Should You Use a Medicare Medical Savings Account?

Pros and Cons of a High-Deductible Medicare Advantage Plan

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Not everyone thinks of health insurance as financial planning, but they should. People on Medicare are more likely to have fixed incomes, but spent as much as $5,460 in healthcare out-of-pocket costs in 2016. Picking a plan that will save the most money could have a major impact on your ability to afford life’s essentials.

A Medicare Medical Savings Account (MSA), in particular, has a lot to offer. These accounts give you quality care through a Medicare Advantage plan while also giving you a bank account to pay for health expenses tax-free.

Medicare Savings Account

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What Is a Medicare Medical Savings Account?

An MSA is a special type of Medicare Advantage plan with two components:

  • A high-deductible health plan: This type of health plan requires you to pay an expensive annual deductible before your coverage benefits kick in. Specifically, you will pay full cost for any Part A or Part B Medicare-covered services until you spend a dollar amount equal to your deductible. After that, your plan will pay 100% of any covered services.
  • A bank account set up by your health plan: Medicare funds this bank account with a fixed dollar amount every year. The amount varies based on the specific plan you choose, but will be less than your annual deductible. You can use these funds tax-free for qualifying medical expenses.

The Medicare Advantage plans associated with MSAs do not have prescription drug benefits. You will need to sign up for a stand-alone Medicare Part D plan if you want medication coverage.

Signing Up

MSAs are not for everyone. You are not eligible for this type of plan if you live outside of the United States for more than half of the year, are on hospice, have end-stage renal disease (with some exceptions), or qualify for the Federal Employees Health Benefits Program, Medicaid, TRICARE, or Veterans Affairs benefits.

Likewise, if you have coverage that will pay your Medicare Advantage deductible outright (e.g., employer-sponsored coverage or union benefits), you will not be able to sign up.

Note: If you already have a Medigap plan when you sign up, you are allowed to keep it, but you cannot enroll in one otherwise. Since you cannot use your Medigap plan to pay down your deductible, it may not be as helpful.

You can enroll in an MSA when you first sign up for Medicare or during the annual open enrollment period (October 15 to December 7). If you leave the plan for any reason, any amount of funds in your bank account will be prorated by the month. You will have to pay back any money you spent for the months you were not on the plan.

How an MSA Works

You can use your MSA to pay for services right away. You do not have to wait until you spend the full deductible amount out of your own pocket. In fact, any money you spend for Medicare-covered services from this account will help pay down your deductible.

There are, however, some rules for the bank account you need to know about. You cannot add funds to this account yourself, though you can withdraw funds at any time. This account accrues interest, and any unused funds roll over to the following calendar year.

Any money from this account used to pay for qualified health expenses will be tax-free, but using it to pay for expenses that do not qualify could literally cost you. You could face a 50% tax penalty for non-qualifying expenses.

Qualifying Medical Expenses

The IRS releases a list of qualifying medical expenses every year that can be deducted from your taxes. This list applies to flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), medical savings accounts, and Medicare Advantage medical savings accounts.

Keep in mind that not all items on this list are covered by Medicare. Only those that are covered by Part A and/or Part B will count toward your deductible.

MSAs are premium-free unless you opt for supplemental benefits like dental, hearing, or vision coverage. You may pay a monthly charge for those services, but since this care is not covered by Part A or B, they are not eligible expenses.

Likewise, although the IRS considers Medicare Part A, B, and D premiums to be qualifying expenses, they will not be applied to your deductible.

Examples

The easiest way to understand how an MSA works is to see it in action. For the scenarios below, assume you have a $5,000 annual deductible and a $1,500 annual bank deposit.

Scenario 1: You have a computed tomography (CT) scan performed to evaluate a severe headache. This test is covered by Medicare Part B and is a qualifying medical expense. It costs $500:

  • $500 is taken from your bank account and applied to your deductible.
  • You now have $1,000 in your bank account ($1,500 - $500) and $4,500 left on your deductible ($5,000 - $500).

Scenario 2: You have acupuncture for headaches. This is not a Medicare-covered service (unless it’s for back pain), but the IRS lists acupuncture as a qualifying medical expense. Your visit costs $100:

  • $100 is taken from your bank account but cannot be applied to your deductible.
  • You now have $1,400 in your bank account ($1,500 - $100) and $5,000 left to pay on your deductible.

Scenario 3: Your headache is triggered by stress because you cannot afford your electric bill. Although this is not a qualifying medical expense, you decide to use $300 from your bank account to pay for it:

  • $300 is taken from your bank account but cannot be applied to your deductible.
  • You now have $1,200 in your bank account ($1,500 - $300) and $5,000 left to pay on your deductible.
  • You will pay an extra $150 out of pocket as a 50% tax penalty on the $300.

Pros and Cons

Deciding to use an MSA is a personal decision. You may need to consider your current financial situation and any preexisting conditions. Look closely at the pros and cons to see if it is right for you.

Pros and Cons of a Medicare Medical Savings Account
Pros Cons
You earn interest on funds in your bank account. You will pay a high dollar amount before your benefits kick in.
Funds carry over year to year, i.e., you do not lose money if you do not spend it. The tax penalties are high at 50% if you withdraw funds for non-qualifying reasons.
You can tap these funds for non-medical reasons, if necessary. This can be a helpful reserve to have in an emergency. If you are not organized, it could be difficult to keep track of your expenses.
If you are healthy or have few chronic medical conditions, you are more likely to have money that will carry over into the next year, building a financial reserve.

A Word From Verywell

If there is one available in your area, you might want to consider a Medicare Medical Savings Account. By offering tax-free funding and bank accounts that accrue interest, you could make the most of your healthcare expenses.

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6 Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Kaiser Family Foundation. How much do Medicare beneficiaries spend out of pocket on health care? Published November 4, 2019.

  2. Centers for Medicare & Medicaid Services. Medicare Medical Savings Account (MSA) plans.

  3. Centers for Medicare & Medicaid Services. Joining a Medical Savings Account plan.

  4. Centers for Medicare & Medicaid Services. How Medicare MSA Plans work with other coverage.

  5. Centers for Medicare & Medicaid Services. Medicare MSA Plan costs & financial considerations.

  6. Internal Revenue Service. Publication 502 (2020), medical and dental expenses (including the health coverage tax credit). Updated March 4, 2021.