Medicare Advantage Medicare Savings Accounts and the IRS

Paul H

Many lower income Medicare beneficiaries do not have a federal tax filing requirement, however If you have a Medicare Advantage MSA and take a distribution you must file a tax return including IRS form 8853

Withdrawals from a Medicare MSA (Qualified and non qualified) are reported on IRS Form 8853

If you use the money in your account for non-qualified expenses, the money will be taxed as part of your income. It will also be subjected to an additional 50% tax penalty.

A Medicare Advantage MSA is to be used solely to pay the qualified medical expenses of the account holder. This is more restrictive than other MSA's and HSA's, which may allow payment for spouses and dependents medical expenses.

The issue of qualified expenses is complicated because of IRS rules for qualified use of MSA funds, which are different then Medicare rules. Only Medicare-covered Part A and Part B services apply to the MSA deductible.

The important thing for those considering a Medicare MSA to be aware of is that if they make any withdrawals from their MSA account they should keep records and file a tax return including IRS Form 8853.

Otherwise they may expect to receive a letter from the IRS assessing the 50% penalty plus any income tax.

MSA funds are normally accessed by the use of a debit card, and there is nothing to prevent the user from making withdrawals, qualified or not.

Medicare MSA withdrawals are reported to the IRS and to the account holder on Form 1099 SA. The IRS may impose a levy on Social Security for taxes due.

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