More than 700,000 people are waiting for assessments for employment and support allowance (ESA), it said.
Minister for Disabled People Mike Penning blamed the delays on Atos, the contractor carrying out controversial fitness-to-work tests.
Atos has said its staff have been “vilified” and abused for doing what was asked of them by ministers.
Asked in Parliament about implementation of benefits reform, Prime Minister David Cameron said changes should be carried out “in a way that works well” rather than to an “artificial deadline”.
He was responding to a question by Labour MP Katy Clark, who asked why the majority of those who had applied for the personal independence payment (PIP) had yet to receive a decision.
PIP started to replace the disability living allowance from April 2013.
An official from the Department for Work and Pensions (DWP) told MPs that Atos, which has agreed to end its contract early, “couldn’t deliver the quality at the capacity we want”.
However, a DWP spokesperson later said Atos was “now processing more cases than come in” and the backlog was falling.
The DWP said the total backlog stood at 712,000 people. Of these, 394,000 are new claimants for ESA and 234,000 are existing ESA recipients whose reassessments as to whether they are still entitled to the benefit have been delayed.
A further 84,000 are people still on incapacity benefit who have not yet been moved over to ESA.
Mr Penning said the government had failed to meet its own deadline of moving these people onto the new benefit by April.
They are still awaiting assessment.
The DWP said: “Incapacity Benefit reassessment has resulted in over 700,000 people looking for, or making steps to return to work – it is crucial that we continue this important process to ensure that people are not written off and we get a fair deal for the taxpayer.”
Critics have said delays and wrong decisions in Atos’s work conducting controversial fitness-to-work assessments have caused distress to vulnerable people.
Atos has acknowledged difficulties but said its staff are well trained and it has become a “lightning rod” for public anger with the principle of the assessments.
Citizens Advice said the assessments were “failing” and “must be fixed to be delivered fairly”.
The organisation’s chief executive, Gillian Guy, said: “The failings of the Work Capability Assessments are leaving sick and disabled people on a knife-edge.
“Employment Support Allowance is now the biggest single issue that Citizens Advice clients need help with and more than 1.5 million people have come to us about problems with ESA since it was introduced.”
Timely and proper
In total, more than three million people on ESA, including all those who previously claimed incapacity benefit, are being assessed to see how their illness or disability affects their ability to work.
This process began under the last Labour government and has been accelerated by the coalition government.
Mr Penning said a decision in March to end Atos’s contract early was based on the fact he had lost faith in the firm.
He said a new contractor – expected to be appointed in early 2015 – would not be chosen on cost alone but on its ability to carry out the assessments in a timely and proper fashion.
This would cost the department more money, he said.
Citizens Advice said safeguards should be put in place to deal with flaws in the assessment process, and the new contractor should be fined if its assessments were shown to be flawed.
Ms Guy said: “Medical evidence should be made available free to claimants to support their application for support and the unacceptable backlog of applications must be dealt with.
“Unless ministers make changes to how assessments are carried out then sick and disabled people face another three years of delays, anxiety and unfair treatment.”