I am trying to figure out exactly how to use my medicare setaside account. Here is some detailed info.
Establishing and Using your Medicare Set-Aside Account
· WCMSA funds must be placed in an interest-bearing account, separate from your personal savings or checking account.
· If you are not currently entitled to Medicare benefits, the WCMSA funds must not be used to pay for any medical expenses. WCMSA funds must be held until you become a Medicare beneficiary.
· WCMSA funds may only be used to pay for medical services related to your work injury that would normally be paid by Medicare. Examples of some items that Medicare does not pay for are: prescription drugs, acupuncture, routine dental care, eyeglasses or hearing aids and therefore, these items can not be paid from the WCMSA account. You may obtain a copy of the booklet "Medicare & You" from your Social Security office for a more extensive list of services not covered by Medicare. If you have a question regarding Medicare's coverage of a specific item or service to determine if you may pay for it from the WCMSA account, call 1-800-MEDICARE (1-800-633-4227).
Please note: If payments from the WCMSA account are used to pay for services other than Medicare allowable medical expenses related to medically necessary services or supplies, Medicare will not pay injury related claims until these funds are restored to the WCMSA account and then properly exhausted.
· As Administrator of the account, you will be responsible for keeping accurate records of payments made from the account. These records may be requested by CMS' lead Medicare contractor as proof of appropriate payments from the WCMSA account.
· You may use the WCMSA account to pay for the following costs that are directly related to the account:
Any banking fees related to the account
· Annually, you must sign and forward a copy of the attached form providing self-attestation that payment from the WCMSA account was made appropriately for word-related injuries that would otherwise be reimbursable by Medicare. The annual accounting shall be submitted no later than 30 days after the end of each year (beginning with one year from the establishment of the WCMSA account). Annual self-attestation should continue through depletion of the WCMSA account to the CMS lead Medicare contractor listed on the first page of this instruction.
If you have any questions regarding the administration of your Medicare Set-Aside funds, please contact the CMS lead Medicare contractor identified on page one.
CMS policies further restrict the use of MSA funds. Payment of fees for trustees, custodians and administrators, as well as those of any other professionals engaged to assist in administration of the MSA, including any medical claims administrator or third party administrator, may not be made from the funds in the MSA. Separate arrangements must made for payment of those fees as part of the WC settlement. Also, the funds in the MSA may not be used to pay premiums for Medicare supplemental (“Medigap”) insurance for the beneficiary.
An MSA administrator is required to account to CMS annually for all deposits and expenditures from the MSA. Trustees and professional Custodians administering MSAT's or MSAC's will usually be required to submit an accounting, both to the beneficiary and to the appropriate Medicare lead contractor. In the case of non-professionals administering SMSA's, CMS will accept a completed annual self-attestation form, in which the SMSA administrator verifies that all expenditures were for work related medical expenses of the type normally covered by Medicare. CMS does reserve the right to demand and receive a complete accounting at its discretion.
CMS policy requires that the set aside amount approved by CMS to fund a SMSA must be placed in a separate interest bearing account. However, state trust and fiduciary laws impose stricter requirements on professional Trustees and Custodians administering MSAT's and MSAC's.
Similarly, when set aside funds are administered non-professionally in a SMSA, best practices suggest that a formal written custodial agreement should be used. WC claimants, friends or family members who might be serving as SMSA administrators often lack the experience, knowledge and sophistication to make proper administrative decisions regarding investments and distributions with only limited guidance. Without a formal, detailed, written and contractually binding custodial agreement, the risk of mismanagement of the SMSA fund by the claimant or other non-professional is astronomical.
IRC § 104(a)(2), provides that damages received on account of a physical injury or illness, including WC settlement proceeds, are excluded from the taxpayer's income. The placement of the award into an MSA should not alter that exclusion. Therefore, the receipt of WC settlement proceeds will not result in income tax liability to the claimant or the claimant's MSA.
If the settlement is structured to provide payments over a period of time through a qualified annuity under IRC §130, even the interest portion of the annuity payment is excluded from taxation under IRC §104(a)(2). However, if the settlement is paid in a lump sum, only the lump-sum portion is excluded from the taxpayer’s gross income; the claimant is taxed on any interest earned. If the claimant accepts a lump sum in settlement of a WC claim and subsequently purchases an annuity to fund the MSA, the interest portion of the annuity payments will likewise be taxable to the claimant.
Generally, the claimant will be recognized as the grantor or owner of an MSAT, MSAC or SMSA. This is true regardless of whether the governing instrument names the claimant as the owner of the MSAT, MSAC or SMSA; or whether a third party created the MSAT, MSAC or SMSA.
MSAT's will almost always be treated as “grantor trusts” for income tax purposes under IRC §§671-679, since the trustee will be given the power to make distributions of income and principal to the claimant/beneficiary (grantor). When a MSAT is classified as a grantor trust, all net income earned by the trust will be treated as taxable income to the claimant/beneficiary of the trust.
Income to MSAC's and SMSA's also will be taxed to the claimant. This means the income, deductions, and credits of an MSA are reported on the claimant's personal tax return each year, and not by the MSA on an IRS Form 1041 (fiduciary income tax return), even if the earnings of the MSA are not actually paid to or on behalf of the claimant. The administrator of an MSA will not be required to file a separate Form 1041; but MSAT and MSAC administrators must provide information on the MSAT's or MSAC's annual income each year to the claimant on an IRS Form K-1.
Because the claimant is treated as the owner of the MSA for income tax purposes, and is taxed on the net earnings of the MSA, regardless of whether any of the income was actually distributed, the payment of the claimant’s income tax by the MSA should not constitute additional income to the beneficiary. Further, CMS does not currently prohibit the payment of taxes from MSA's.
The MSA is permitted to report income under the claimant's social security number, since income earned by an MSA will be taxed to the claimant/beneficiary. However, professional administrators should obtain a separate employer identification number (EIN) for an MSAT or MSAC to facilitate fiduciary accounting. A separate EIN is not needed for a SMSA.
The brief guidelines for administration provided by CMS may give the initial impression that the proper administration of a MSA is a fairly simple matter. Nothing could be further from the truth. Even CMS' guidelines, while simply stated, can be very difficult to implement, especially where it is necessary to determine which of a claimant's medical expenses are injury-related and which are normally covered by Medicare.
To make matters more complex, the powers and duties of MSA administrators are governed by strict state laws applicable to trusts and fiduciaries. Finally, federal tax laws will govern the income tax treatment of earnings realized by an MSA.
Professional fiduciaries are already aware of many of the complexities of trust and custodial arrangement administration. However, most non-professionals and "self-administrators" are dangerously uninformed. No administrator should merely be handed a settlement check and a two-page recitation of CMS guidelines with the expectation that this will be sufficient to ensure proper MSA administration.
As practitioners in the field of Medicare Set-Aside Arrangements, we have an obligation to provide guidance to all MSA administrators, especially those with little or no professional knowledge or experience. Hopefully, this article will prove helpful to self-administrators and professional fiduciaries alike in the proper execution of their duties and responsibilities in MSA administration.