Workers’ Comp and Medicare: Set-Asides, Administration, and Conditional Payments

A workers’ compensation Medicare set-aside is a portion of your workers’ comp settlement that is walled off to pay for future injury-related medical care Medicare would otherwise cover. You spend that money first, on qualifying treatment for the work injury, and Medicare only begins paying as the primary source once the account is properly exhausted. The arrangement exists because federal law makes workers’ compensation the primary payer for injury-related care, and that priority does not end when a claim settles.

Why the Set-Aside Exists

Under the Medicare Secondary Payer Act at 42 U.S.C. § 1395y, Medicare cannot pay for treatment when another source of coverage exists, and workers’ compensation is one of those sources.¹ If a settlement hands the injured worker money that could cover future care for the injury, the parties cannot simply pocket those funds and send the medical bills to Medicare. A Workers’ Compensation Medicare Set-Aside Arrangement (WCMSA) is the mechanism that keeps the workers’ comp dollars doing the job the law says they must do.

How the Account Is Funded

A WCMSA takes one of two forms. A lump-sum arrangement deposits the full set-aside amount into the account at settlement. A structured arrangement begins with an initial deposit large enough to cover the first surgery or procedure for each injured body part plus the first two years of projected annual costs, then adds annual installments over time. In a structured account, any money left from one year’s deposit carries forward and adds to the next year’s funding. Medicare will not pay for injury-related care until the whole fund, including those carry-forwards, has been appropriately spent.²

Does CMS Have to Approve the Amount

No. Submitting a WCMSA proposal to the Centers for Medicare & Medicaid Services for review is voluntary. No statute or regulation requires it, and CMS says so in its own reference guide.³ The practical catch is that if you settle without CMS approval, CMS is not bound by whatever number the parties agreed to. If CMS later decides the set-aside was too low, Medicare can refuse to pay for future injury-related care. That exposure is why significant cases usually go through review.

CMS uses two dollar thresholds to decide which proposals it will even look at. These are workload thresholds, not legal safe harbors:

For current Medicare beneficiaries, CMS will review when the total settlement exceeds $25,000.
For claimants not yet on Medicare, CMS will review when the total settlement exceeds $250,000 and the claimant has a reasonable expectation of Medicare enrollment within 30 months of settlement.

A “reasonable expectation” of enrollment typically means the claimant has applied for or is receiving Social Security Disability Insurance, or is at least 62 and a half and approaching Medicare eligibility. The total settlement figure for threshold purposes includes everything: medical allocations, indemnity, attorney fees, and any prior payouts on the claim.²

Settlements below these numbers do not get reviewed, and CMS will not issue a letter saying a set-aside is unnecessary. Your obligation to protect Medicare’s interests still exists; CMS just leaves the method to you.

When a Zero-Dollar Set-Aside Fits

Not every settlement involves future medical care. In some cases, a WCMSA of zero dollars is correct. As of July 17, 2025, CMS no longer reviews zero-dollar proposals, so the settling parties decide for themselves and keep documentation supporting the conclusion.² A zero allocation is generally defensible when any of the following is true:

The treating physician records, to a reasonable degree of medical certainty, that no further treatment or medication is needed for the work injury.
The insurer denied the claim, made no medical or indemnity payments except for investigation, is not paying benefits, and the settlement does not allocate money for future medical care.
A court or workers’ compensation board ruled on the merits that the insurer owes no additional medical or indemnity benefits.
The insurer issued a statutory denial within the state’s allowed investigation window, is not paying benefits, and the settlement allocates nothing for future care.

CMS will not confirm a zero-dollar set-aside in writing. The parties keep the records in case the position is ever challenged.

What the Money Can and Cannot Pay For

WCMSA funds are limited to future medical expenses that are related to the work injury and that Medicare would otherwise cover. Prescription drugs, doctor visits, surgeries, physical therapy, and durable medical equipment all qualify when they match that description.

Services Medicare does not cover cannot be paid from the account, even when they relate to the injury. The CMS reference guide specifically identifies acupuncture, routine dental care, eyeglasses, and hearing aids as prohibited expenses. If the injury requires something Medicare does not cover, you pay for it another way. Attorney fees and legal costs also cannot come from the account.²

One nuance: if Medicare later begins covering a service that was not covered at the time of settlement, those costs should then be treated as part of the set-aside going forward. The funds do not need to be shifted into the WCMSA account or reported in the annual attestation until that coverage change takes effect.

Running the Account

After settlement, you either administer the account yourself or hire a professional administrator.

Self-Administration

Self-administration means opening a separate, interest-bearing bank account used only for set-aside funds. The money cannot be mixed with personal savings or other settlement proceeds. You pay providers directly from the account for covered, injury-related care, and you keep detailed records because CMS can ask for proof of appropriate spending at any time.⁴

You can shift spending between the medical and prescription portions of the set-aside as your needs change. If CMS approved $7,000 for prescriptions and $3,000 for medical costs, but actual spending runs $6,000 and $4,000, the full $10,000 still counts as appropriately spent as long as every dollar went to covered, injury-related care.

Professional Administration

A professional administrator handles bill payments, provider negotiations, and government reporting on your behalf. Fees are not regulated by CMS and come from the non-set-aside portion of the settlement, not the WCMSA itself. For claimants who do not want to deal with medical billing and recordkeeping, this is the usual way to avoid the accounting errors that trigger Medicare denials.

Annual Attestation

Whether the account is self-administered or professionally administered, an annual attestation goes to the Benefits Coordination & Recovery Center (BCRC), not directly to CMS. It is due within 30 days of each anniversary of the settlement and must separately report spending on medical treatment and on prescription drugs. Attestations continue every year until the account is permanently depleted, at which point a final attestation closes it out.³ Beneficiaries can file online through their Medicare.gov account; professional administrators use the WCMSA Portal; paper submissions go to the BCRC in Oklahoma City.

What Happens If Funds Are Misused

This is the heart of the risk. If WCMSA money is spent on anything other than Medicare-covered, injury-related care, Medicare will deny every injury-related claim until you can show that an amount equal to the full set-aside has been properly spent. CMS places an electronic marker in its payment systems that blocks injury-related claims, and the marker stays until the BCRC can verify appropriate exhaustion of the entire set-aside, including accrued interest.²

In plain terms, a claimant who uses set-aside money for rent or a car payment will have to cover injury-related medical costs out of pocket until the misused amount is accounted for. There is no forgiveness mechanism, and the burden of proof sits with the claimant.

Don’t Forget Conditional Payments

The set-aside addresses future care. Medicare’s past payments on the injury are a separate obligation. Any medical bills Medicare has already paid for the work injury are conditional payments, covered on the condition that Medicare will be repaid if a settlement happens. Those debts have to be resolved at settlement.

You can track them through the Medicare Secondary Payer Recovery Portal, which lists the treatments and amounts Medicare expects to recover and lets you dispute items you believe are unrelated to the injury.⁵ Once the case settles, the settlement documentation goes to the BCRC, which issues a final demand letter with the exact repayment amount. Payment is due within 60 days of that letter, and interest begins accruing from the date of the letter if you miss the deadline.⁶

Leftover Funds and Taxes

If a claimant dies before the WCMSA is fully spent, the BCRC first confirms that all outstanding medical claims have been paid. The account can remain open for up to 12 months after the date of death because providers have that long to submit initial bills to Medicare.³ Once Medicare’s interests are satisfied, any remaining balance is distributed under the terms of the settlement agreement or applicable state law, so it is worth deciding where leftover funds go when the settlement is being drafted.

On taxes, workers’ compensation benefits, including lump-sum settlements, are excluded from gross income under Section 104(a)(1) of the Internal Revenue Code.⁷ Interest earned on the WCMSA bank account is different. Financial institutions report interest of $10 or more on Form 1099-INT, and WCMSA accounts are not among the exempt account types. That interest is taxable even though the underlying settlement is not, so self-administrators should plan for it at tax time.⁸

1
Office of the Law Revision Counsel. 42 USC 1395y – Exclusions From Coverage and Medicare as Secondary Payer
2
Centers for Medicare & Medicaid Services. WCMSA Reference Guide Version 4.5
3
Centers for Medicare & Medicaid Services. WCMSA Reference Guide Version 4.4
4
Centers for Medicare & Medicaid Services. WCMSA Self-Administration
5
Centers for Medicare & Medicaid Services. Medicare Secondary Payer Recovery Portal
6
Centers for Medicare & Medicaid Services. What to Know About Conditional Payment Letters
7
Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness
8
Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID