Medicaid-Compliant Annuity: What It Is, How It Works, and What the Law Requires

A Medicaid-compliant annuity is a contract bought with savings that pays the money back as regular monthly income. If it meets the federal tests in 42 U.S.C. § 1396p(c)(1)(F) and (G), the purchase is not penalized as a transfer for less than fair market value on account of the annuity rules. It comes up where one spouse enters a nursing home and the other stays at home.

Most people facing this question are a husband or wife whose spouse has just moved into a nursing home, or an adult child sorting out a parent's money while the monthly bills arrive. Someone has mentioned an annuity, perhaps a financial adviser or a friend, and the family is trying to work out whether it is a legitimate Medicaid rule or a sales pitch, and what it would mean for the spouse at home.

This page explains what the federal statute requires, how the annuity works for a married couple and for a single person, and where each state's own rules take over. It covers Medicaid for long-term care only; it does not cover Medicare, private long-term-care insurance or veterans' benefits.

What a Medicaid-Compliant Annuity Is

When Medicaid decides whether someone is eligible for long-term care, it looks at countable assets: the bank accounts, investments and similar holdings it measures against its resource limit. Savings above that limit keep the applicant from qualifying until the excess is gone. A Medicaid-compliant annuity changes the form of that money. A lump sum, which is countable, becomes a stream of monthly payments, which is income. If the contract meets the federal conditions, the lump sum may no longer be counted as an asset, depending on the state's rules.

This is what separates it from an ordinary commercial annuity. A typical deferred annuity can be cashed in, sold or postponed, so Medicaid can treat it as an asset or its purchase as a gift. A compliant annuity is built to satisfy specific statutory terms, and the label matters only if those terms are actually met.

The tool comes up in spousal-impoverishment planning. The community spouse is the spouse who is not in a medical institution or nursing facility while the other spouse is. Federal law already protects a share of a couple's savings for that spouse, and the annuity is one way the remaining excess can be turned into income for the spouse at home.

A single person can also buy one, but the rules work differently and the result is narrower, as explained below. No annuity makes eligibility certain. The outcome depends on the contract terms, the family's facts and the state's review.

The Federal Requirements Under 42 U.S.C. § 1396p

Since the Deficit Reduction Act of 2005, federal law treats an annuity bought by or for a long-term-care applicant as an asset that can trigger a transfer penalty, unless it meets set conditions. Under 42 U.S.C. § 1396p(c)(1)(G)(ii), the annuity is not counted as such an asset if it:

"(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."

Section 1396p(c)(1)(G)(i) of 42 U.S.C. separately excludes certain retirement annuities, including certain individual retirement annuities described in the Internal Revenue Code and annuities bought with proceeds from an IRA, a simplified employee pension or a Roth IRA.

The three conditions are these. Irrevocable and nonassignable means the contract cannot be revoked and cannot be assigned to someone else. Actuarially sound means soundness is determined in accordance with the actuarial publications of the Office of the Chief Actuary of the Social Security Administration. Equal payments means the same amount each period, with no deferral and no balloon payment.

A further condition sits in § 1396p(c)(1)(F) and concerns who receives anything left over. The purchase is treated as a transfer for less than fair market value unless the state is named remainder beneficiary in first position for at least the total Medicaid paid for the institutionalized person, or in second position after the community spouse or a minor or disabled child. It moves to first position if that spouse, or a representative of that child, disposes of the remainder for less than fair market value.

These are the federal terms for the transfer rules. 42 U.S.C. § 1396p(e)(4) adds that nothing in that subsection prevents a state from denying eligibility based on the income or resources derived from an annuity, so a state's own rules also matter.

How the Annuity Works in Spousal-Impoverishment Planning

The community spouse resource allowance, or CSRA, is the amount of countable assets the community spouse may keep under the federal spousal-impoverishment rules in 42 U.S.C. § 1396r-5. At application, § 1396r-5(c)(2) treats all resources held by either spouse as available to the spouse in care, but only to the extent they exceed that protected amount. Whatever sits above the CSRA is excess, and it generally has to be spent down or otherwise accounted for before the spouse in care qualifies. The Medicaid spend-down attorney page covers spend-down more broadly.

In the typical arrangement, the community spouse uses excess countable assets to buy a compliant annuity. The purchase price may no longer be counted as an asset, depending on the state's rules, and the annuity then pays the community spouse a fixed monthly amount.

Two federal rules support this. A transfer to one's spouse carries no transfer penalty under 42 U.S.C. § 1396p(c)(2)(B)(i). And on income, § 1396r-5(b)(1) provides that while the spouse is in the institution, "no income of the community spouse shall be deemed available to the institutionalized spouse," while § 1396r-5(b)(2)(A)(i) treats income paid solely in one spouse's name as that spouse's alone. How a particular state applies these attribution rules depends on its own program.

The minimum monthly maintenance needs allowance, or MMMNA, is the monthly income level to which the community spouse's income can be supplemented from the institutionalized spouse's income. Annuity income can bring the at-home spouse's income up to or toward it. Federally, the minimum allowance changes each July 1, and the maximum allowance and the resource figures change each January 1, as the CMS bulletin of April 27, 2026 explains. A state's own figures apply from the dates its official pages state.

The Look-Back Period and Why the Annuity Is Not a Penalized Transfer

A spouse at home who hears "look-back" often fears that any money moved will be punished. The rule is narrower than that.

The look-back period is the window before a Medicaid application in which the agency reviews transfers made for less than fair market value. Federally it is 60 months for any transfer made on or after February 8, 2006, under 42 U.S.C. § 1396p(c)(1)(B)(i). Each state runs its own program, and its rules may differ.

A penalty period is a stretch of Medicaid ineligibility for long-term care. Under § 1396p(c)(1)(E), it equals the total uncompensated value transferred divided by the average monthly private-pay cost of nursing-facility care in the state, or, at the state's option, in the community, at the time of application. For transfers on or after February 8, 2006, the penalty starts on the later of the month of the transfer and the date the person is eligible and would otherwise be receiving institutional-level care, under § 1396p(c)(1)(D)(ii), and the start cannot fall during another period of ineligibility. As a result, a gift made four years ago and one made last month, both inside the look-back, are penalized the same way.

An annuity that meets the statutory terms is generally not penalized as a transfer on account of the annuity rules. Two separate tests apply: under § 1396p(c)(1)(F), the purchase is treated as a disposal for less than fair market value unless the state is named remainder beneficiary as that paragraph requires, and under § 1396p(c)(1)(G), the annuity counts as an asset for the transfer rule unless it falls within (G)(i) or meets the terms in (G)(ii). A transfer to one's spouse is separately not penalized under § 1396p(c)(2)(B)(i).

If the contract misses a condition, the result changes. It may be treated as a countable asset, or its purchase as a transfer for less than fair market value that starts a penalty. Which of these happens depends on the state agency's review.

When a Medicaid-Compliant Annuity May Be Used by a Single Person

For an unmarried applicant, the picture is narrower. There is no community spouse to receive the payments, so the monthly income goes to the person in care and counts as that person's income under the state's Medicaid income rules. Converting savings to income may resolve an asset problem while raising the amount the person pays toward care each month, depending on the state.

How much that added income matters turns on how the state's income rules are built. States do not all handle an applicant's income the same way, and the state's own approach decides whether new monthly annuity payments simply flow toward the cost of care or create an income problem of their own. For a single applicant, this question about the state's income rules sits alongside the asset question, and the annuity cannot be judged on the asset side alone.

The beneficiary rule is also stricter. With no community spouse or minor or disabled child to name ahead of it, the state must be the first remainder beneficiary for at least the total Medicaid paid, under 42 U.S.C. § 1396p(c)(1)(F)(i).

The actuarial requirement matters more here. Because the annuity must be actuarially sound under 42 U.S.C. § 1396p(c)(1)(G)(ii)(II), its terms are tested against the actuarial publications of the Office of the Chief Actuary of the Social Security Administration, and for an older applicant the resulting payment term can be short.

A state's own rules on the income and resources derived from an annuity also apply (42 U.S.C. § 1396p(e)(4)). Whether the arrangement achieves anything for a single person depends on the income rules, the applicant's health and the state's review, not on the annuity alone.

What Varies by State

Federal law in 42 U.S.C. § 1396p sets the federal terms for annuities under the transfer rules, and a state's own rules on annuity income and resources also apply (§ 1396p(e)(4)). Medicaid.gov describes Medicaid as a joint federal and state program.

In practice, a family reviewing an annuity in a particular state is usually looking at several questions at once. One is how the state treats annuity payments when it calculates what the spouse in care contributes toward care. The state's own CSRA and MMMNA figures matter too, and they apply from the dates its official pages state. Estate recovery also differs: some states recover only from the probate estate and others from a broader estate, which affects how the state's beneficiary position plays out after a death. Finally, spousal refusal is an approach in which the community spouse declines to make assets available to the spouse in care; whether a given state allows it depends on that state's current rules.

The look-back period itself can differ. California's look-back period and the date it began depend on California's current Medi-Cal rules; the California Medi-Cal asset limits page discusses Medi-Cal's asset rules. Florida's figures come from its own agency, as the Florida Medicaid planning page explains. Elsewhere, the answer depends on that state's current rules.

The federal home-equity limit is a separate issue: under 42 U.S.C. § 1396p(f), a person whose equity interest in the home exceeds the limit is not eligible for nursing facility or other long-term care coverage unless a spouse, or a child under 21 or a blind or disabled child, is lawfully residing in the home. The statute also directs a process to waive the limit in a demonstrated hardship (§ 1396p(f)(4)).

Estate Recovery and the State-as-Beneficiary Requirement

Estate recovery is the process by which a state seeks repayment of certain Medicaid benefits after an enrollee dies. Medicaid.gov explains that for people 55 or older, states must seek recovery for nursing-facility services, home and community-based services, and related hospital and prescription-drug services.

The annuity adds a second route. Because the state is named remainder beneficiary, it is entitled to any balance left at the annuitant's death, up to the Medicaid it paid. Under the CMS State Medicaid Manual transmittal on estate recoveries, a state may also collect against an annuity owned by a deceased beneficiary if it uses a probate-law definition of estate that includes annuities, or the expanded definition of estate.

Federal law delays recovery, but does not cancel it, while a surviving spouse, a child under 21 or a blind or disabled child survives, under 42 U.S.C. § 1396p(b)(2). States must also have procedures to waive recovery where it would cause undue hardship.

What a state recovers from depends on its rules. California's recovery scope depends on its current Medi-Cal rules.

If the annuity pays out fully during the annuitant's lifetime, nothing remains for the state to claim from the contract. That depends on the annuitant living at least as long as the actuarial tables project, which no one can know at purchase.

Request a Consultation

An annuity decision turns on details that a general page cannot weigh: who owns which accounts, when any money moved, whether one spouse is already in care, the annuitant's age and health, and which state's Medicaid rules apply. For more background, the Medicaid planning attorney page describes the role.

Families can request a consultation with Medicaid Asset Protection Group about their Medicaid and long-term-care options.