What Is a Medicare Advantage Medical Savings Account Plan?
Key takeaways:
Medicare Advantage medical savings accounts (MSAs) combine a high-deductible health plan with a dedicated savings account.
Each year, the plan deposits into the account a sum of money that partially covers the deductible amount.
MSAs are not widely used but may be suitable for people who want more control over their healthcare dollars.
Table of contents
As you turn 65 and join Medicare, you may decide to enroll in a Medicare Advantage (MA) plan. Designed to match and often exceed the coverage provided by Medicare Parts A and B, MA plans are privately managed and feature a wide variety of premium and deductible options.
One of the less common plan types is the Medicare Advantage medical savings account (MSA). Recently, MSAs have become available in more areas of the country. Their special design and features may appeal to people who like to have control over their healthcare dollars and make their own spending decisions.
What is a Medicare Advantage medical savings account (MSA)?
A Medicare Advantage MSA plan is one of the six types of Medicare Advantage — also called Part C — plans offered to consumers by private insurance companies in partnership with Medicare.
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An MSA combines a high-deductible health plan and a special savings account that works like a Medicare version of a health savings account (HSA). At the beginning of the year, the MSA plan deposits into your account a lump sum from Medicare that remains tax-free as long as you use the money to pay for qualified medical expenses. This type of plan will require you to keep track of your medical bills and out-of-pocket healthcare spending.
How does an MSA plan work?
You may be familiar with high-deductible healthcare plans and health savings accounts from employer or union insurance plans outside of Medicare.
Like those, a Medicare MSA plan has two parts: a health insurance plan with a high deductible and a dedicated bank account.
1. High-deductible health plan
You must have a Medicare Advantage plan with a high deductible to gain access to a Medicare Advantage MSA. With a high-deductible health plan, you’ll have lower monthly premiums. But you’ll have to pay for healthcare expenses out of pocket until you meet your annual deductible. Your deductible will be higher than it would be with a traditional health insurance plan, and the annual amount will vary based on the health plan you choose.
2. Medical savings account
To meet the high deductible, you can pay toward it with MSA funds.
Each year, Medicare will deposit a certain amount of money to your health plan to fund your MSA. But you can’t add any of your own money to the MSA. The plan provider chooses the bank for the initial account, and then you have the option to move it into a savings account at a different bank. That cash is yours to spend on medical expenses, even those not covered by Medicare.
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Let’s say your insurance plan deposits $1,500 into your MSA at the beginning of the year. If your yearly deductible is $3,000, you can use the $1,500 in your MSA to pay for Medicare-covered Part A and Part B services to count toward your deductible.
Once you’ve spent the MSA funds, you’ll pay out of pocket for any additional healthcare costs, at Medicare-approved rates, until you hit the remaining $1,500 of your deductible. After that, the plan pays for 100% of Medicare-covered services for the rest of the calendar year. Any funds remaining in the account at year-end roll over to the next year.
Pros and cons of an MSA
While there are some benefits to using an MSA plan, it may not be the right choice for everyone on Medicare. Therefore, it’s important to review the pros and cons before deciding if an MSA plan is the best choice for you.
Advantages
Choosing an MSA plan could provide money to pay for your medical expenses without an additional premium cost. Here are a few benefits of an MSA plan:
The plan deposits tax-free funds into your MSA account each year.
You typically pay $0 in monthly premiums for an MSA plan.
Annual out-of-pocket expenses are capped.
After you meet the deductible, Medicare-covered health services are paid at 100%.
Tax benefits of a Medicare MSA plan are limited to the money you spend on healthcare. If you spend the money on Medicare-covered Part A or Part B services or other qualified medical expenses, the funds — and any interest earned — are tax-free. However, if you spend any of the cash on nonmedical expenses, such as rent or travel, you’ll have to pay income tax on the amount you’ve spent, plus you’ll be hit with a 50% penalty.
To help manage your funds, some MSA plans provide you with a debit card. If you keep the money in the plan’s chosen account, its monthly statements will track your spending; you can also find out whether your expenses count toward your deductible. However, if you transfer the money to a different savings account, you’ll be fully responsible for saving your healthcare receipts and keeping tabs on your spending.
Disadvantages
Choosing an MSA plan could lead to paying more out of pocket for healthcare costs. Here are a few things to consider:
The plan does not include prescription medication coverage. You’ll need to enroll in a separate Part D plan for that.
There’s a high deductible of several thousand dollars before coverage kicks in. The maximum deductible for 2024 is $16,000.
The annual Medicare deposit doesn’t cover the whole deductible, and you are expected to pay the difference out of pocket.
If you spend any money on bills that are not qualified medical expenses, you will have to pay taxes on that amount plus a 50% penalty.
MSA plans are not allowed to cover prescription medications, unlike other Medicare Advantage plans. However, you can pair an MSA plan with any Medicare Part D prescription medication plan and then use your MSA funds toward Part D copays, coinsurance, or deductibles. Those expenditures will count toward your Part D out-of-pocket limits but not toward the MSA plan deductible.
MSA vs. HSA & FSA
MSA | Health savings account (HSA) /Flexible spending account (FSA) | |
Source of money in the account | Only Medicare deposits money into the account. | Either the individual or an employer deposits money into the account. |
What happens to unspent money at year-end? | Remaining funds roll over into the following year. | With HSAs, leftover money rolls over year to year. Health FSAs may or may not have a grace period or allow unused funds to be carried over. |
Account earnings and taxation | The funds in the savings account earn tax-free interest. The money can’t be invested, but you do have the option of moving it into a different account. | Money in an HSA may earn interest or investment returns. These additional earnings are not taxed if used for qualified medical expenses. |
Who is eligible for a Medicare Advantage MSA plan?
You are not eligible for a Medicare Advantage MSA plan in these cases:
You already have health insurance that would cover the MSA plan deductible, such as employer-provided healthcare benefits or a union retiree healthcare plan.
You have healthcare coverage through Tricare or the Department of Veterans Affairs (VA).
You’re a retired federal employee covered by the Federal Employees Health Benefits (FEHB) Program.
You’re eligible for Medicaid.
You have end-stage renal disease (with certain exceptions).
You’re getting hospice care.
You live outside of the U.S. for more than half the year.
If you’re eligible now, keep in mind that certain actions or events could disqualify you. Your MSA insurer can cancel your plan if you begin getting health benefits through Medicaid, the FEHB program, Tricare, or the VA. Your plan can also be canceled if you join an employer or union health plan that covers any portion of your deductible, if you move out of the plan’s service area, or if you stay outside that area for more than 6 months.
Can I get out of my MSA plan if I don’t like it?
Yes. If you enroll in an MSA plan and change your mind, you can cancel it by December 15 of the same year. You’ll need to pay back a prorated portion of the funds you were given, and you won’t receive any more money. According to Medicare rules, you have until December 7 to join another plan. Between December 7 and December 15, your only option will be original Medicare.
MSA deductibles, deposits and costs
There are typically no premiums for MSA plans, but you must pay Part B premiums, which, for most people, are $174.70 per month in 2024. If your income exceeds the annual threshold, you’ll have to pay a surcharge on these premiums.
Which insurers offer MSA plans?
MSA plans aren’t offered everywhere in the U.S., but they’re becoming more widely available. In 2023, they were available in 37 states, according to Q1Medicare.com. There were only 11 MSA plans offered nationwide in 2022.
The bottom line
Medicare Advantage MSA plans combine a high-deductible health plan with a medical savings account that’s funded by the government. While they’re not widely used, they may appeal to Medicare beneficiaries who want a flexible approach to their healthcare spending and who expect to need few healthcare services.
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References
Centers for Medicare & Medicaid Services. (n.d.). Fact sheet on Medicare medical savings account (MSA) plans.
Centers for Medicare & Medicaid Services. (n.d.). Medical savings account (MSA).
Centers for Medicare & Medicaid Services. (2012). Your guide to Medicare medical savings account (MSA) plans.
Centers for Medicare & Medicaid Services. (2023). Announcement of calendar year (CY) 2024 Medicare Advantage (MA) capitation rates and Part C and Part D payment policies.
Medicare Rights Medicare Interactive. (n.d.). Qualified medical expenses.
Medicare.gov. (n.d.). Compare types of Medicare Advantage plans.
Medicare.gov. (n.d.). Examples of Medicare medical savings account (MSA) plans.
Medicare.gov. (n.d.). How Medicare MSA plans work with other coverage.
Medicare.gov. (n.d.). Medicare medical savings account (MSA) plans.
Q1Medicare.com. (2022). More 2023 Medicare Advantage plan choices, with increases in HMO and local PPO options.
U.S. Department of Health and Human Services. (2021). Joining a medical savings account plan.
U.S. Department of Health and Human Services. (2021). Medical savings accounts (MSA).
U.S. Office of Personnel Management. (n.d.). Healthcare.
