Medicare covers many of your healthcare costs after you turn 65, but it doesn’t cover everything. You may be eligible for a high-deductible Medicare plan called a Medicare savings account (MSA). These health plans use a flexible savings account that’s funded each year by the government.

For some Medicare users, these plans are a way of stretching your money further when it comes to covering the cost of your deductibles and copays.

Medicare savings accounts aren’t as widely used as you might think — probably because there’s a lot of confusion about who’s eligible and how they work. This article will cover the basics of Medicare savings accounts, including the pros and cons of having one.

Like employer-supported health savings accounts (HSAs), Medicare savings accounts are an option for people who have high-deductible, private health insurance plans. The major difference is that MSAs are a type of Medicare Advantage plan, also known as Medicare Part C.

To qualify for an MSA, your Medicare Advantage plan must have a high deductible. The criteria for what is a high deductible may vary according to where you live and other factors. Your MSA then works together with Medicare to help cover your healthcare costs.

Only a handful of providers offer these programs. For some people, they may make fiscal sense, but many people have concerns about a high-deductible insurance plan. For these reasons, only a small percentage of people on Medicare use MSAs.

The Kaiser Family Foundation estimates that fewer than 6,000 people used MSAs in 2019.

MSAs are sold by private insurance companies that contract with banks to create the savings accounts. Many of these companies offer transparency by including a comparison of their plans so that consumers understand their options.

If you have an MSA, Medicare seeds that account with a certain amount of money at the beginning of each year. This money will be a significant deposit, but it won’t cover your entire deductible.

The money that’s deposited in your MSA is tax-exempt. As long as you use the money in your MSA for eligible healthcare costs, it’s tax-free to withdraw. If you have to take money out of your MSA for a non-health related cost, the withdrawal amount is subject to income tax and a 50 percent penalty.

At the end of the year, if there’s money left in your MSA, it’s still your money and simply rolls into the next year. Interest can accrue on money in an MSA.

Once you have reached your annual deductible using the MSA, the rest of your Medicare-eligible healthcare costs are covered through the end of the year.

Vision plans, hearing aids, and dental coverage are offered if you decide to pay an additional premium for them, and you can use the MSA for associated costs. These kinds of health services don’t count toward your deductible. Preventive care and wellness visits may also be covered outside of your deductible.

Prescription drug coverage, also called Medicare Part D, isn’t automatically covered under an MSA. You can purchase Medicare Part D coverage separately, and the money you spend on prescription drugs can still come out of your Medicare savings account.

However, copays on drugs won’t count toward your deductible. They’ll count toward the Medicare Part D’s out-of-pocket spending limit (TrOOP).

Advantages of a Medicare savings account

  • Medicare funds the account, giving you money every year toward your deductible.
  • Money in an MSA is tax-free as long as you use it for your healthcare costs.
  • MSAs can make high-deductible plans, which often offer more comprehensive coverage than original Medicare, financially feasible.
  • After you meet your deductible, you don’t have to pay for care that’s covered under Medicare Part A and Part B.

Disadvantages of a Medicare savings account

  • Deductible amounts are extremely high.
  • If you need to take money out of your MSA for non-healthcare costs, the penalties are steep.
  • You can’t add any of your own money to an MSA.
  • After you’ve met your deductible, you still have to pay your monthly premium.

Some people who are eligible for Medicare aren’t eligible for a Medicare savings account. You’re not eligible for an MSA if:

  • you’re eligible for Medicaid
  • you’re in hospice care
  • you have end stage renal disease
  • you already have health coverage that would cover all or part of your annual deductible
  • you live outside of the United States for half the year or more

A Medicare savings account is required to cover anything that would be covered by original Medicare. That includes Medicare Part A (hospital care) and Medicare Part B (outpatient health care).

Since Medicare savings account plans are Medicare Advantage plans (Medicare Part C), the network of doctors and healthcare coverage may be more comprehensive than original Medicare.

A Medicare savings account doesn’t automatically cover vision, dental, prescription drugs, or hearing aids. You can add these types of coverage to your plan, but they’ll require an additional monthly premium.

To see which extra insurance plans are available in your area if you have an MSA, contact your state health insurance assistance program (SHIP).

Cosmetic and elective procedures aren’t covered by a Medicare savings account. Services that haven’t been assigned by a doctor, such as holistic healthcare procedures, alternative medicine, and nutritional supplements, aren’t covered. Physical therapy, diagnostic tests, and chiropractic care may be covered on a case-by-case basis.

If you have a Medicare savings account, you’ll still need to pay your Medicare Part B monthly premium.

You must also pay a premium to enroll in Medicare Part D separately, since Medicare savings accounts don’t cover prescription drugs and you’re legally required to have that coverage.

Once you get your initial deposit, you may move the money from your Medicare savings account to a savings account provided by a different financial institution. If you choose to do this, you may be subject to that bank’s rules about minimum balances, transfer fees, or interest rates.

There are also penalties and fees for withdrawing money for anything other than approved health expenses.

You can enroll in a Medicare savings account during the annual election period, between Nov. 15 and Dec. 31 of each year. You can also enroll in the program when you first sign up for Medicare Part B.

Before you enroll in an MSA, there are two key questions you need to ask:

  • What will the deductible be? Plans with MSAs typically have a very high deductible.
  • What will the annual deposit from Medicare be? Subtract the annual deposit from the deductible amount and you can see how much of the deductible you’ll be responsible for before Medicare will cover your care.

For example, if the deductible is $4,000 and Medicare is contributing $1,000 to your MSA, you’ll be responsible for the remaining $3,000 out of pocket before your care is covered.

A Medicare savings account could make sense if you’re spending a lot on high premiums and would prefer to allocate those costs toward a deductible. Even though a high deductible may give you sticker shock at first, these plans do cap your spending for the year so you have a very clear idea of the maximum amount you might have to pay.

In other words, an MSA could stabilize how much you spend on healthcare every year, which is worth a lot in terms of peace of mind.

Medicare savings accounts are meant to give people who have Medicare help with their deductible, as well as more control over how much they spend on healthcare. The deductibles on these plans are much higher than comparable plans. On the other hand, MSAs guarantee a significant, tax-free deposit toward your deductible every year.

If you’re considering a Medicare savings account, you may want to speak to a financial planner or call the Medicare helpline (1-800-633-4227) to see if one is right for you.