How Medicare Advantage MSA Plans Work

December 20, 2019

Never heard of a Medicare Medical Savings Account (MSA) plan? You’re not alone.

Only about 5,600 Medicare enrollees have MSA plans in 2019.1 That’s miniscule compared to the 64 million total people on Medicare.2

However, things may be changing, as MSA plans are about to become available to more people in more states. That’s a good thing, because this type of plan offers substantial benefits for some people.

What is an MSA plan?

An MSA plan is a type of Medicare Advantage plan. Medicare Advantage plans give you health coverage through a private insurance company that has contracted with Medicare.

MSA plans have two parts:

  • A high-deductible health plan (HDHP). With this type of plan, you are responsible for paying your health costs up to a certain dollar amount, called your deductible. Once you reach the deductible, the plan pays all your medical costs.
  • A medical savings account. Medicare puts money into this account for you each year, and you can use it to pay for your health care costs before you reach your deductible. Money in the account grows tax-free, and you pay no taxes on it when you take it out.

Usually the amount deposited into the medical savings account is less than your deductible. That means you may need to pay with money from elsewhere if you have a lot of health costs in a particular year.

If you don’t have many costs in a certain year, there will be money remaining in your MSA account. That extra money then gets carried over to the next year, in addition to a new deposit from Medicare. It will continue to grow tax-free, giving you even more money to cover future health costs.

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How do MSA plans work with Medicare Advantage?

Typically you will pay your medical bills after you receive care with a dedicated debit card that your MSA plan mails to you.

The premium for an MSA is $0, but that doesn’t mean your total costs are always zero. It’s best to set some money aside in case you have health care costs above what is in the savings account.

Until you meet your deductible, you’re responsible for paying 100% of the Medicare-approved amount for your care. You can use the money from your medical savings account to pay for these expenses. When it’s used up, you will pay for health expenses out of pocket until you reach your deductible. Then the plan pays 100% of the Medicare-approved amount.

MSA plans have tax benefits

You pay no taxes on the money that Medicare puts into your medical savings account each year. Then, the money earns interest that is also tax-free. If you use the account funds for qualifying medical expenses (as defined by the IRS), there are no taxes when you take them out of the account, either.

However, you will have to pay taxes (and a medicare penalty) if you use the money for expenses that the IRS says aren’t eligible. Be sure to save all your paperwork and receipts related to the MSA to make tax filing easier. You will need to file Form 1040 and Form 8853 with the IRS each year to report your MSA distributions.

Pros and cons of MSA plans

Pro Heading
Pros
Pro Bullet $0 premium
Pro Bullet Require no copays or coinsurance
Pro Bullet Allow you to earn tax-free interest
Con Heading
Cons
Con Bullet Do not include prescription drug coverage (you’ll need a separate Part D prescription drug plan)
Con Bullet Are not available in all states (if you move, you may need to find another plan)
Con Bullet Require that you file tax forms each year

Why choose an MSA plan?

MSA plans have many appealing features for some people on Medicare.

  • They have a $0 premium.  You pay no premium with an MSA plan. You do still have to pay your Part B premium (typically it’s withheld from your Social Security check) and the premiums for any Part D prescription drug plan you choose.
  • They are simple. If you enroll in an MSA, you can have $0 premiums, and no required copays or coinsurance.
  • They have tax benefits. Money deposited in the MSA account is not taxed as income, and any interest it earns is tax-free too.
  • Your out-of-pocket costs are predictable. Worst-case scenario: the most you’d have to spend is the difference between the annual deposit and your deductible.
  • Your savings can build if you stay healthy. If you spend less money on health care than the yearly deposit, the difference will roll over. If the balance grows high enough to cover your full deductible, you might not need to pay anything out of pocket in some years.
  • You can move the funds to any financial institution you choose. The plan will open your account at a bank they choose, but you can move the money if you like. Keep in mind that you will be responsible for tracking your spending if you move the funds.

How do MSA plans compare to other Medicare Advantage options?

An MSA plan is a type of Medicare Advantage plan. However, MSA plans are different from most other Medicare Advantage plans.

MSA plans don’t typically include dental, vision, or prescription drug coverage, as some Medicare Advantage plans do.

MSAs have more restrictions than Medicare Advantage plans when it comes to who can join in the first place. We’ll cover those specifics in the “How to enroll” section below.

How do MSA plans compare to HSAs and FSAs?

MSA plans are in the same family as HSAs (Health Savings Accounts) and FSAs (Flexible Spending Accounts), which you may have encountered outside of Medicare. They are all examples of “consumer-directed health care.” The idea is that, with more control over your health care dollars, you’ll make money-smart health choices so that you can keep funds in your account to grow over time, rather than spending them on excessive health care.

The biggest difference between MSAs and HSAs/FSAs is who puts money into the savings account you use to pay your medical expenses. With MSAs, Medicare funds the account. In fact, you’re not allowed to contribute any money to an MSA.

With HSAs/FSAs, it’s the opposite: you supply the money to fund an HSA or FSA, sometimes with a boost from your employer.

A few other differences to note:

  • MSAs (and HSAs) carry over funds year to year. If you don’t use FSA money by the end of the year, you lose it.
  • MSA money can only be used for your own medical expenses. HSA and FSA money can be used for medical expenses for another person, such as a spouse.
  • MSAs accrue simple interest rates equivalent to a bank savings account. HSAs can invest in mutual funds and exchange-traded funds.

All three plans follow the same rules from the IRS regarding qualified medical expenses. You can spend the money in your accounts only on certain expenses to avoid being taxed. You can find the full list from the IRS here.

Who is eligible for an MSA plan

You can sign up for an MSA plan if:

  • You live in an area the plan serves. MSAs are not yet available in all states, so you may need to research to make sure you can sign up. 
  • You have already signed up for Medicare Part A and Part B.
  • You reside in the US more than half of the year.

There are a few other situations that can disqualify you from an MSA plan, but they affect fewer people. Examples include having end-stage renal disease, getting hospice care, or receiving health benefits from other programs such as Medicaid, Tricare, the Department of Veterans Affairs (VA), the Federal Employees Health Benefits (FEHB) Program, or an employer or union retiree plan.

How to enroll in an MSA plan

There are two times you can join an MSA plan: when you are first eligible for Medicare and each year in the fall.

Specifically, the initial enrollment period occurs during a seven-month window around your 65th birthday. It includes the month you turn 65, plus the three months before and after.

The Annual Election Period, when anyone can change Medicare plans, runs from October 15 to December 7. Juggling all the different periods can be confusing, so consult our enrollment periods cheat sheet so you don’t miss a deadline.

When you sign up for an MSA plan, you agree to stay on it for a full calendar year (unless it’s your first year on the plan). If you must disenroll during the year, you’ll have to pay back some of the money deposited in your savings account.

The bottom line

MSA plans can be a great option if you want more control over the money Medicare plans to spend on your health. In exchange, you agree to pay some expenses out of pocket until you reach a deductible. Some people see MSAs as an exciting opportunity to build savings for health expenses tax-free.


Sources: 

1. Henry J. Kaiser Family Foundation. Medicare Advantage Fact Sheet. https://www.kff.org/medicare/fact-sheet/medicare-advantage/. Accessed 8/22/19.
2. Henry J. Kaiser Family Foundation. Medicare Advantage Fact Sheet. https://www.kff.org/medicare/fact-sheet/medicare-advantage/. Accessed 8/22/19.

Content on this site has not been reviewed or endorsed by the Centers for Medicare & Medicaid Services, the United States Government, any state Medicare agency, or any private insurance agency (collectively "Medicare System Providers"). Eligibility.com is a DBA of Clear Link Technologies, LLC and is not affiliated with any Medicare System Providers.

Kathryn Anne Stewart
Written by
Kathryn Anne Stewart
Kathryn Anne Stewart is a freelance writer who covers the intersection of health and money. She has written for Johns Hopkins Medicine, Weight Watchers, Newsmax Magazine, Franklin Prosperity Report, and the National Hemophilia Foundation, often crafting clear explanations of complex topics. When she's away from her desk, you can find her reading a library book, watching stand-up comedy, or cycling with her husband.
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