Medicare MSA Plans a good idea?

Medicare Medical Savings Account (MSA) plans are a unique twist on an old idea.  But are they a good choice for your Medicare coverage?

The first thing to understand is what a MSA plan actually is.

MSA plans combine a high deductible Medicare Advantage plan and a trust or custodial savings account (as defined and/or approved by the IRS).

Key points of MSA plans

As with anything in life, there are pros and cons.  But here are they key points so you can see what you prefer based on your priorities.

High Deductible Health Plan + Medical Savings Account

A MSA plan is a special type of Medicare Advantage plan that has a high deductible.  The plan will only cover your costs after you meet your annual deductible.

This deductible varies by plan but I’ve often seen it range between $5,000 and $8,000 per year.

The premium for these plans are usually $0.  And you get a deposit at the beginning of each year into your Medical Savings Account.

• So you pay everything until you reach your calendar year deductible
• Then after deductible, coverage is usually 100% so you pay nothing more
• You receive a deposit in your account each year from the insurance company

Medical Savings Account Quirks

The money in this account is yours.  But there’s a few things to know so you regret how you spend it.

Money rolls over each year

Yes, the money in the account rolls over each year.  So you’re not forced to use it all each year.  You can let it build up over time.

An example of how this works in real life would be your deductible is $5,000 and your deposit is $1,500.  You only go to the doctor once this year and it cost $200 which you paid out of your account.

$1,500 – $200 = $1,300

The next year you have $1,300 in your account BEFORE the insurance company puts in another deposit of $1,500. Raising your account balance up to $2,800.

Qualified Medical Expenses

You can use the money in a variety of ways.  But it’s important to use it for qualified medical expenses otherwise you may face tax consequences.

One example of qualified medical expenses is dental work.

Dental work does NOT apply to your deductible.  So the money spent doesn’t count toward your $5,000 deductible in the example above.

But you are able to use that money tax free.

Non-qualified Medical Expenses

The money in the account in yours so technically you can use the money in the account to pay your cable bill.

But it may not be wise to do so.

That’s because you will pay income taxes on that withdrawal as well as a 50% tax penalty.  So it’s usually best to only use the money in the account for qualified medical expenses.

Can I see any doctor with a MSA plan?

Technically, MSA plans do NOT use a network.  But the provider must accept Medicare in order for this plan to pay anything.

So in general, that gives you a lot of flexibility about where you can go for treatment.

But.

Yes, there’s a “but”.

MSA plans are fairly new.  And at this point, the traditional “national/name brand” insurance companies are not offering them.

So there are situations where the providers tell patients that they don’t accept that insurance.  Which can certainly be frustrating for you when trying use your coverage.

Prescription Medication coverage

MSA plans do NOT include prescription medication coverage.

This is an easy fix because you can purchase a stand alone Medicare Part D/prescription drug plan.

Who can enroll in a MSA plan?

Enrolling in a MSA has stricter requirements compared with normal Medicare Advantage plans.

MSA plans do NOT coordinate coverage.

So that means you cannot get an MSA plan if you:

• Have other coverage such as employer or union coverage
• Tricare or VA benefits
• Federal Employees Health Benefits Program (FEHB)
• Medicaid

When can you enroll in a MSA plan?

Since money is being deposited into your account, you also have stricter requirements about when you can enroll or disenroll from a MSA plan.

In general, you must enroll for a full calendar year.

There are some other possibilities where you may qualify for a special enrollment period such as becoming eligible for Medicare.

What are some concerns about enrolling in a MSA plan?

Guaranteed Renewable?

First thing to know before you actually enroll is your plan is NOT guaranteed renewable.

It is set for a calendar year.  But after that, the plan benefits could change or it could even go away entirely.  So when you enroll in this plan, you really don’t know how long you can actually keep it.

Changes to benefits

One of the big reasons people choose MSA plans is because the math makes good financial sense for them.  But they often are planning on multiple years in this coverage which the math remaining the same.

And that could turn out to be a poor assumption.

In 2018, there were options that included a larger deposit and smaller deductible than we have now.  At that point, the difference was only $2,600 per year.

But in 2021 that gap has grown to $3,600.

What if that trend continues?

Because no one knows with certainty how the plan will work next year.

Providers not familiar with it?

What’s a provider and why do I care if they are familiar with this?

Providers are the doctors and hospitals where you want to go to actually use this coverage.

Since MSAs are a type of Medicare Advantage plan, some providers believe they have the option of deciding to accept it or not.

If this happens to you, who is going to tell that provider what they can or cannot accept?

Preventive Care not covered by insurance company

Preventive care is covered by most types of insurance before deductible or copays.

But not with a MSA plan.

That’s right.  Your wellness visit or annual physical is not paid for by the insurance company.  You are responsible for paying everything up until you reach your deductible.  Then they pay 100% after that.  But they pay $0 before deductible.

Paperwork for withdrawals

You can use the money in the account tax free for qualified medical expenses.

But you have to prove that the money was used for qualified medical expenses.

So in order to avoid a tax on withdrawals from your account, you need to file Form 1040, U.S. Individual Income Tax Return, and Form 8853 each year to report your Qualified Medical Expenses.

If you don’t complete this properly, you could pay taxes plus a 50% penalty on your withdrawals.

Who might a MSA make sense for?

I think the MSA makes the most sense for 2 groups of people to consider:

• Group 1 – You have a Medicare supplement but it has gotten very expensive. Your health history prevents you from being approved for a Medicare supplement from a different company to lower your monthly premium.
• Group 2 – People under age 65 on Medicare due to disability. This is a financial decision because at age 65 you do get another opportunity to make your decision with no health history questions

If you are in Group 1, it’s worth comparing these is your monthly premium multiplied by 12 is similar or more than the deductible minus the deposit.

I know that sounds complicated so here’s an example:

MSA deductible = $5,000
MSA deposit = $1,500

Your responsibility if using deposit towards deductible = $5,000 – $1,500 = $3,500

$3,500 / 12 months = $291.67

If your monthly premium for your Medicare supplement is more than $291.67 then it could make financial sense for now to switch to a MSA plan.

But you’ve got to be willing to talk to providers if they say they don’t accept that insurance as well as complete the paperwork each year to get the tax benefits.

Group 2 is very similar with one big exception.  When you turn 65, you get a “reset” at age 65.  You will have a limited window where you can be approved from any Medicare supplement company you want. This gives you more flexibility than group 1.

 

MSA Plan

$0 Monthly Premium
$5,000 Deductible
$1,500 Deposit

Example – Outpatient knee replacement surgery

According to a recent study, the average cost of an outpatient knee replacement was $19,002 in 2019.

With a MSA, you are responsible for 100% until you reach your deductible.

So you use your $1,500 deposit plus you spend $3,500 on your own to reach the $5,000 deductible.  You know have 100% coverage.

Your out of pocket costs = $3,500.

Medicare Supplement Plan G

$100 Monthly Premium
$203 Deductible

 

Example – Outpatient knee replacement surgery

Using the same information which is the average cost of an outpatient knee replacement was $19,002.

With a plan G, you are responsible for the first $203.

Then Medicare covers 80% and the supplement covers the other 20%. Which means your responsibility is done.

You paid $100 month X 12 + $203 deductible = $1,403.

So you just saved yourself almost $2,100.

And you don’t have to fill out paperwork to prove you used the MSA money on qualified medical expenses.

With a plan G, you also don’t have to worry about a provider not accepting “that insurance.”

Key Takeaways

If you are considering a MSA plan, the number one thing is you have to be willing to be flexible and do some extra work.

If that doesn’t sound like you, then a MSA is NOT a good option for you.

Here’s some of the extra things involved with a MSA:

• Paperwork for qualified medical expenses
• You pay for everything before the deductible including PREVENTIVE CARE
• Provider education about who accepts this insurance
• Flexibility to adapt if/when the plan benefits change each calendar year

If you are able and willing to go through those things AND you think the MSA money will be a better choice financially for you then it’s something to look into closer.

Otherwise stick with a Medicare supplement or more traditional Medicare Advantage plan.

 

Mike Lovell does not provide tax, legal, or accounting advice.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice.  You should consult your own tax, legal, and accounting advisors before engaging in any transaction.