Free Guide to Medicare Set Aside Account Rules

What Is a Medicare Set Aside Account and How Does It Work

A Medicare Set Aside (MSA) account is a special arrangement used in workers' compensation cases where an injury settlement includes money that would normally go toward future medical treatment. Instead of the injured worker spending this money freely, a portion is set aside in a dedicated account specifically for medical expenses related to the work injury. The account holds funds that the worker uses to pay for future medical care before Medicare can pay its share.

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Here's how the basic structure works: When someone receives a workers' compensation settlement that covers both past and future medical needs, Medicare requires that a certain amount be set aside for those future medical costs. This protects Medicare from having to pay for treatment related to the work injury when money from the settlement should cover it first. The worker can access these funds to pay for doctor visits, medications, therapy, and other medical services connected to their injury.

The funds in an MSA account remain the worker's money—they don't belong to Medicare or the insurance company. The worker maintains control and decides how to use the money for medical purposes. However, there are specific rules about what counts as an allowable medical expense and how the account must be managed to stay in compliance with Medicare rules.

According to the Centers for Medicare & Medicaid Services (CMS), approximately 20,000 to 40,000 MSA accounts are established each year across the United States. These accounts vary significantly in size—some contain $10,000 while others contain several hundred thousand dollars, depending on the injury severity and life expectancy calculations.

Practical Takeaway: Understanding that an MSA is simply a designated account for medical expenses—not a special insurance product or government benefit—helps clarify why specific rules apply to how the money can be used and tracked.

When MSA Accounts Are Required by Law

Medicare has established clear circumstances that trigger the requirement to establish an MSA account. The primary trigger occurs when a workers' compensation settlement, judgment, or structured award includes compensation for future medical expenses. The settlement amount must meet or exceed $25,000 to activate this requirement. Below $25,000, no MSA account is needed for most situations, though some cases may still benefit from having one.

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The rules apply specifically to settlements that involve "future medical" components—money designated to cover treatment the worker will need going forward related to their work injury. If a settlement is solely for lost wages or permanent disability but makes no provision for future medical care, an MSA may not be required. However, when any portion of the settlement clearly addresses future treatment needs, the Medicare rules come into play.

Another critical factor is whether the worker is currently a Medicare beneficiary or will become one during the settlement period. If the worker is under age 65 and not yet eligible for Medicare, but the settlement covers medical needs that might extend into their Medicare years, an MSA must still be established. This prevents the situation where Medicare would later have to pay for treatment that the settlement was supposed to cover.

There are some exceptions to these rules. Certain types of settlements—including those for workers in states without workers' compensation systems or those involving federal programs—may have different requirements. Additionally, settlements that are truly one-time payments with no future medical component do not trigger MSA requirements.

The Social Security Administration and CMS released joint guidance indicating that settlements involving workers' compensation must consider Medicare's interests in medical cost protection. This means that even if a state doesn't require an MSA, Medicare's rules may still apply to the federal level.

Practical Takeaway: Check whether your settlement includes any amount designated for future medical expenses and whether that amount reaches $25,000, as these factors determine whether MSA rules will affect your settlement.

How MSA Account Deposits and Funding Work

Once an MSA account is established, funding typically occurs when the workers' compensation settlement is finalized. The settlement agreement will specify exactly how much money goes into the MSA versus how much goes to the worker as unrestricted funds. A third-party administrator, often called an MSA custodian or trustee, holds and manages these funds according to Medicare's rules.

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The money doesn't go directly into a regular bank account. Instead, it's held in a specialized account specifically structured to comply with Medicare requirements. These custodians are companies that specialize in managing MSA accounts and have established processes to track expenses, maintain records, and report to Medicare about account activity. Common MSA custodians include companies like Med America, First Healthcare, and other specialized firms that focus exclusively on this type of account management.

Workers typically receive a debit card or checkbook connected to their MSA account. This allows them to pay for covered medical expenses directly from the account. Some custodians require pre-authorization of expenses, meaning the worker must submit information about a planned medical procedure before using MSA funds to pay for it. Others allow payment after the fact, with documentation submitted later.

The amount deposited into an MSA is calculated using specific formulas that consider several factors: the worker's age at settlement, their life expectancy, the severity of their injury, and estimated future medical costs related to that injury. A 35-year-old worker with a serious back injury might have a much larger MSA than a 62-year-old worker with a minor shoulder injury, since the younger worker has more years of potential medical needs ahead.

Importantly, any interest earned on MSA funds belongs to the worker and becomes part of the account balance. If the account earns $500 in interest over several years, that $500 can be used for medical expenses just like the original deposit. This is one of the few ways an MSA account can grow beyond its initial funding amount.

Practical Takeaway: When your settlement is finalized, work with your attorney and the MSA custodian to understand exactly how much money is being deposited, how you'll access it, and what documentation you'll need to provide when paying for medical expenses.

Allowable Medical Expenses and What Cannot Be Paid From MSA Funds

The rules about what counts as an allowable medical expense in an MSA account are specific and based on Medicare's definition of medical care. Generally, allowable expenses include doctor visits, hospital care, medications prescribed by a doctor, therapy and rehabilitation, medical equipment, and diagnostic tests related to the work injury. If an expense would normally be covered by Medicare for a regular Medicare beneficiary, it typically counts as allowable from an MSA.

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However, several common expenses explicitly cannot be paid from MSA funds. Cosmetic procedures—even if they relate to treating the injury—are not allowable. For example, if a worker with a facial injury from a workplace accident wants plastic surgery for appearance reasons rather than functional medical reasons, that cost cannot come from the MSA. Expenses for over-the-counter medications that don't require a prescription are not allowable, except for insulin. Many workers are surprised to learn that aspirin, ibuprofen, cold medicine, and vitamins cannot be paid from MSA funds.

Other non-allowable expenses include medical travel costs (getting to the doctor's office), lodging during treatment, meals, and general wellness items. If a worker needs a hotel room during a hospital stay in another city, that hotel cost is not allowable. Health club memberships, even if recommended by a physical therapist as part of recovery, cannot be paid from the MSA. The distinction is between paying for actual medical treatment versus paying for related expenses or general wellness.

Dental work, vision care, and hearing aids have complex rules. Some dental work directly related to the injury may be covered, but routine dental care is typically not allowable. Similarly, hearing aids are covered only if the hearing loss is directly caused by the work injury, with documentation. Vision correction that's not injury-related is not covered.

According to Medicare guidance documents, expenses must have a clear connection to treating the compensable work injury. A worker injured in a workplace accident who receives an MSA for that injury cannot use MSA funds to treat an unrelated back problem that developed later. The injury date and description in the settlement determine what medical conditions are covered under that specific MSA.

Practical Takeaway: Before paying for any medical expense from your MSA account, verify with your custodian whether it's allowable by asking whether Medicare would typically cover it for a beneficiary with your medical condition.

Documentation, Reporting, and Compliance Requirements

Maintaining detailed records is not optional—it's a legal requirement for MSA accounts. Every dollar spent from the account

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