The abbreviation MSA in the context of the federal health program stands for Medicare Savings Account. The MSA is a type of Medicare Advantage Plan (Part C) provided by private insurance companies that have a contract with Medicare. This plan combines two distinct components: a high-deductible health insurance plan and a corresponding special medical savings account. The plan does not charge a monthly premium, but beneficiaries must continue to pay their Medicare Part B premium.
Defining the Medicare Savings Account
The Medicare Savings Account is a consumer-directed health option that pairs a high-deductible insurance policy with a tax-advantaged financial account. This savings account is a specialized bank account established by the beneficiary with a financial institution chosen by the plan. The plan’s structure encourages beneficiaries to manage their healthcare spending directly using the funds in the account.
The high-deductible plan and the savings account function as a single unit to cover Medicare-approved services. Beneficiaries are not restricted to a network and can visit any doctor, hospital, or supplier that accepts Medicare. This flexibility is often not found in other Medicare Advantage plans. The financial account provides initial resources for routine expenses until the high deductible is satisfied. The account itself is portable, meaning the funds remain with the beneficiary even if they switch plans in a future enrollment period.
How the High Deductible Plan Works
The High Deductible Health Plan (HDHP) is the insurance portion of the MSA plan and covers all services included in Original Medicare (Part A and Part B benefits). The plan only begins to pay for services once the beneficiary has reached a high annual deductible amount. This deductible is set by the private insurance company and must fall within a range established by Medicare each year.
Until the high deductible is met, the enrollee is responsible for 100% of the cost of their Medicare-covered services. During this phase, providers are prohibited from charging more than the Medicare-approved amount for the services provided. Once the annual deductible is satisfied, the HDHP takes over and provides catastrophic coverage for the rest of the calendar year. This mechanism caps the beneficiary’s out-of-pocket spending for Medicare-covered services each year at the level of the deductible. MSA plans do not typically include prescription drug coverage (Part D), so beneficiaries who want this coverage must enroll in a separate stand-alone Part D plan.
Funding, Spending, and Tax Status
Each year, Medicare provides a certain amount of money to the private plan, which is then deposited into the beneficiary’s savings account. The amount deposited is determined by the specific MSA plan and is usually less than the high deductible amount. Beneficiaries are not permitted to contribute their own money to the MSA.
The funds deposited into the account are not considered taxable income, and any interest or investment gains earned on the balance are also tax-free. Withdrawals are not taxed as long as the money is used to pay for qualified medical expenses, which are defined by the Internal Revenue Service (IRS). Qualified expenses include costs for services covered by Medicare Part A and Part B, as well as some other medical expenses.
A significant benefit of the MSA is the ability to roll over any unused funds from one year to the next. This rollover allows the account balance to accumulate over time, creating a growing reserve for future healthcare expenses. If funds are withdrawn and used for expenses that are not considered qualified medical costs, they are subject to income tax and may incur an additional tax penalty.
Eligibility and Enrollment Restrictions
To be eligible for an MSA plan, an individual must be enrolled in both Medicare Part A and Medicare Part B. The beneficiary must also reside within the plan’s service area for at least six months of the year.
An individual is ineligible if they are currently receiving health benefits through Medicaid or if they are receiving hospice care. Enrollment is also prohibited for those who have other health coverage that would cover the MSA plan’s deductible, such as TRICARE or a Medigap policy. While individuals with End-Stage Renal Disease (ESRD) were historically ineligible, this restriction has been lifted, and those with ESRD can now enroll in an MSA plan. Certain other specific coverage types, like those receiving benefits from the U.S. Department of Veterans Affairs, may also make an individual ineligible.