral or balloon.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Do the contracts qualify as "annuities" under the DRA? | Plaintiffs: yes — contracts exchange a sum for periodic payments (term of years) and thus are annuities. | DHS: too short and not investment products; broker fees make them net losses, so not genuine annuities. | Court: They are annuities — term of years need not have a multi‑year floor; short term does not preclude being an annuity. |
| Are the annuities "actuarially sound" (safe harbor requirement)? | Plaintiffs: an annuity is actuarially sound if its term does not exceed the annuitant’s reasonable life expectancy; short terms here satisfy that standard. | DHS: terms are far shorter than SSA life‑expectancy tables; not commensurate or coincident — thus not actuarially sound. | Court: Actuarial soundness under statutes/Transmittal 64 requires only that term not exceed life expectancy; short terms here satisfy the safe‑harbor test. |
| Were the annuities trust‑like / transfers for less than fair market value (i.e., shams)? | Plaintiffs: not trust‑like; no fiduciary, contractual payment obligation to ELCO — and Secretary has not designated annuities as trusts. | DHS: purchases were sham transactions to shelter assets and should be treated like transfers for less than fair market value. | Court: Rejected DHS’s trust‑like argument — no Secretary specification and annuities here are contractual payment streams, not trusts; sham/transfer finding reversed. |
| Is Pennsylvania’s statute making anti‑assignment clauses void (62 Pa. Stat. § 441.6(b)) preempted by federal Medicaid law? | Plaintiffs: Yes — federal law protects nonassignable irrevocable annuities from being counted; state law imposing assignability conflicts with federal rules. | DHS: DRA allows states discretion; §1396p(e)(4) shows states may treat annuities as resources; Pennsylvania can make annuities assignable. | Court: State law is preempted to the extent it conflicts with the federal safe‑harbor scheme; Pennsylvania may not impose more restrictive rules that nullify federally protected nonassignable annuities. |
Key Cases Cited
- NationsBank of N.C., N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251 (definitional background: annuity as payment stream for fixed term or life)
- James v. Rickman, 547 F.3d 214 (3d Cir.) (recognizing protection for community spouse nonassignable annuities)
- Lewis v. Alexander, 685 F.3d 325 (3d Cir.) (Medicaid is a comprehensive federal asset‑counting regime; states cannot impose more restrictive rules)
- Morris v. Oklahoma Dep’t of Human Servs., 685 F.3d 925 (10th Cir.) (discussion of Transmittal 64 and safe‑harbor treatment)
- Geston v. Anderson, 729 F.3d 1077 (8th Cir.) (Secretary has not specified that annuities are treated as trusts; federal preemption analysis)
- Heffner v. Murphy, 745 F.3d 56 (3d Cir.) (standard of review for summary judgment and statutory interpretation)
- United States v. Wexler, 31 F.3d 117 (3d Cir.) (sham‑transaction context referenced by DHS/dissent)