Medicaid and Annuities: What the Rules Actually Say

Medicaid can treat an annuity differently depending on how it is built. Under federal law, buying an annuity is treated as a transfer for less than fair market value unless the state is named as a remainder beneficiary as the statute describes; a separate test, for an annuity bought by or for someone who has applied for long-term-care Medicaid, asks whether it is a certain retirement-account annuity or is irrevocable and nonassignable, actuarially sound, and pays equal amounts.

Most people facing this question are sitting with a hard fact: a parent or a husband or wife needs nursing-home care now or soon, and the savings the family built over decades look as if the cost of care could use them up. Somewhere in that search, the word "annuity" comes up, often from a relative, a financial adviser or an article, as a way to turn savings into income without losing Medicaid eligibility. The family is trying to work out whether that is real, what the law actually requires, and what an annuity cannot do.

This page explains the federal rules on annuities in Medicaid long-term-care planning, how they connect to the protections for a spouse at home, the look-back period and estate recovery, and where each state's own rules decide the outcome.

What a Medicaid Annuity Is — and What It Is Not

An annuity is a contract: a person pays a lump sum to an insurance company, and in exchange the company pays back a stream of regular payments, usually monthly, over a set term. Nothing about the contract itself is special to Medicaid. What makes it matter is how Medicaid counts money.

Medicaid for long-term care looks at two things separately: what a person owns and what a person receives. A countable asset is property the state counts toward its Medicaid resource limit, such as a bank balance or an investment account, as opposed to an exempt asset the state leaves out. A lump sum in savings is generally a countable asset. Once that same money is turned into monthly payments, the payments are generally treated as income instead. That conversion is the reason annuities come up in Medicaid planning at all, and it is also why the income side of the rules, covered further down, still matters.

An ordinary commercial annuity bought for retirement may let the owner cash it in, change the payment schedule, defer payments for years or name any beneficiary. Federal Medicaid law treats an annuity with those features very differently from one built to meet its specific conditions. The difference is not a matter of label. It depends on what the contract actually says.

Federal law sets the framework, and each state runs its own Medicaid program with its own rules on assets, income, transfers and recovery. CMS describes Medicaid as "a joint federal and state program" on its eligibility policy page. This page covers Medicaid for long-term care only. It does not cover Medicare, private long-term-care insurance or veterans' benefits.

The Federal Statutory Framework: 42 U.S.C. § 1396p and the Deficit Reduction Act

The Deficit Reduction Act of 2005 rewrote the federal rules on transfers of assets and annuities, and those rules now sit in 42 U.S.C. § 1396p. CMS explained the changes to state Medicaid directors in a July 27, 2006 letter that lists, among its topics, "Extension of the look-back period to 60 months," the "Start date of the penalty period" and the "Requirement to name the State as a remainder beneficiary."

The starting rule is that giving away assets for less than they are worth can make a person ineligible for nursing-home-level Medicaid for a period of time. The statute reaches back to a look-back date that, for any disposal of assets made on or after February 8, 2006, is 60 months before the person is both institutionalized and has applied for Medicaid (42 U.S.C. § 1396p(c)(1)(B)(i)).

Annuities are pulled directly into that rule. Under 42 U.S.C. § 1396p(c)(1)(F), "the purchase of an annuity shall be treated as the disposal of an asset for less than fair market value unless" the state is named as remainder beneficiary as the statute describes. Under § 1396p(c)(1)(G), an annuity bought by or for someone who has applied for nursing-home or other long-term-care Medicaid also counts as an asset for transfer purposes unless it fits one of two groups. The first group covers certain individual retirement annuities and annuities bought with proceeds from certain retirement accounts, including an IRA, a simplified employee pension or a Roth IRA. The second covers an annuity that:

"(I) is irrevocable and nonassignable; (II) is actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration); and (III) provides for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made."

These are two separate tests. Under § 1396p(c)(1)(F), the state must be named as remainder beneficiary, in the first position for at least the total medical assistance paid on behalf of the institutionalized individual, or in the second position as described below. Under § 1396p(c)(1)(G), an annuity bought by or for an applicant is counted as an asset for the transfer rules unless it is a retirement-account annuity of the kind listed above or meets all three conditions quoted above. A purchase that fails (F) is treated as a disposal for less than fair market value, one that fails (G) is counted as an asset under the transfer rules, and in either case the penalty rules described below can apply.

Spousal-Impoverishment Rules and Annuities: 42 U.S.C. § 1396r-5

A community spouse is the husband or wife who stays at home while the other spouse, the institutionalized spouse, receives long-term care. Congress wrote special rules for married couples so that the spouse at home is not left with nothing. CMS's spousal impoverishment page describes the aim as preventing a situation that leaves "the spouse who is still living at home in the community with little or no income or resources."

For a spouse at home, this is often the section that matters most. Under 42 U.S.C. § 1396r-5(c), the state totals the couple's countable resources as of the start of the first continuous period of institutionalization and computes a spousal share of one half. At application, all the resources held by either spouse or both are treated as available to the institutionalized spouse only to the extent they exceed the greatest of the figures in § 1396r-5(f)(2)(A): a federal minimum or a higher amount the state specifies, up to the federal maximum; the lesser of the spousal share and the federal maximum; an amount set at a fair hearing; or an amount transferred under a court order. The community spouse resource allowance (CSRA) is the amount by which that greatest figure exceeds the resources otherwise available to the community spouse, and the institutionalized spouse may transfer that amount to the community spouse without a transfer penalty (§ 1396r-5(f)(1)). On the income side, each state establishes a minimum monthly maintenance needs allowance (MMMNA) for the spouse at home, the level to which that spouse's income is raised when it falls short (§ 1396r-5(d)(2) and (d)(3)).

These figures change on fixed dates. The CMS bulletin of April 27, 2026 explains that the maximum income allowance and the minimum and maximum resource allowances are adjusted each January, while the MMMNA and the housing allowance are adjusted effective July 1 each year. A state's own figures apply from the date that state's official page gives, and which figure governs a particular couple depends on that state's current rules.

Here is where an annuity enters. When a couple's countable assets exceed what the state protects, a community spouse annuity is a planning approach in which the excess is used to buy an annuity paying income to the spouse at home. A transfer of assets to the person's spouse carries no transfer penalty (42 U.S.C. § 1396p(c)(2)(B)(i)). The annuity conditions still apply, and the statute allows the state to be named second, after the community spouse. Income paid solely in the community spouse's name is generally treated as available only to that spouse (§ 1396r-5(b)(2)(A)(i)). How a state treats such an annuity when deciding the institutionalized spouse's eligibility depends on that state's current rules.

What Makes an Annuity 'Medicaid-Compliant': The Requirements in Plain Terms

Each condition in the statute closes a specific gap, and seeing why helps make sense of the whole.

Irrevocable and nonassignable. The contract cannot be cancelled, surrendered for cash or signed over to someone else. If the owner could cash it in, the money would still behave like savings, a countable asset, rather than income. Locking it in is what lets the law treat the payments as income instead.

Actuarially sound. The statute measures this against the actuarial publications of the Social Security Administration's Office of the Chief Actuary. In plain terms, the payment schedule is tested against how long the annuitant is expected to live. If the annuitant dies before the payments finish, the remaining payments go to the remainder beneficiaries, and the state is first in line, or second where the statute allows.

Equal payments, no deferral, no balloon. Payments must be the same amount throughout the term, must start without a waiting period, and cannot end with one large final payment. A deferred or balloon annuity would hold value back until later, which defeats the point of converting a lump sum into a steady income stream.

The state as remainder beneficiary. Under § 1396p(c)(1)(F), the state must be named in first position for at least the total amount of medical assistance paid on behalf of the institutionalized individual, or in second position after the community spouse or a minor or disabled child. In the second case, the state moves to first position if that spouse, or a representative of the child, disposes of the remainder for less than fair market value. This is how the state is repaid from money left in the contract.

Meeting these federal conditions is necessary but not, on its own, enough. Each state runs its own program, and whether a particular annuity produces the result a family expects depends on that state's current rules. No annuity always protects assets or always makes someone eligible.

How Annuities Interact with the Look-Back Period and Transfer Penalties

A family that has just learned about the look-back often worries most about transfers made years ago. The look-back period is the window before a Medicaid application during which the state reviews transfers of assets. Federally, it is 60 months for transfers made on or after February 8, 2006 (42 U.S.C. § 1396p(c)(1)(B)(i)). States do not all apply the same look-back period, so the period that governs a given application depends on that state's rules. The California Medi-Cal asset limits and Florida Medicaid planning pages on this site cover two state programs.

A penalty period is a stretch of months during which a person is not eligible for Medicaid long-term-care coverage because of a transfer for less than fair market value. Under § 1396p(c)(1)(E), the number of months equals the total uncompensated value transferred on or after the look-back date, divided by the average monthly cost to a private patient of nursing facility services in the state at the time of application. A state may instead use the cost in the community in which the individual is institutionalized. States may not round down or disregard a partial month.

An annuity bought inside the look-back that fails the federal conditions is treated as one of these transfers. The penalty does not start when the money left. For transfers on or after February 8, 2006, it starts on the later of the first day of the month of the transfer and the date the person is eligible for Medicaid and would otherwise be receiving institutional-level care based on an approved application, but for the penalty (§ 1396p(c)(1)(D)(ii)). Because of that start date, a transfer made four years before the application is penalized the same way as one made four months before. Age within the window does not soften it.

Not every transfer is penalized. The statute lists exceptions, including a home whose title was transferred to the person's spouse and transfers to the person's spouse more generally. The Medicaid crisis planning page describes how these rules apply once care has already begun.

What Annuities Do Not Protect Against: Estate Recovery and Income Rules

Three sets of rules keep working after an annuity is in place.

Income. Annuity payments generally count as income. CMS describes a "medically needy" pathway in which "the Medicaid program then pays the cost of services that exceeds the expenses the individual had to incur to become eligible." States take different approaches to income for long-term-care eligibility, and how annuity income affects a particular application depends on that state's rules. After eligibility, the post-eligibility calculation on the CMS spousal impoverishment page decides how much of the institutionalized person's income goes toward the cost of care, after deductions that include a personal needs allowance and, where the spousal rules apply, a community spouse monthly income allowance actually made available to the spouse.

Estate recovery. Estate recovery is the process by which a state seeks repayment from a deceased Medicaid recipient's estate for benefits paid. According to CMS's estate recovery page, for people 55 or older (and for a permanently institutionalized person of any age) states must seek recovery for nursing facility services, home and community-based services, and related hospital and prescription drug services, and must have procedures to waive recovery when it would cause undue hardship. The State Medicaid Manual transmittal on estate recoveries adds that a state may collect against an annuity if it uses a state probate-law definition of estate that includes annuities, or an expanded definition. Federal law delays recovery, rather than cancelling it, while a surviving spouse, a child under 21 or a blind or disabled child survives (42 U.S.C. § 1396p(b)(2)). Separately, the state's position as remainder beneficiary lets it collect from annuity payments left at death. What a state recovers from beyond that depends on its own rules.

The home. A home is not excluded whatever its value. Under 42 U.S.C. § 1396p(f), an individual is not eligible for nursing-facility or other long-term-care coverage when the equity interest in the home exceeds a limit that the state sets between a federal minimum and maximum ($752,000 and $1,130,000 for 2026, effective January 1, 2026, in the CMS bulletin of April 27, 2026), unless a spouse, a child under 21 or a blind or disabled child is lawfully residing in the home. The statute also provides for a hardship waiver process, and it does not prevent using a reverse mortgage or home equity loan to reduce the equity. An annuity does not change that rule. The Medicaid spend-down page covers how spending interacts with these limits.

If You'd Like to Talk Through Your Situation

Annuities sit at the point where several Medicaid rules meet: the look-back, the penalty start date, the spousal allowances, income counting and estate recovery. Each turns on contract terms and state rules that a general page cannot settle. Readers who are looking for help with Medicare, private long-term-care insurance or veterans' benefits will not find it on this page. A broader overview is on the page about what a Medicaid planning attorney does.

You can request a consultation about your family's Medicaid and long-term-care options through Medicaid Asset Protection Group, which is not a law firm; a request may be passed to attorneys who decide for themselves whether to respond.