You asked for an update of OLR Report 2001-R-0941 to include the effects on seniors' eligibility for the state tax freeze program and federally financed housing of payments from the Anthem-Blue Cross demutualization.

SUMMARY

About 67,000 seniors will receive stock or cash payouts as a result of Anthem-Blue Cross' switch from a mutual to a stock company. Average payment data is not available and amounts will vary widely, but some could be as high as $ 10,000. The company will calculate each individual's entitlement based on how long the person had continuously owned the policy during the 10 years up to November 2, 2001. For federal and state income tax purposes, some recipients who choose the cash may have to pay a capital gain tax on it depending on their income. They will not have to pay tax on stock until they sell it.

The effect on eligibility for assistance can vary, to some extent, depending on whether the program treats the payout as income or an asset. It appears that all assistance programs will treat the stock as an asset, but different programs will treat the cash payouts differently.

The Department of Social Services (DSS)- administered Medicaid, State Supplement, Food Stamp, and Qualified Medicare Beneficiary (and related "dually eligible") programs will treat a cash payout as an asset, but will not count it immediately. People will have a brief opportunity to bring their assets back down to program limits.

The rental assistance program (RAP), elderly RAP, and state-assisted elderly housing programs will also treat the money as an asset, which is not counted because these programs have only income limits. While the payment will not affect people's ability to continue to live in elderly housing, if it is substantial enough to generate income, it could affect the amount of rental subsidy they receive the following year. The federal Housing and Urban Development Department (HUD) will treat cash payouts as assets as long as they are held in a bank account. If an individual does not do this, the payout will be considered income and could affect eligibility for Section 8 assistance and HUD-sponsored senior housing.

The state's energy assistance programs will also treat the payment as an asset, but will add assets over the established limits to the applicant's income when determining eligibility.

ConnPACE, on the other hand, will apparently treat the cash payment as income (the program does not have an asset limit). But it will probably not affect many participants' eligibility because the program bases eligibility either on the prior year's income or, if that is too high, on the projected income in the year of application.

The "circuit breaker" homeowners' assistance, renters' rebate, tax freeze, and additional veteran's exemption programs (which have income caps but no limits on assets) will also likely treat some or all of the money payout as a capital gain, just as the Internal Revenue Service (IRS) does, and require it to be considered income for both their eligibility and benefit determinations.

For programs that have asset limits and count the payouts as assets, people could avoid becoming ineligible if they are close to these limits by spending the money soon after they receive it. For instance, if they are Medicaid or State Supplement recipients, they could spend it on "excluded assets," and certain other permitted transactions, described in more detail below. Or, they could pay it to the state and continue uninterrupted in the program.

People will have to report cash payouts received as income for the few programs that count them as income. If their incomes are already close to the programs' limits, the payouts could affect their eligibility for the following year, and spending the money would not reduce the income they have to report for that year. People who are participating only in these programs and are close to the income limit might want to consider choosing the stock, which would be considered an asset, and retaining it or selling it gradually over several years to reduce the impact on their income.

SENIORS AFFECTED BY DEMUTUALIZATION PAYMENTS

The stock and cash payouts affect about 67,000 seniors who have Medicare supplement ("Medigap") or other individual health insurance policies with Blue Cross-Blue Shield, according to Christine Ciarleglio, director of government relations for the company. Seniors covered by group policies will not receive payouts.

AVERAGE PAYMENT

Calculating an "average" payment is difficult, according to Ciarleglio, and this type of information will not be available until the end of the year, when all the payouts have been made. She estimates that someone who has had a Medigap insurance policy with Blue Cross-Blue Shield for over 10 years could receive between $ 5,000 and $ 10,000, depending on the type of policy.

PAYMENT CALCULATION

The company will calculate the payment according to a complex formula, which takes into account the type of policy and the number of years the individual has owned the policy. To determine who is eligible, the company looks back 10 years. The maximum number of shares go to people who have continuously had policies with the company for 10 years up to November 2, 2001. The minimum number of shares (25) go to people who had policies from June 18, 2001 (when the company's board voted to demutualize) up to November 2, 2001. For those who choose a cash payment or make no choice, the company converts their number of shares to money at the rate of $ 36 a share.

TAX IMPLICATIONS

People who choose stock will not have to pay federal tax on the stock until they later sell it. If they choose cash, they may have to pay federal and state short- or long-term capital gains tax on all or part of it, depending on their income levels and how long they have had the policies, according to a question and answer booklet available from the company at: http: //www. anthem. com/jsp/maroon/demutualization/mis_q&a. pdf.

Many people receiving state assistance will not have to pay federal or state taxes on the capital gains from this because their total incomes are so low that they don't have to file tax returns. But people participating in programs with higher income limits may have to pay taxes on it.

For more detailed information on tax consequences, people should consult the IRS, a lawyer, or tax advisor.

EFFECT ON ASSISTANCE PROGRAM ELIGIBILITY

We do not currently know how many seniors receiving stock or cash payouts are participating in an assistance program. For those who do, the payments will be treated as either an asset or income depending on the program.

Programs Treating Cash Payouts as Assets

Medicaid, Home Care, State Supplement. DSS will count the cash payment as an asset in the (1) Medicaid (including long-term care assistance in nursing homes, the home care program, and people receiving Medicaid for other medical services in the community) and (2) State Supplement programs (see attached September 5, 2001 DSS directive). Although participants have to report the payment within 10 days of receiving it, DSS will not count it as an asset in the month the person receives it. So, if people are close to the income limit for a program, this is not a problem. But if they are close to the asset limit in the first month, they have to reduce their assets back to the required level by the end of the following month to continue in the program. (For instance, asset limits are $ 1,600 for a single Medicaid recipient living in a nursing home or in the community; asset limits are higher for couples where one spouse is in a nursing home and one still lives at home. ) See below for a discussion of options for reducing assets and the effect of "look back" periods.

Generally, people who are permanently on Medicaid do not need to maintain their Medigap insurance, since Medicaid pays for their medical care that Medicare does not cover (this includes State Supplement recipients, who are automatically eligible for Medicaid). Consequently,

many, but not necessarily all, program participants may have previously discontinued their Medigap coverage and will not qualify to receive the demutualization payouts.

Food Stamps. The state-administered federal Food Stamp program will count a cash payout as an asset and follow rules similar to those that apply to Medicaid for reducing assets, although the precise amount of time people have to spend the assets before they lose eligibility appears to depend on the time of the month when they receive the payment. DSS has to give recipients 10 days' notice before discontinuing benefits. So if the payment happens near the beginning of the month the recipient may lose benefits for the following month. If they receive the payment near the end of the month, the 10-day required notice could mean that they would still receive benefits in the following month. The asset limit for this program is $ 2,000 but $ 3,000 if one person in a household is at least age 60. They can spend the money on basically the same list of excluded assets as for Medicaid and the State Supplement (applicants are ineligible for a period of time if they spend or transfer assets illegally while on the program or within three months before applying for it).

Qualified Medicare Beneficiary Program (QMB). The QMB program and related "dually eligible" programs will also treat the cash payments as assets. For example, the QMB program uses Medicaid money to pay for Medicare monthly premiums and deductibles for poor seniors who meet certain income and asset limits. Asset limits are $ 4,000 for single people and $ 6,000 for couples. QMB participants often do not need to keep up their Medigap insurance policies, since this program pays for the same things as many of those policies. Thus, it seems that few of them will receive demutualization payments. The QMB program has generally the same rules for asset reduction as Medicaid and most people who are in it are also in some other type of Medicaid program.

Elderly RAP and Elderly Housing. The elderly Rental Assistance Program (RAP), administered by the Department of Economic and Community Development (DECD), will treat the payments as assets, according to Mike Santoro at DECD. This program is only available to people living in elderly housing that DECD subsidizes. To be eligible to move into this housing (including congregate housing), seniors' incomes must be less than 80% of their area's median income (they are not evicted if their income later increases). Once there, they must pay in rent the greater of the complex's base rent (which varies from place to place, but is often $ 250 to $ 275) or 30% of their income. Elderly RAP assistance is available for lower income seniors in those complexes that participate in the program only if the base rent is more than 30% of their income. While neither DECD elderly housing nor elderly RAP assistance has an asset limit, the cash payments could affect the size of the elderly RAP rental subsidy because assets are used to calculate interest income at the annual recertification.

Federal Section 8 and HUD-Sponsored Senior Housing. HUD will treat a stock payout as an asset, unless the recipient sells the stock in which case it will be treated as income. HUD will treat a cash payout as an asset only if the recipient places it in a bank account and does not use it. If cash is not held in a bank account, HUD will consider it income "derived from an asset," which will increase the recipient's income level and may affect his eligibility for Section 8 or federal public housing. If an individual's assets are greater than $ 5,000, HUD uses a formula to determine how interest or other income from the assets will be added to his annual income. This is a standing HUD policy and not the result of the Anthem payouts.

Energy Assistance. The DSS-administered energy assistance programs will treat the demutualization stock or payments as assets, not income. But under these programs, assets over $ 10,000 for homeowners and $ 7,000 for renters are added to the applicant's income to determine eligibility. So the payment could affect eligibility in some circumstances if people retain the stock or keep the money in their bank accounts until they have to reapply for the assistance.

Programs Treating Cash Payouts as Income

ConnPACE. ConnPACE (Connecticut Pharmaceutical Assistance Contract to the Elderly and Disabled) will apparently treat the payment as income, according to Greg Fitzpatrick, lead planning analyst in DSS's pharmacy assistance division. The program has no asset limit. Eligibility for a particular year is based on the prior year's income, but if that exceeds program limits, people can alternatively use the current year's income to qualify. This alternative for calculating eligibility means that most likely not too many people will become ineligible because of the one-time cash payment. For example, if they apply in January 2002 and the payment makes their 2001 income rise too high, they can instead use their projected income for 2002, which will not include that payment. There could be a few situations where people are so close to the income limit that if they put it in the bank the interest would raise their income above the cap by the time they reapply for the program the following year. This is, however, less likely to happen for 2002 applications because recent legislation (PA 01-2, June Special Session) just mandated a considerable jump in the limits on April 1, 2002.

Circuit Breaker and Renters' Rebate. The Homeowners' Elderly/Disabled Tax Relief ("circuit breaker"), Tax Freeze, Renters' Rebate for Elderly/Disabled Renters, and additional veteran's exemption programs, all administered by the Office of Policy and Management (OPM) follow federal IRS rules for determining income, according to OPM's Cathy Rubenbauer. The programs have no limit on assets, only income. Thus, it appears that if people choose stock, it will not be a problem until they sell it. But if they choose the money, part or all of it would most likely be considered a capital gain and have to be added to their income, thus potentially affecting their eligibility or the amount of their benefit. This could be a problem for people who are close to the income caps in the year they receive it. These programs look only at the prior year's income and do not appear to have an option of using the current year's income, as ConnPACE does. Governor Rowland announced on January 16 that he will seek legislation to exclude Anthem payments from consideration in determining eligibility for these programs.

HOW PEOPLE CAN SPEND THE MONEY TO AVOID ELIGIBILITY PROBLEMS

If people are receiving Medicaid or State Supplement benefits, they could spend the cash payment on acquiring assets that are not counted when it comes to determining eligibility. These "excluded assets" include such things as personal effects, essential household items, burial plots, up to $ 1,200 for a revocable burial fund or up to $ 5,400 for an irrevocable burial fund, one motor vehicle under some conditions (particularly if they are handicapped and it is modified to transport them), up to $ 1,500 worth of life insurance, and any amount of term life insurance. If they are still living in their own home, they could use it to make home improvements or modifications, since their principal residence is an excluded asset.

Medicaid and State Supplement recipients could also transfer the money to someone else, but only for fair market value or "other valuable consideration. " PA 01-2, June Special Session, recently limited allowable asset transfers in exchange for other valuable consideration to those where the consideration received is at least as valuable as the transferred asset. Thus, recipients could not usually just give the money away because they would be subject to a penalty of ineligibility for the period of time that the money would pay for care or services (Department of Social Services Uniform Policy Manual, Sec. 3028. 10 -3028. 25 and 4020. 10). They also cannot refuse to accept the money from the insurance company because DSS requires them to seek payments to which they are entitled. If they have nothing to spend it on and are concerned about jeopardizing their eligibility, they have the option of simply paying it as a "voluntary reimbursement" to DSS by making a check out to the DSS commissioner and sending it to their regional DSS office. This would then enable them to continue uninterrupted in the program.

State law generally prohibits applicants for Medicaid and the State Supplement from transferring assets for less than fair market value for a certain period of time before applying for assistance. This period is called the "look back" and it is (1) three years for people applying for Medicaid coverage of long-term care in a nursing home or home care (five years if they transfer the assets to a trust) and (2) two years for people applying for Medicaid in the community and for the State Supplement.

In the case of Medicaid long-term care and the State Supplement (but not Medicaid in the community), people who make illegal transfers during this time become ineligible for services for the period of time that the asset or money would have covered. (OLR Reports 2000-R-1089 and 2001-R-0674 discuss transfer of asset rules. ) This "penalty period" currently starts on the date of the transfer. (PA 01-2, June Special Session, required DSS to seek a federal waiver to change the penalty period's start date from the date of the transfer to the date a nursing home resident is otherwise approved for Medicaid rather than when she makes the transfer. Since the DSS application has not yet been approved, Anthem Blue Cross payouts would be subject to the current rule. )

If people have questions about whether a specific purchase or transaction they wish to make would be allowed, they should check with their regional DSS office or an elder law attorney.

HN/SS: ro