Whether you will lose your Medicaid if you get a settlement depends on which type of Medicaid you have. If you qualify through the Affordable Care Act’s expansion or another income-based category, a settlement will usually only disrupt coverage for the single month the money arrives. If you qualify as aged, blind, or disabled, the settlement can end your benefits until you bring your assets back below the state’s limit, which is often around $2,000. In both cases, you have tools to protect the money and the coverage, but only if you move quickly.
Which Medicaid You Have Decides the Risk
Medicaid is not one program. The eligibility rules that apply to you depend on the category you qualified under, and that category controls what a settlement does to your case.
If you’re enrolled through Medicaid expansion or another income-based group (parents, pregnant women, children), your eligibility is calculated using Modified Adjusted Gross Income, or MAGI. MAGI rules have no asset or resource test. Only income counts.1Medicaid.gov. Eligibility Policy A settlement counts as income in the month you receive it and could push you over the income limit for that month alone. Starting the next month, the money is just an asset sitting in your account, and MAGI-based Medicaid doesn’t look at assets.
If you qualify as aged, blind, or disabled, older SSI-related rules apply, and those include an asset test alongside the income test. The limit varies by state but sits around $2,000 for an individual in most places. A settlement that pushes your countable resources above that limit will end your eligibility, and it stays ended until the money is gone, sheltered, or otherwise no longer countable. This is the category where a settlement genuinely threatens coverage, and where the protective strategies below matter most.
How Medicaid Treats the Settlement Money
Medicaid counts a settlement as income in the month the check arrives. Starting the following month, anything you haven’t spent becomes a countable asset. That two-step treatment is why timing matters. For MAGI-based Medicaid, only the income month is a concern. For disability-based Medicaid, both steps are a concern, and the asset problem doesn’t resolve on its own. The money keeps threatening your eligibility until you spend it down, place it in a trust, or move it into an ABLE account.
Report the Settlement Right Away
You’re legally required to report the settlement to your state Medicaid agency, typically within 10 days of receiving it. The exact window varies by state, but it’s short, and missing it is costly. State agencies find unreported settlements through data matching with court records and insurance databases, so quiet is not a plan.
If you don’t report, the agency can terminate benefits retroactively to the date you became ineligible, and you’ll owe the state for every service Medicaid paid during that period. Some agencies treat non-reporting as fraud, which carries additional penalties. Call your caseworker as soon as funds arrive, ideally with an attorney who can present a plan for sheltering the money and keeping your eligibility intact.
Medicaid’s Claim on the Settlement Itself
Before you protect anything, Medicaid has a right to be repaid for medical care it already covered that’s related to the injury behind your lawsuit. If Medicaid spent $40,000 on surgeries and rehabilitation connected to the accident, the state can recover that amount from the settlement.2Office of the Law Revision Counsel. 42 USC 1396a – State Plans for Medical Assistance
There’s an important limit. The U.S. Supreme Court has held that states can only recover from the portion of a settlement that represents payment for medical expenses, not the whole amount.3Justia US Supreme Court. Arkansas Dept of Health and Human Servs v Ahlborn If your settlement compensates you for pain and suffering, lost wages, and medical costs, only the medical share is subject to the state’s claim. The Court reinforced that in 2013 when it struck down a state law that automatically designated one-third of every settlement as medical expenses.4Justia US Supreme Court. Wos v EMA Your attorney can negotiate the allocation with the state agency, and that negotiation should happen before any funds move into a trust or ABLE account.
Protecting What’s Left
First-Party Special Needs Trust
The most common shelter for a settlement is a first-party special needs trust. You fund it with your own money, and once the funds are in, they’re no longer counted as your asset because you don’t have direct access to them. A trustee manages the account and pays for things on your behalf.5Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
Federal law sets three conditions. You must be under 65 when the trust is established. You must have a disability that meets Social Security’s definition. And the trust must include a payback provision: when you die, whatever’s left goes first to reimburse the state for every dollar Medicaid spent on your care, and only then can anything pass to heirs.5Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Since 2016, you can establish this trust yourself if you’re mentally competent.
Pooled Trust If You’re 65 or Older
The age-65 cutoff rules out a standard first-party trust for older beneficiaries. A pooled trust is the alternative. Nonprofit organizations establish and manage these trusts, giving each beneficiary a separate account while pooling funds for investment. There’s no age limit for joining.5Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
Two trade-offs to know about. When the beneficiary dies, remaining funds either stay with the nonprofit or go to the state as Medicaid reimbursement. And transferring funds into a pooled trust after age 65 can trigger a transfer-of-assets penalty in some states, potentially creating a period of ineligibility for long-term care services. Talk to an attorney before moving settlement funds in.
ABLE Account
An ABLE account is a tax-advantaged savings account for people with disabilities. Starting January 1, 2026, you’re eligible if your disability began before age 46, up from the previous cutoff of 26.6Social Security Administration. Spotlight On Achieving A Better Life Experience (ABLE) Accounts Unlike a special needs trust, an ABLE account gives you direct control over the money.
For Medicaid, the entire ABLE balance is excluded as a countable resource, no matter how large it grows.7ABLE National Resource Center. The ABLE Age Adjustment Act Fact Sheet SSI rules are tighter: if the balance exceeds $100,000 by enough to push your total countable resources over the SSI limit, your SSI cash payments are suspended until the balance comes down, but your Medicaid coverage continues.6Social Security Administration. Spotlight On Achieving A Better Life Experience (ABLE) Accounts
The 2026 annual contribution limit is $20,000, with additional room up to earned income (capped at roughly $15,650 in the continental U.S.) if you work and aren’t in an employer retirement plan. That makes ABLE accounts a strong fit for smaller settlements but insufficient for a six-figure payout in a single year. The common approach for larger settlements is to put most of the money in a special needs trust and funnel the annual ABLE maximum in for everyday expenses.
Spend the Money Down
You can also maintain eligibility by spending the settlement down to your state’s asset limit, provided you spend it on exempt assets. Those generally include your primary home, one vehicle, household furnishings, personal belongings, and prepaid burial or funeral arrangements. Paying off a mortgage, buying a reliable car, making accessibility modifications, or prepaying funeral costs all reduce countable assets without harming eligibility. Purchases need to be for your genuine benefit, at fair market value, and completed quickly. Letting the money sit in a bank account while you decide is how people lose coverage.
Do Not Give the Money Away
The instinct to hand the settlement to a family member “for safekeeping,” or to gift it to relatives so it doesn’t count, triggers a serious penalty. Federal law imposes a 60-month look-back period. If Medicaid discovers you transferred assets for less than fair market value at any point during the five years before applying for or receiving long-term care benefits, you face a penalty period during which Medicaid won’t pay for nursing facility or other long-term care services.8CMS. Transfer of Assets in the Medicaid Program – Important Facts for State Policymakers
The penalty length equals the amount transferred divided by the average monthly cost of nursing home care in your state. Give away $60,000 in a state where care averages $10,000 a month, and you face a six-month penalty you’d have to cover out of pocket, with money you no longer have. The penalty period doesn’t start until you’re otherwise eligible for Medicaid and need institutional care, so it can’t be waited out in advance.
Transferring settlement funds into a properly structured special needs trust or ABLE account is not a gift and doesn’t trigger these penalties. Handing cash to a relative does.