The Consequences of Not Using Your Medicare Set-Aside Funds

A Medicare Set-Aside (MSA) account contains funds that are set aside specifically to pay for future medical expenses related to a work injury or illness. This separate account is meant to cover injury-related costs that would otherwise be covered by Medicare. But what happens if you receive MSA funds as part of a settlement and then fail to use them properly? Unfortunately, not utilizing your MSA appropriately can lead to some serious consequences. In this article, we’ll take an in-depth look at what can go wrong if you don’t follow MSA rules and use the funds as intended.

An Overview of Medicare Set-Aside Accounts

First, let’s make sure we understand what an MSA is. When someone who is entitled to Medicare receives a settlement for a work-related injury, the settlement often includes funds meant to cover future medical costs stemming from that injury.

Rather than paying out the full settlement amount at once, a portion is set aside in a separate account specifically for these future medical expenses. That set-aside amount is the MSA.

Some key points about MSAs:

  • The funds can only be used for medical costs related to the work injury, costs that would otherwise fall to Medicare.

  • The injured individual maintains control over the account and the spending of the funds.

  • Once the MSA funds are depleted, Medicare kicks in as the primary payer for any further injury-related costs.

  • Any MSA funds that remain unused do not expire, but carry over year to year.

So in essence, the MSA protects Medicare’s interests by ensuring available funds to cover future medical expenses for which Medicare would be responsible. This preserves Medicare coverage for the beneficiary while also protecting the program itself.

What Happens If You Don’t Follow MSA Rules?

Given the purpose of MSA funds, it’s imperative that account holders use them appropriately. But what actually happens if someone fails to adhere to the rules?

Unfortunately, not spending MSA funds as intended or using them for non-approved expenses can lead to some significant problems. Here are some of the potential consequences:

Loss of Medicare Coverage

One of the biggest risks is losing your Medicare coverage altogether. If you receive settlement funds meant to cover future medical costs, but then don’t use those funds for their intended purpose, Medicare may revoke your benefits. This could mean losing Medicare coverage not just for your work injury, but for healthcare in general.

Medicare’s role is to be the secondary payer after you have exhausted your primary MSA funds. If you fail to use your set-aside funds first, Medicare is no longer obligated to step in as the secondary payer. And if they’ve paid claims that should have been covered by your MSA funds, they have the right to terminate your Medicare benefits.

Legal Action and Repayment Responsibilities

In addition to revoking Medicare coverage, the Centers for Medicare & Medicaid Services (CMS) can also take legal action if you misuse MSA funds. Both CMS and Medicare can seek restitution from anyone involved in the settlement – the injured worker, employer, insurers, and even attorneys.

If Medicare pays out claims that should have been covered by your MSA, they can sue the primary payer to recoup those costs. And you may be held responsible for repaying Medicare if they footed the bill for medical services that your set-aside funds were intended to cover.

Loss of Means-Tested Public Benefits

If you receive needs-based government benefits such as Medicaid or SSI, not using your MSA appropriately could disqualify you from those programs too. Any settlement funds, including MSAs, are considered assets for purposes of qualification for these types of public assistance programs.

Excess assets can make you ineligible for Medicaid, SSI, food stamps, and other benefits with income and resource limits. A properly structured MSA won’t impact your eligibility, but misuse of the funds likely will.

Breach of Your Settlement Agreement

Finally, failure to adhere to MSA spending rules may also mean you are violating your original settlement agreement. Most settlements involving an MSA have provisions requiring that the set-aside funds be used for their intended medical expenses. If you use the money inappropriately, you are breaching your settlement contract.

This could open you up to legal action from the other parties to the settlement, including former employers, insurers, etc. So improper use of your MSA funds has broad legal and financial implications.

How to Avoid Consequences of MSA Misuse

Hopefully this breakdown gives you a good sense of what’s at stake if you fail to manage your MSA appropriately after a settlement. To avoid potential issues, make sure you:

  • Spend funds only on injury-related medical expenses. Don’t use MSA monies for anything other than care, treatment, medications, equipment, etc. directly related to your work accident or illness.

  • Exhaust your MSA funds first before billing Medicare. Medicare only steps in once you’ve depleted your set-aside account, so don’t submit injury-related claims to Medicare until the MSA is completely spent.

  • Keep detailed records of your spending. Carefully track what you are spending MSA funds on so you can prove proper usage if questioned.

  • Consider professional MSA administration. An administrator handles compliance, record-keeping, account maintenance, and more, reducing your risk of misuse.

  • Seek help if you have questions. Consult with legal counsel or a professional administrator if you are unsure what expenses are permitted. It’s better to ask than accidentally misuse funds.

What Happens to Leftover MSA Funds?

A final MSA question that often comes up is: what if there are funds remaining in your set-aside account when you pass away? What happens to any leftover money?

The simple answer is that Medicare gets first dibs on any unused MSA funds upon your death. Here’s the process:

  • Medicare has 12 months from the date a service was provided to submit any outstanding costs related to your work injury to your estate. This covers them for any pending expenses.

  • Once that 12-month claim period closes, if there are still MSA funds left over, the remainder can be disbursed according to your state’s laws and the settlement terms.

  • For example, leftover MSA monies may go to your designated beneficiaries or become part of your overall estate. But Medicare gets first crack at recovering any unpaid injury-related costs.

The exact disposition of surplus MSA funds depends on the settlement terms and applicable state regulations. But Medicare will claim any outstanding payments before any remaining money is distributed to heirs.

Weighing the Risks of MSA Misuse

As you can see, failing to use your MSA funds appropriately carries some substantial risks. Before finalizing a settlement with an MSA component, make sure you fully understand the rules and obligations that come with a Medicare set-aside.

Work closely with your attorney and consider professional administration services if at all concerned about your ability to self-manage an MSA. An experienced administrator will handle compliance and proper use of funds on your behalf, giving you valuable peace of mind.

While MSAs provide important protection for Medicare beneficiaries, they must be carefully followed to prevent serious fallout. Use your set-aside account judiciously and seek expert assistance if needed. With the right support and understanding, you can avoid any negative consequences and make your MSA work smoothly for you.

If you get a personal injury settlement and don’t notify Medicare within 60 days


Can I cash out my Medicare set aside account?

No. You are not entitled to release of the MSA funds if you lose your Medicare entitlement. However, the funds in the MSA may be expended for medical expenses specified in the MSA arrangement until Medicare entitlement is re‐established or the MSA is exhausted.

What happens to unused MSA funds?

Any money left in your account at the end of the year will remain in your account. If you stay with the Medicare MSA Plan the following year, the new deposit will be added to any leftover amount.

What triggers a Medicare set aside?

When is a Medicare Set-Aside Necessary? If a client is a Medicare beneficiary and has a workers’ compensation or third-party liability claim that is settled, there may be a need for a Medicare Set Aside to preserve their future eligibility for Medicare benefits.

Can I spend my MSA money?

Funds in a Medicare Set-Aside (MSA) can only be used to cover medical expenses due to your injury as set out in the MSA agreement, even if you no longer receive Medicare or treatment. They can’t be used for any other purpose.

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