Healthcare is one of the biggest challenges that people face as they get older, and retirees in particular often struggle to cover the costs of their healthcare. Medicare is a key source of financial support for those 65 and older, with tens of millions of Americans using the program's benefits to manage their healthcare costs.
There's been a lot of debate recently about the role Medicare plays in America, with some seeking universal availability of Medicare benefits for all. Earlier this month, the White House offered its view, with President Trump signing an executive order enumerating his own positions about Medicare. Among them was a call to make it easier for Medicare participants to use medical savings accounts. MSAs have been available for a long time, but relatively few people use them. The Trump administration believes that an enhanced role for MSAs within the Medicare Advantage program could result in lower costs and more control for the Medicare participants who use them.
What is a Medicare MSA?
Medicare medical savings accounts look a lot like the health savings accounts that those who aren't yet eligible for Medicare can use with private plans. In order to use a Medicare MSA, you first need to participate in a Medicare Advantage plan rather than use traditional Medicare. The plan you pick has to be designed specifically for use with an MSA, with required policy provisions that include high deductibles you have to cover on your own before coverage kicks in.
The big difference between MSAs and health savings accounts is the source of the money that goes into the account. With an HSA, you're the one who typically makes contributions, with some employers chipping in an amount of their own to supplement your savings. But with an MSA, the Medicare program itself makes deposits into the account to help you cover healthcare costs. The general idea is that the health insurance company offering the MSA-eligible plan saves enough money with the high-deductible option that it can add the savings to your account.
How can you use MSAs?
You're allowed to use any money in your MSA to cover qualifying medical expenses. MSA funds can go toward helping you cover the deductible for your high-deductible Medicare Advantage plan, or you can use it for out-of-pocket costs even once Medicare coverage kicks in. That includes copays, coinsurance amounts, or even some qualifying health-related products that Medicare doesn't typically cover.
Whenever you use MSA money for medical expenses, there's a form you'll fill out to document how you spent the funds. That form helps you at tax time by keeping everyone informed that you've used the MSA properly. The cost of using MSA money for improper purposes is harsh, as the distribution is treated as taxable income and you'll also have to pay a 50% tax penalty.
Why are MSAs useful?
Obviously, having more money to cover your healthcare costs is beneficial. Some MSA providers allow participants to invest their money in different types of investments, including mutual funds in some cases. Although many people keep their MSA balances in ultra-safe FDIC-insured bank accounts, investing MSAs in growth investments can help you earn higher returns over time. Moreover, as long as the money's used for qualifying healthcare needs, distributions are free of tax -- even on the portion representing income earned within the account.
MSAs are also flexible, letting you carry money over from year to year until you need it. So, if you have a healthy year and don't need to spend money on healthcare, then the full amount will still be available in the future. If you suffer a serious health condition the following year, then you'll be glad that money's still there and ready for you. If you end up not using all your MSA money during your lifetime, then you can name a beneficiary to receive whatever's left.
Unfortunately, there are some downsides to Medicare MSAs. If you need prescription drug coverage, you'll have to get it separately through a Medicare Part D plan, because MSA-eligible Medicare Advantage plans don't incorporate drug coverage into their benefits. Also, if your healthcare costs are especially high, then you might end up being better off with traditional Medicare or a more comprehensive Medicare Advantage plan -- even if it means giving up the benefits of an MSA.
Also, some people don't qualify for MSAs. If you're on Medicaid or get healthcare benefits as a veteran, member of the military, or retired federal government employee, then you're not eligible for an MSA. In addition, those with end-stage renal disease typically can't get MSAs.
Keep your eyes on MSAs
With open enrollment starting Oct. 15, the recent executive order might well cause the federal government to take a closer look at MSAs. That might not result in easier access right away. But if it eventually leads to changes in the program, then even more people might qualify and find MSAs useful for their healthcare needs.
Many people aren't comfortable with the responsibility for paying high deductibles before coverage kicks in, and Medicare MSA plans therefore haven't been all that popular. For healthy people who can handle a deductible payment, though, Medicare MSAs can be extremely attractive.