Secrets of Medicare Savings Accounts, a new solution to an old problem

Laurie Bouck | May 3, 2011

Medicare Advantage plans, which are offered by private insurers, let Medicare recipients purchase additional supplemental health care. One relatively new type of Medicare Advantage plan is the Medicare Savings Accounts (MSA).

Medicare Savings Accounts have a high yearly individual health insurance deductible - usually several thousand dollars - that must be paid before Medicare covers health care expenses. However, each year the MSA plan deposits some money into an account that you can access. The MSA plan chooses the bank that contains the account.

Using an MSA

You can use MSAs to pay for approved medical expenses such as co-pays for doctor's visits or medical tests. Any money left in the account each year remains for you to use in the future. Some MSA plans also offer other insurance for services that Medicare does not cover, such as vision or dental care.

Tax breaks associated with MSAs

Medical Savings Accounts offer tax advantages because the money from the MSA that you spend on Qualified (approved) Medical Expenses is not taxed. This MSA money you spend also counts against your plan's yearly deductible. The IRS publication #502, "Medicare and Dental Expenses," lists all the Qualified Medical Expenses.

If you spend MSA money on unapproved medical expenses, the money is not taxed but it also does not count against your plan's deductible. If you spend MSA money on non-medical expenses, however, you will face both taxes and financial penalties.

Good for poor, poor for rich

Medical Savings Account plans don't deposit enough money in your account to pay for your entire individual health insurance deductible each year. If your medical expenses exceed the amount in your MSA, you will have to pay for the difference out-of-pocket. This difference can be about $1,000 to $3,000.

Because of this "gap," the Henry J. Kaiser Family Foundation has stated that MSA plans can be a good choice for people with low Medicare expenses, but they can be a bad supplemental health care choice for those with high expenses. The Kaiser Family Foundation also stated that it is important to make sure that you spend money (from the MSA account or out-of-pocket) on preventative care, which can prevent more serious health care problems.

Key supplemental health care questions

To make the most of your MSA plan, the Centers for Medicare & Medicaid Services suggests that you ask seven questions:

  1. What is the yearly deductible in this plan? Are there other charges after I meet this deductible?
  2. How much money does the plan deposit in the MSA each year?
  3. What medical services are approved for the MSA? Are there limits on these services?
  4. Are the services that are most important to me covered?
  5. How will this plan affect my Medigap policy (if you have one)?
  6. What are the fees and rules of the MSA's financial institution?
  7. How do I access the money in the MSA account?

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