Does an Annuity Count as Income for Medicaid?

Understanding how annuities are treated under Medicaid rules is important for financial planning, especially for long-term care. This article explains how different types of annuities are considered as income and assets for Medicaid eligibility.

Medicaid Eligibility Basics

Medicaid, a joint federal and state program, provides health coverage, including for long-term care. Eligibility is primarily determined by an applicant’s income and countable assets, ensuring assistance goes to those with financial need.

In 2025, most states allow a single applicant for long-term care Medicaid to have up to $2,000 in countable assets. For married couples where both apply, the combined asset limit is typically $3,000 or $4,000, though some states treat them as single applicants. If only one spouse applies, the non-applicant spouse may keep a Community Spouse Resource Allowance (CSRA) of up to approximately $157,920 in most states.

Most states in 2025 set an individual income limit for long-term care Medicaid at around $2,901 per month. All applicant income, regardless of source, is considered. Medicaid also uses a “look-back period” for asset transfers made before an application.

This look-back period extends five years (60 months) before applying for long-term care Medicaid. Transfers of assets for less than fair market value during this time can result in a penalty period of Medicaid ineligibility. This rule prevents individuals from giving away assets to qualify for benefits.

Annuity Treatment as Income

Periodic payments from an annuity are generally counted as income for Medicaid eligibility. Regular disbursements contribute to the applicant’s total monthly income, which must remain below the state’s income limit. For example, a $1,000 monthly annuity payment is added to other income sources.

Immediate annuities begin payments soon after a lump-sum premium is paid. These fixed, regular payments are immediately relevant to Medicaid’s income calculations. If these payments cause an applicant’s total income to exceed the Medicaid income threshold, they may be ineligible.

Deferred annuities do not begin payments until a future date. During their accumulation phase, they are generally not considered income. However, once a deferred annuity is annuitized and starts making payments, those payments become countable income for Medicaid. Withdrawals made before annuitization may also be treated as income or a resource.

Annuity Treatment as Assets

Annuities also have implications as assets for Medicaid eligibility. The principal or cash value of an annuity can be a countable asset, especially if it can be surrendered or liquidated. If an annuity’s cash value is accessible, its value typically counts toward Medicaid’s asset limits.

Deferred annuities, particularly those with significant cash value, are usually classified as countable assets because their funds are generally accessible. To become Medicaid eligible, an individual may need to “spend down” these assets, possibly by liquidating the annuity or converting it into an income stream. Surrender charges or tax implications might apply if liquidated prematurely.

Immediate annuities, once purchased and making payments, generally convert a lump sum of assets into a non-countable income stream. This can reduce countable assets below Medicaid’s asset limit. However, if an immediate annuity is revocable or assignable, its remaining value might still be considered an available asset.

Medicaid Compliant Annuities

A Medicaid Compliant Annuity (MCA), also known as a Deficit Reduction Act (DRA) annuity, helps individuals meet Medicaid’s asset limits. These annuities convert countable assets into an income stream, reducing resources without violating the look-back period. Purchasing an MCA is typically treated as a spend-down of assets, not an impermissible transfer.

To be Medicaid compliant, an annuity must adhere to several strict requirements:
It must be irrevocable and non-assignable.
The annuity must be actuarially sound, meaning total payments cannot exceed the individual’s life expectancy per Medicaid’s tables.
Payments must be fixed and made in equal amounts over the term, without balloon or deferral payments.

The state Medicaid agency must be named as the primary beneficiary, up to the amount of Medicaid benefits paid. This provision, from the Deficit Reduction Act of 2005, ensures the state can recover costs from the annuity upon the annuitant’s death. Meeting these criteria allows an MCA to convert assets into an income stream, helping an individual qualify for Medicaid by reducing countable assets while providing for their financial needs.