When the Deficit Reduction Act of 2005 changed 42 U.S.C. § 1396p, new restrictions were imposed on promissory notes. Subsection (c)(1)(I) note provides that the purchase of a promissory notes is treated as a transfer subject to the penalty rules unless the note meets the following guidelines:

(I) For purposes of this paragraph with respect to a transfer of assets, the term “assets” includes funds used to purchase a promissory note, loan, or mortgage unless such note, loan, or mortgage—

(i) has a repayment term that is actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration)

(ii) provides for payments to be made in equal amounts during the term of the loan, with no deferral and no balloon payments made; and

(iii) prohibits the cancellation of the balance upon the death of the lender.

In the case of a promissory note, loan, or mortgage that does not satisfy the requirements of clauses (i) through (iii), the value of such note, loan, or mortgage shall be the outstanding balance due as of the date of the individual’s application for medical assistance for services described in subparagraph (C).

Georgia Promissory Notes

Under Section 2313 of Georgia’s ABD Medicaid Manual, a promissory note is not a resource if it is written, actuarially sound, amortized, non-negotiable, does not contain a prepayment clause and prohibits cancelation upon the death of the lender. If it meets all of these requirements, then the note is not a resource and the monthly payments are treated as unearned income. See Section 2313-7 (Steps 3 and 4). If the note is secured, then it is a countable resource if it has value and can not be sold so most notes prepared as part of a Medicaid plan are unsecured. If the note does not meet all of the criteria above, whether secured or unsecured, then it is treated as a transfer of resources and is subject to the penalty rules if created during the look back period. Thes rules are conistent with POMS SI 01120.220.C.2.c.

Actuarially Sound

Actuarially sound means that the average number of years of expected life remaining for the owner of the contract must be equal to or more than the number of years stated in the contract to be paid. Social Security’s Period Life Table is used, although Georgia ABD Manual Section 2339 directs caseworkers to subtract 1 year when determining whether the contract is actuarially sound.

Amortized

Amortized means the payments are equal with a reasonable interest rate (at least 1% interest) so that the last payment is the same as the previous payments. For Medicaid purposes, payments must be monthly only. Any other schedule of payments is not considered as amortized.

Non-Negotiable