What Is a Medicaid-Compliant Annuity, and When Does It Make Sense?

The short answer: a Medicaid-compliant annuity is an immediate annuity, bought from an insurance company, that converts a lump sum of countable savings into a stream of monthly payments that Medicaid treats as income rather than as an asset. It is legal because federal law says exactly what such an annuity must look like, and it works because Medicaid counts assets against a limit of about 2,000 dollars but treats income under different rules, especially income paid to a spouse who stays at home. It is most useful in two situations: a married couple with savings above the amount the community spouse may keep, and a single person who needs care now and cannot wait out a five-year look-back. It is the wrong tool for anyone who has time to plan, because the money it protects is protected only as income, the contract cannot be undone, and the State stands in line to collect whatever is left if the annuitant dies early.

This article explains the federal requirements, why the technique works, how it is used for couples and for single applicants with 2026 figures, what New Jersey, New York, and Connecticut each add, and the trade-offs that make it a last-resort tool rather than a first choice. For the broader set of options, see our article on protecting assets from nursing home costs.

FREE WEBINAR

5 Things to Know About

Estate Planning

When You Turn Sixty-Five

Save the Date

Friday, Oct 9^th at 2:30pm

What Makes an Annuity “Medicaid-Compliant”?

The phrase comes from the Deficit Reduction Act of 2005, which wrote annuity rules into the federal Medicaid statute at 42 U.S.C. 1396p. Two subsections do the work.

The first, section 1396p(c)(1)(G), says that “the term ‘assets’ includes an annuity purchased by or on behalf of an annuitant who has applied for medical assistance with respect to nursing facility services or other long-term care services” unless the annuity is one of two things. It may be a retirement annuity, meaning one held in or purchased with the proceeds of an individual retirement account or similar plan described in the Internal Revenue Code sections the statute lists. Or it may be a commercial annuity that meets three tests: it “is irrevocable and nonassignable”; it “is actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration),” meaning its term does not exceed the annuitant’s life expectancy; and it “provides for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made.”

The second, section 1396p(c)(1)(F), adds the requirement that gives the State its stake. “The purchase of an annuity shall be treated as the disposal of an asset for less than fair market value,” that is, as a penalized gift, unless “the State is named as the remainder beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the institutionalized individual,” or “the State is named as such a beneficiary in the second position after the community spouse or minor or disabled child and is named in the first position if such spouse or a representative of such child disposes of any such remainder for less than fair market value.”

Section 1396p(e) closes the loop. The Medicaid application must “disclose a description of any interest the individual or community spouse has in an annuity,” whether or not it is irrevocable, and the application form must state “that under paragraph (2) the State becomes a remainder beneficiary under such an annuity” by virtue of paying benefits. The State then “shall notify the issuer of the annuity of the right of the State” as a preferred remainder beneficiary.

An annuity that satisfies all of this is neither a countable asset nor a penalized transfer. The purchase price disappears from the resource calculation, and the monthly payments appear as income.

Why Does Converting Assets to Income Help?

Because Medicaid’s two tests treat the same dollars differently. Assets above the limit, 2,000 dollars in New Jersey and New York and 1,600 dollars in Connecticut, disqualify the applicant entirely until spent down. Income does not disqualify a nursing home applicant; it is applied toward the cost of care, with the applicant keeping a small personal allowance and, in New Jersey, with any income over the state’s cap routed through a qualified income trust. And income belonging to the spouse at home is, under federal law, off limits. Section 1396r-5(b)(1) provides that during any month in which one spouse is institutionalized, “no income of the community spouse shall be deemed available to the institutionalized spouse.”

The Second Circuit Court of Appeals, whose decisions bind the federal courts in New York and Connecticut, confirmed the principle in Lopes v. Department of Social Services, decided October 2, 2012, a Connecticut case in which the community spouse had bought a nonassignable annuity. The court held that “the income stream from Lopes’s annuity is properly considered income, not a resource, because the annuity is non-assignable.” The Third Circuit, which covers New Jersey, went further in Zahner v. Secretary of the Pennsylvania Department of Human Services, decided September 2, 2015, upholding annuities with terms of 12 and 14 months. “Congress did not require any minimum term for an annuity to qualify under the safe harbor,” the court wrote, and “the statutes that control our inquiry do not require a positive rate of return as a prerequisite for being sheltered under the DRA safe harbor.” Both decisions describe the technique as Congress designed it, not as a loophole.

How Does a Married Couple Use It?

This is the cleanest use. When one spouse enters a nursing home, the spouse at home may keep a Community Spouse Resource Allowance, which in New Jersey for 2026 is one-half of the couple’s countable assets with a floor of 32,532 dollars and a ceiling of 162,660 dollars. Everything above that, and above the institutionalized spouse’s 2,000 dollars, must be spent before Medicaid pays.

Suppose a New Jersey couple has 400,000 dollars in countable assets. The community spouse keeps 162,660 dollars and the institutionalized spouse keeps 2,000 dollars. The remaining 235,340 dollars is the problem. Spent on the nursing home at private rates, it lasts a year or so. Used instead to buy a compliant annuity in the community spouse’s name, it becomes a monthly payment to the community spouse for a term not longer than that spouse’s life expectancy, the couple’s countable assets fall to the allowance, and the institutionalized spouse is eligible the following month. The community spouse’s annuity income is not deemed available to the institutionalized spouse, so it does not increase the cost share.

Two federal details matter here. The guidance the Centers for Medicare and Medicaid Services issued to state Medicaid directors in July 2006 reads section 1396p(c)(1)(F) “as applying to annuities purchased by an applicant or by a spouse,” so the State must be named remainder beneficiary on the community spouse’s annuity too, and “if the State is not named as a remainder beneficiary in the correct position, the purchase of the annuity will be considered a transfer for less than fair market value.” The same guidance notes that the three structural tests of subsection (G) do “not apply to annuities for which the community spouse is the annuitant,” though New York and Connecticut impose them by state rule regardless, as described below, and prudent practice is to meet them everywhere.

The community spouse’s annuity is a real annuity. The money is gone from the balance sheet and comes back only month by month. A community spouse in their sixties with a long life expectancy may be locking up savings for a decade or more, while a spouse in their eighties can choose a short term and have the money back within a few years. The term is a planning decision, not a formula.

How Does a Single Person Use It?

A single applicant has no community spouse to receive the income, so an annuity paid to the applicant simply goes to the nursing home as cost share. Alone, it protects nothing. Combined with a gift, it protects roughly half.

The plan, usually called “half a loaf,” works like this. The applicant gives part of the excess savings to children, which creates a penalty period under the five-year look-back. The penalty is the gift divided by the state’s divisor, and it begins only when the applicant is in the facility and otherwise eligible. The applicant uses the rest of the excess to buy a compliant annuity whose term equals the penalty period and whose monthly payment, added to the applicant’s other income, covers the nursing home bill during that period. When the penalty ends, the annuity has paid out, the applicant is at the asset limit, and Medicaid begins. The gift is preserved.

New Jersey’s divisor is set in Medicaid Communication 26-04, which states that “effective April 1, 2026, the penalty divisor has increased from $402.74 to $420.67” per day. A gift of 100,000 dollars therefore produces a penalty of 237 days, about seven and three-quarter months, and the annuity must be sized to cover the difference between the facility’s private rate and the applicant’s income for that long. New York uses monthly regional rates published in GIS 25 MA/14 for 2026: 15,282 dollars in New York City, 15,193 dollars on Long Island, and 15,024 dollars in the Northern Metropolitan region, so the same 100,000-dollar gift produces roughly six and a half months of ineligibility in New York City. Connecticut divides by the average monthly private cost of nursing facility care, a figure the Department of Social Services updates and that should be confirmed with the Department at the time of planning.

Zahner is what makes this plan work in New Jersey without argument: a seven- or eight-month annuity is actuarially sound and compliant so long as it meets the four tests, and no minimum term or rate of return is required. The arithmetic is unforgiving. If the annuity is too small, the applicant runs out of money before the penalty ends; if it is too large, money is wasted on the facility that could have been given. The calculation depends on the divisor, the facility’s private rate, the applicant’s income, and life expectancy, and it should be done by someone who has done it before.

What Does Each State Add?

The federal statute governs in all three states, and each adds its own layer.

New Jersey

New Jersey’s transfer regulation, N.J.A.C. 10:71-4.10(p), predates the federal rules and does not repeat them; the State-as-beneficiary, irrevocability, and equal-payment requirements apply in New Jersey directly through section 1396p. The regulation adds two conditions of its own. “Any annuity purchase in which the entity issuing the annuity is not a commercial financial institution shall be considered to be a transfer of an asset in order to qualify for Medicaid benefits, regardless of the terms of the annuity payout,” which rules out private annuities between family members. And “any commercial annuity purchased which is not actuarially sound, based on the life expectancy of the individual (as set forth in life expectancy tables published by the Centers for Medicare and Medicaid Services)” is a transfer. New Jersey’s regulation names the CMS tables while the federal statute names the Social Security Administration’s actuarial publications; the reviewing caseworker may apply either, and a term comfortably inside both is the safe course. Annuity payments are unearned income under N.J.A.C. 10:71-5.4(a)3, which means an annuity paid to the applicant counts toward New Jersey’s income cap of 2,982 dollars for 2026 and may require a qualified income trust. The Division of Medical Assistance and Health Services has not issued a Medicaid Communication specifically on annuities.

New York

New York’s rule is in Social Services Law 366(5)(e)(3), which provides that “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 beneficiary in the first position for the Medicaid paid and “the annuity meets the requirements of section 1917(c)(1)(G)” of the Social Security Act, the federal provision described above. The Department of Health’s directive 06 OMM/ADM-5 applies the rule to annuities purchased “by or on behalf of” the applicant or the applicant’s spouse on or after February 8, 2006, requiring that the annuity be “irrevocable and non-assignable,” “actuarially sound,” and provide “payments in equal amounts.” The same directive confirms that “a community spouse’s income is not counted when determining an institutionalized spouse’s financial eligibility for nursing facility services.” New York has no income cap, so an annuity paid to a single applicant raises the cost share but not an eligibility barrier, and New York’s penalty divisor varies by region as noted above.

Connecticut

Connecticut’s Department of Social Services sets its rule in Uniform Policy Manual section 3029.12. The Department “shall consider the purchase of an annuity by, or on behalf of, an annuitant who has applied for nursing facility or other long-term care services to be a transfer for less than fair market value unless” it meets the federal retirement-annuity or irrevocable, nonassignable, actuarially sound, equal-payment tests and names the Department remainder beneficiary “in the first position for at least the total amount of medical assistance paid.” Section 3029.12.B applies the same first-position requirement to an annuity purchased “by or on behalf of the community spouse,” and section 3029.12.C treats payments from a compliant annuity to anyone other than the applicant, the spouse, a blind or disabled child, or a qualifying trust as transfers for less than fair value. Connecticut also reaches the remainder through its estate recovery statute: under General Statutes 17b-95(c), “all sums due on or after July 1, 2003, to any individual after the death of a Medicaid beneficiary pursuant to the terms of an annuity contract purchased at any time with assets of a Medicaid beneficiary, shall be deemed to be part of the estate of the deceased beneficiary and shall be payable to the state.” Connecticut has no income cap. Lopes, the Second Circuit case described above, arose from a Connecticut denial and binds the Department.

What Are the Trade-Offs?

• It is irrevocable. The annuity cannot be cashed in, sold, or assigned, by design. A family that later wishes it had the lump sum, because the resident died, recovered, or moved home, has no recourse.
• The State collects what is left. If a single annuitant dies during the term, the remaining payments go to the State up to the Medicaid paid. For a short-term annuity in a gift-and-annuity plan, that exposure is limited to a few months of payments. For a community spouse’s long annuity it is the reason the term is chosen carefully.
• It creates income. Payments to the applicant go to the cost of care and, in New Jersey, may require a qualified income trust. Payments to the community spouse are that spouse’s to keep, but they may also affect that spouse’s own future Medicaid eligibility if the spouse later needs care while the annuity is still paying.
• Part of each payment is taxable. Under Section 72(b)(1) of the Internal Revenue Code, the portion of each payment that returns the purchase price is excluded from income and the rest, the interest component, is taxed. For a short-term annuity bought with after-tax savings the taxable portion is small; for an annuity bought with retirement funds, every dollar is taxable as it is paid.
• It must be a commercial product. New Jersey’s regulation says so expressly, and the other states’ rules assume it. A note signed by a child promising monthly payments is not an annuity in this sense.
• The paperwork is scrutinized. The application must disclose the annuity, the caseworker will read the contract for each federal test, and a contract that fails one, such as a missing State-beneficiary designation or an option to commute payments, converts the entire purchase into a penalized gift on top of the gift already made.
• It does not substitute for planning. A family that acts five years before care is needed can protect the whole excess in an irrevocable trust, with the home’s basis step-up preserved and no State remainder interest. An annuity protects about half, for a single person, at the cost of irreversibility. It is what is left when the time to plan has passed.

When Is an Annuity the Wrong Tool?

When the excess is small enough to spend down on exempt items such as home repairs, a funeral trust, or paying off a mortgage, which protect value at full dollar with no contract. When the applicant’s life expectancy is very short, because a compliant annuity must still be actuarially sound and the State’s remainder claim will absorb the payments. When the community spouse is young, because the term needed to keep the annuity actuarially sound is also the term for which the money is unavailable. And when the family has not first confirmed that the applicant will otherwise be eligible on the planned date, because the penalty period, and therefore the annuity term, does not begin until then. Our article on what a Medicaid application requires describes the documentation the caseworker will want for the annuity and the gift alike, and our article on what to do if the application is denied covers the appeal when a caseworker treats a compliant annuity as a transfer.

Plan Well. Live Better.

A Medicaid-compliant annuity is a precise instrument for a specific moment, and used correctly it can preserve a spouse’s security or half of a lifetime’s savings when nothing else can. At Milvidskiy Law Group, we determine whether an annuity fits the family’s situation, run the calculations, coordinate the purchase with the application, and defend the plan if the agency questions it. Learn more about our Medicaid planning services.

This article is for general informational purposes only and does not constitute legal, tax, or financial advice, and it does not recommend any insurance product. Reading it does not create an attorney-client relationship. Medicaid annuity rules depend on the applicant’s marital status, state, income, and life expectancy, and the figures change every year. The federal statute, the Third and Second Circuit decisions, New Jersey’s N.J.A.C. 10:71-4.10 and Medicaid Communication 26-04, New York’s Social Services Law 366(5)(e), 06 OMM/ADM-5, and GIS 25 MA/14, and Connecticut’s Uniform Policy Manual 3029.12 and General Statutes 17b-95 were verified in September 2026 and should be confirmed before relying on them. Connecticut’s 2026 penalty divisor was not verified and is deliberately not stated.