You can spend your Medicare Set-Aside money, but only on medical care and prescription drugs that meet two conditions at once: the care must treat the injury or illness covered by your workers’ compensation settlement, and it must be the kind of care Medicare would pay for. Anything outside those two lines is off-limits, and spending outside them can cause Medicare to refuse your injury-related bills later.
The Two-Part Test for Any Expense
Every charge you pay from the account has to pass the same test. Is the treatment related to the settled injury? Would Medicare cover that treatment? If both answers are yes, the account can pay. If either answer is no, it cannot.
That covers hospital and inpatient services under Medicare Part A, outpatient care under Part B (office visits, diagnostic imaging, physical therapy, surgical procedures), and prescription drugs under Part D. Your settlement paperwork includes a medical treatment plan listing the services and medications the MSA is expected to cover, and sticking to that plan is the simplest way to keep spending clean. Providers should bill at Medicare-approved rates for your area. If a doctor prescribes a new drug for the injury, confirm it appears on a Medicare Part D formulary before you pay for it from the account.
What the Account Cannot Pay For
Two categories are blocked. The first is any treatment unrelated to the settled injury, even care Medicare would otherwise cover. If you develop diabetes or heart disease, those bills belong on other insurance or come out of pocket. The second is any service Medicare does not cover at all, even if it relates to the injury.
- Routine dental care and eye exams. Medicare generally does not cover these.
- Most alternative therapies, such as massage therapy or acupuncture, unless Medicare specifically covers them for your condition.
- Over-the-counter products, including vitamins, supplements, and basic bandages.
- Living expenses of any kind: rent, utilities, groceries, transportation, personal debts.
- Legal or administrative fees connected to the settlement itself, including attorney costs.
When you are unsure about a specific service, work the test backward. Check whether Medicare covers it. Check whether it treats the injury described in your settlement. Both have to be yes.
The One Non-Medical Expense You Can Pay
The settlement money that funded the account is generally not taxable income under federal law.1Office of the Law Revision Counsel. 26 U.S. Code 104 – Compensation for Injuries or Sickness The interest the account earns, however, is taxable. Your bank issues an IRS Form 1099-INT each year, and you report that interest on your tax return.2Centers for Medicare & Medicaid Services. Self-Administration and You – Beneficiary Toolkit for Workers’ Compensation Medicare Set-Aside Arrangements
You can pay the taxes owed on that interest directly from the MSA. This is the only non-medical expense the account allows. Document the amount carefully, because you have to report it on your annual attestation. No other taxes and no personal expenses qualify.
Keeping the Account Separate
MSA funds have to sit in a dedicated bank account, separate from your personal checking or savings. CMS requires the account to earn interest and recommends FDIC insurance. Look for low or no minimum-balance fees and easy check-writing, which makes paying medical bills from the fund simpler.3Centers for Medicare & Medicaid Services. Self-Administration Toolkit for Workers’ Compensation Medicare Set-Aside Arrangements
Never mix MSA money with personal funds. Commingling makes it hard to prove, dollar by dollar, that the account was spent correctly. Interest the account earns becomes part of the MSA and follows the same spending rules as the original deposit, with the single tax exception noted above.
Proving You Spent It Correctly
If you administer the account yourself, you have to send an annual attestation to the Benefits Coordination & Recovery Center (BCRC) confirming the funds were spent on allowable care. The first attestation is due no later than 30 days after the one-year anniversary of the settlement, with each later report on the same yearly cycle.4Centers for Medicare & Medicaid Services. WCMSA Reference Guide Version 4.4 Submission goes through the WCMSA Portal on the CMS website or your Medicare.gov account.5Centers for Medicare & Medicaid Services. WCMSA Self-Administration
Each attestation lists the medical and prescription expenses paid during the period, with date of service, provider name, and amount paid. It also reports interest earned on the account and any taxes paid on that interest.6Centers for Medicare & Medicaid Services. WCMSAP User Guide Version 7.3 Keep every receipt, invoice, and bank statement for the life of the account and after. If you need to fix an earlier attestation, the portal lets you upload replacement or additional documents to an existing case.7Centers for Medicare & Medicaid Services. WCMSA Portal
Missing an attestation or failing to document your spending can lead Medicare to refuse injury-related bills once the fund is gone, even if the spending itself was proper.
When the Account Runs Out
How Medicare responds depends on whether the balance is temporarily or permanently gone.
Temporary Depletion
If your settlement pays into the MSA in annual installments and you spend the current year’s funds before the next deposit, the account is temporarily depleted. Send an attestation letter to the BCRC saying so, and have providers bill Medicare directly for injury-related care until the next deposit arrives. When it does, you go back to paying from the MSA.2Centers for Medicare & Medicaid Services. Self-Administration and You – Beneficiary Toolkit for Workers’ Compensation Medicare Set-Aside Arrangements
One practical point. If your remaining balance only covers part of a bill, do not make a partial payment. Have the provider send the whole bill to Medicare. Splitting a bill between the MSA and Medicare creates problems for both you and the provider.
Permanent Exhaustion
Permanent exhaustion means the entire balance, including all interest, has been spent on appropriate care. Notify the BCRC and show that every dollar went to Medicare-covered, injury-related expenses. Once the BCRC verifies proper exhaustion, Medicare takes over as the primary payer for your injury-related care from that point forward.8eCFR. 42 CFR 411.46 – Lump-Sum Payments
Verification is the critical step. Without proof the funds were spent correctly, Medicare can refuse injury-related claims and leave those bills with you.
If You Spend the Money Wrong
Using MSA money for anything outside the two-part test triggers a hard consequence. Medicare will deny all claims related to your workers’ compensation injury until you restore the misspent amount to the account and then spend it on allowable care.9Centers for Medicare & Medicaid Services. WCMSA Reference Guide Version 3.0 There is no set end date on that denial. It lasts until the problem is fixed.
In more serious situations, where a settlement did not adequately consider Medicare’s interests to begin with, Medicare can refuse to pay for injury-related services until your out-of-pocket medical expenses equal the entire settlement amount, not just the MSA portion. The practical result of misspending is that the financial burden of your injury-related care shifts back onto you, which is the exact outcome the account was set up to prevent.
What Happens to Leftover Money if You Die
Remaining funds do not pass automatically to heirs. The BCRC first makes sure all outstanding medical claims have been paid. Because providers and suppliers have up to 12 months from the date of service to submit bills, the account typically stays open for a period after death to handle late-arriving claims.4Centers for Medicare & Medicaid Services. WCMSA Reference Guide Version 4.4
Once Medicare’s interests are fully protected and the outstanding claims are settled, anything left is distributed according to the original settlement agreement or applicable state law. The settlement paperwork often names who receives leftover MSA funds, so reviewing that language with an attorney is worthwhile for anyone sitting on a significant balance.