The draft legislation, aimed at cutting down on 'welfare tourism', proposes the limits for those not employed in Germany
Foreign EU citizens could be blocked from receiving welfare payments in Germany for up to five years after their arrival in the country.
The draft legislation was drawn up the country's Labour minister Andrea Nahles, The Local reports.
Under the proposals, foreign EU citizens would only have the right to claim basic unemployment benefit - or 'Hartz IV' - after five years unemployed or without government support.
However, EU citizens working in the country could still accrue entitlements during their first years in the country.
The proposed rules are said to have the backing of Chancellor Angela Merkel, meaning they are likely to pass through the German parliament.
The efforts to introduce changes to the system come after a German court decision last year that ruled EU citizens have a right to welfare payments after living in the country for six months.
The ruling led local governments in Germany to lobby for reform to welfare rules.
While newly unemployed people in Germany are entitled to around two-thirds of their final salary for one year under the welfare system, all German citizens are entitled to basic benefits.
The basic rate is around €404 a month, along with rent and heating supplements.
Earlier this year, the European Court of Justice ruled that EU citizens were not entitled to receive social welfare for three months after arriving in Germany - a ruling that appeared to support the country's first steps to counter so-called 'welfare tourism'.