The government has suffered three defeats in the Lords over welfare reform.
Planned restrictions on employment and support allowance (ESA) affecting cancer patients and the disabled were overturned by peers considering the Welfare Reform Bill.
The Lords also rejected a proposed one-year limit on ESA claims.
Labour said the coalition had been defeated for trying to "cross the basic line of British decency". It said the government should not now try to reinstate the measures in the Commons.
Peers voted by 260 to 216 to retain automatic eligibility to ESA for young disable people who are unable to work.
The Lords also voted by 234 to 186 to impose a two year time limit for ESA claimants, instead of the government's proposed 12 months, and by 222 to 166 to exempt cancer patients from the limit.
The three defeats are a major blow to the government, and to Lord Freud, who was charged with piloting the bill through the Lords.
The government is attempting to remove the "youth provision" from ESA, which allows young people to receive the benefit even if they have not contributed to National Insurance due to disability or illness.
The changes would limit the time anyone can receive ESA without means-testing to 12 months.
Opponents to the plan argue that disabled people who are not able to work would lose access to ESA.
The Macmillan cancer charity has said that 7,000 people could lose £94 a week if the plans go through.
Labour MPs supported an amendment to the bill by Lord Patel, the former president of the Royal College of Obstetricians, which would increase the limit on means-testing to two years.
Shadow welfare minister Lord McKenzie attacked the Government's proposal as "fundamentally unfair" and called for a limit to be reached after "an evidence-based process" and not chosen as an "an arbitrary figure".
But Welfare Reform Minister Lord Freud said the effect of increasing the time limit from one to two years would be £1.6 billion over five years.
He said the proposal to time-limit contributory ESA only applied to people in the "work-related activity group" and not those in the "support group" who were deemed incapable of work.
"Those in the support group and those claiming income-related ESA are unaffected by these proposals," he said.
"We will always provide a safety net for those with limited income and people will still be able to claim income-related ESA."
A spokesman for the Department for Work and Pensions said: "Our plans are about returning the welfare state to its original purpose of supporting those with the most need. This means ensuring that taxpayers' money is spent on those who are too sick or disabled to work and those with the least money.
"ESA is for people who could be expected to get back into work and was never intended to be a long term benefit.
"The time-limit of one year strikes the best balance between recognising that some people need extra help to enter the workplace and that the taxpayer cannot afford to support people indefinitely who could be in employment."