Treat Annuities According to Change 2 Rules
As a site owner or manager, you may have come across residents who receive annuities. If so, you must ask how the annuity should be treated—that is, as income or as an asset, or whether to exclude it entirely based on which it is, says affordable housing consultant Elizabeth Moreland, an expert in HUD rules.
According to HUD Occupancy Handbook 4350 REV-1, CHG 2, issued in 2007, annuities must be treated either as income or an asset, but never as both [Chap. 5, §5-7, par. G(2)]. Here are three rules to remember:
1. An annuity account is considered “income” if the resident receives it on a regular, periodic basis and if the resident cannot access the full amount of the capital held in the annuity account.
2. HUD considers the annuity account to be an asset if the resident holds the full amount in an interest-bearing account and has access to the full amount of the capital (even if the resident decides to withdraw portions periodically) in the annuity account.
3. An annuity is excluded entirely if the annuity is held in an interest-bearing account, but the resident does not have access to the full amount or must repay any amount withdrawn.
You must treat each type of annuity differently, Moreland says.
Annuities Treated as Assets
According to the handbook, if the resident has access to the full amount of the annuity (that is, can withdraw it entirely), the annuity account must be treated as an asset, whether or not the resident is receiving periodic payments [Chap. 5, §5-6, par. O]. Whether or not the resident intends to withdraw the full amount is irrelevant; the mere possibility makes the annuity account an asset.
If a resident maintains funds in the account, receiving periodic payments but having access to the full amount, you must treat the annuity account as an asset. And you must count as an asset the accessible amount minus the penalties to convert it to cash, because the annuity is actually functioning as a certificate of deposit (CD).
When to Exclude Annuity
If the resident cannot access the full amount of the annuity until he or she retires or leaves employment, you must document this fact and exclude the annuity entirely. The handbook states that such annuities, like retirement accounts, “are counted as assets if the money is accessible to the family member. For individuals still employed, accessible amounts are counted even if withdrawal would result in a penalty. However, amounts that would be accessible only if the person retired are not counted” [Chap. 5, §5-6, par. G(4)].
If the annuity account has limited accessibility, meaning that the resident may access funds under limited circumstances—such as buying a house or paying school loans—and has to repay the money, you must exclude it entirely. The handbook states, “While an individual is employed, count only amounts the family can withdraw without retiring or terminating employment” [Chap. 5, §5-7, par. G(4)(c)(1)].
Further reading: See “HUD Changes Rules on Periodic Payments from Annuities, Investments,” in the January/February 2008 issue of our sister publication, Assisted Housing Financial Management Insider, p. 1.
10 Steps for Determining How to Treat an Annuity
To make it easier to analyze how to treat annuities, use the following “decision tree,” created by affordable housing consultant Elizabeth Moreland. Take these steps to determine whether an annuity account is income, an asset, or an excludable item, and, if counted, to calculate it correctly.
Step 1: Ask whether the resident gets the money from the annuity account in regular, periodic payments. If the resident answers yes, go to Step 2. If the resident answers no, skip to Step 6.
Step 2: Ask whether the resident has access to the full amount of the annuity. If the resident answers yes, skip to Step 7. If the resident answers no, go to Step 3.
If the resident answers no to Step 1 or answers yes to Step 2, you must treat the annuity account as an asset.
Step 3: Verify that the resident does not have access to the full amount of the annuity. Go to Step 4.
Step 4: Verify the amount of each periodic payment received before any deductions and the frequency of payments. Go to Step 5.
Step 5: Annualize the periodic payment and add that amount to the tenant income certification (TIC) or your calculation worksheet, and perform your standard income calculations. You have treated the annuity as income and can stop here.
Step 6: Verify that the resident has access to the full amount of the annuity account. If so, go to Step 7. If the resident does not have access to the account (or the money can be accessed only as a loan), you must exclude the account as income. Document this fact in the file. Do not add this account to the TIC.
Step 7: Verify the amount in the account that is accessible, any penalties incurred to convert it to cash, and any interest, dividends, or other asset income the account earns. As these amounts constitute an asset, you must verify the amounts every year. You are unable to predict what this amount will be in the future. Go to Step 8.
Step 8: Subtract the penalties from the amount that is accessible to the resident. That amount is the asset's cash value. Go to Step 9.
Step 9: Calculate the asset income (if applicable). Go to Step 10.
Step 10: Place the cash value and asset income in the appropriate columns in the asset calculation worksheet on the TIC or on your calculation worksheet, and complete your asset calculation as normal.
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