Issue #15 June 20, 2005
HOW TO ADMINISTER A MEDICARE SET ASIDE
By John J. Campbell, Esq., CELA, MSCC
Medicare’s regulations provide that Medicare will not cover a worker's compensation (WC) claimant’s future injury-related medical expenses following a settlement until the amount of the settlement reasonably allocated to future medical expenses is spent on the claimant's future injury-related medical expenses for which Medicare would otherwise pay. These regulations require that a WC settlement must give reasonable consideration to Medicare's interests as a secondary payer.
Accordingly, the Centers for Medicare and Medicaid Services (CMS), the federal agency administering the Medicare program, requires that WC settlements allocate a reasonable amount for the claimant’s future medical expenses. If the settlement provides reasonably for the future medicals, CMS will recognize it, confer approval and extend coverage for the claimant’s injury-related care and treatment expenses in excess of the allocation.
For settlements meeting CMS' review criteria, a Medicare Set-Aside arrangement (MSA) must be submitted to and approved by CMS. As part of any MSA, the future medical expense allocation approved by CMS must be set aside and administered according to the regulations and CMS' policies. Otherwise, the claimant's future Medicare benefits could be jeopardized.
CMS permits MSA's to be administered under several different forms. The most common of these are Medicare Set-Aside Trusts (MSAT's), Medicare Set-Aside Custodial Accounts (MSAC's) and self-administered Medicare Set-Aside accounts (SMSA's). MSAT's and MSAC's are typically administered by professional fiduciaries. SMSA's are usually administered by the claimant, a spouse, family member or friend.
The requirements and criteria for administration of Medicare Set-Aside arrangements arise under the Medicare Secondary Payer (MSP) regulations, state trust and fiduciary laws and the Internal Revenue Code (IRC). This article discusses these various requirements and criteria as they apply to each of the three most common types of MSA's.
Medicare Secondary Payer Requirements
WC settlements for seriously disabled individuals require compliance with the federal Medicare Secondary Payer (MSP) statute and regulations (42 U.S.C. §1395y; and 42 C.F.R. §§411.20-.37 and 411.40-47). Failure to comply will result in carriers, claimants, and their attorneys remaining exposed, even after settlement, to significant potential liability; and the possible denial of the claimant's future Medicare benefits.
The MSP statute, at 42 U.S.C. §1395y(b)(2)(A), states:
Payment under this subchapter may not be made, except as provided in subparagraph (B), with respect to any item or service to the extent that. . .
(ii) payment has been made or can reasonably be expected to be made under a workmen's compensation law or plan of the United States or a State or under an automobile or liability insurance policy or plan (including a self-insured plan) or under no fault insurance.
42 U.S.C. §1395y(b)(2)(A)(ii) (emphasis added).
Further, the MSP regulations applicable to WC settlements, state:
§ 411.46 Lump-sum payments.
(a) Lump-sum commutation of future benefits. If a lump-sum compensation award stipulates that the amount paid is intended to compensate the individual for all future medical expenses required because of the work-related injury or disease, Medicare payments for such services are excluded until medical-expenses related to the injury or disease equal the amount of the lump-sum payment.
42 C.F.R. § 411.46(a) (emphasis added).
These statutory and regulatory sections provide the basic blueprint for administration of any MSA. The primary criteria for MSA administration are that the funds in the MSA may only be used to pay for (1) future medical expenses (2) for treatment of the claimant's work-related injuries (3) of the type normally covered by Medicare. If an MSA administrator makes an impermissible distribution from the MSA, Medicare will not cover the claimant's future injury-related medical expenses until the improper distribution is returned to the MSA and then expended properly.
No medical items or services will be covered by Medicare unless the claimant is eligible for Medicare benefits. Therefore, MSA funds may not be expended on medical care during any periods in which the claimant does not qualify for Medicare. Further, Medicare Part A covered items and services may not be paid from the MSA if the claimant is only enrolled in Medicare Part B, and vice versa.
Since medical providers and suppliers are permitted to bill their "full and actual" charges when Medicare is secondary to workers' compensation pursuant to 42 CFR §411.31, they can also bill their full charges to an MSA for injury-related Medicare covered services. Alternatively, an MSA may provide for payment at applicable WC rates, if the claimant's medical providers agree to accept payment at those rates.
Administration of an MSA does not require a determination of what would be paid under Medicare approved charges. Nor must the MSA administrator consider or calculate Medicare deductible or co-payment amounts. However, proper MSA administration may require a determination of applicable WC rates and charges.
Whether medical expenses are to be paid on a "full and actual" basis or at WC rates will be set forth in the MSA submission to CMS. Typically, the particular rates or charges used to determine the set aside amount will be contained in a Medicare Set-Aside Allocation or life care plan, included with the MSA submission. The MSA submission will also contain information on what the work-related injuries are; and what types of expected medical items or services would be covered by Medicare.
Once the MSA has been approved by CMS, the MSA administrator can rely upon this information with relative safety as a guideline for payments of future medical expenses. However, unexpected medical expenses may arise. Therefore, it is important for the MSA administrator to become familiar with some basic guidelines regarding Medicare-covered services.
Traditional Medicare is divided into two parts: Part A and Part B. Medicare Part A pays for inpatient hospitalization for up to a maximum of 90 days for a single “spell of illness,” as well as an additional 60 "lifetime reserve days." Covered inpatient hospital services generally include: a semi-private room, meals, regular nursing services (other than private duty), drugs, medical supplies and appliances ordinarily furnished by the hospital for treatment of inpatients, and any other diagnostic or therapeutic items or services ordinarily furnished to inpatients by the hospital or by others under arrangements with the hospital. Coverage is also provided for use of the operating and recovery rooms, intensive care and coronary care units, and all other medically necessary services and supplies.
If a skilled nursing facility is required following a minimum 3-day hospital stay, Medicare will help pay for care for up to 100 days in a benefit period if certain eligibility conditions are met. The first 20 days are covered at Medicare's full benefit; the last 80 days are covered at a reduced benefit, requiring a large daily co-pay amount.
If the Medicare patient is confined to his or her home and requires skilled care, Medicare can pay for home care provided by a home health agency if certain eligibility requirements are met. A prior stay in the hospital is not required to qualify for home health care.
If the Medicare patient is terminally ill, hospice care may be provided by either a private organization or a public agency for up to 210 days.
Part A does not pay for personal convenience items such as a telephone or television in your room; for private duty nurses; or any extra charges for a private room unless it is medically necessary.
Medicare Part B supplements Part A coverage. Part B generally covers physicians’ services provided in connection with the physician’s examination of the patient; physician-supervised services that are incidental but integral to the physician’s treatment of the patient (i.e., services customarily provided in the physician’s office or physician-directed clinic); outpatient hospital services; medications and biologicals (i.e., whole blood) that cannot be self-administered; basic therapy services (physical, occupational, and speech); rehabilitation facility services; diagnostic tests (i.e. x-rays, lab work); durable medical equipment; braces and prosthetic devices; home-health services; and some preventive care.
Medicare does not cover the following: services not reasonable or necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body member; services performed by a relative or a household member; services outside the U.S. (exceptions are Canadian and Mexican facilities if they are nearest to your home or while you are traveling to or from Alaska through Canada); routine foot care and orthopedic shoes, except for diabetes; custodial care; cosmetic surgery (except after an accident); most immunizations; private nurses; extra charges for a private room (unless medically necessary); and a telephone, television, or other personal comfort items.
Beginning January 1, 2006, Medicare Part D will cover outpatient prescription medications for Medicare beneficiaries who enroll. Enrollment is voluntary; there will be several choices of basic and expanded coverage under available prescription drug plans through various private contractors; and payment amounts will vary according to the various prescription plan formularies and according to the income and resource levels of beneficiaries. In short, the complexity of Medicare Part D makes it virtually impossible to determine in advance what Medicare covered prescription drug costs will be for any particular claimant.
As a result, future prescription medication expenses are the only injury-related expenses to be covered by Medicare that do not have to be included in a MSA allocation. However, since prescription drug costs are not included as part of the Medicare set aside amount, these expenses may not properly be paid from the MSA arrangement.
In the case of MSAT's and MSAC's, the arrangement will be administered by a professional fiduciary. Trustees will often seek the assistance of a medical claims administrator or third party administrator with knowledge and experience in Medicare claims. However, non-professionals administering SMSA's will not usually have access to such knowledge or assistance.
CMS currently recommends that non-professional administrators look to Medicare's publications, such as "Medicare and You," for guidance. This, and any of Medicare’s other publications, are available from any local Social Security office; or from Medicare, by calling 1-800-633-4227 or by visiting Medicare’s web site on the Internet at “www.medicare.gov” .
CMS also provides guidelines to non-professionals for administering SMSA's. These guidelines are provided by CMS to SMSA administrators in substantially the following form:
ADMINISTERING YOUR WORKER'S COMPENSATION MEDICARE SET-
ASIDE ARRANGEMENT (WCMSA)
You have chosen to personally administer the WCMSA account establised as part of a Worker's Compensation settlement. It is important that you understand The Centers for Medicare and Medicaid Services' (CMS) policies regarding WCMSA's.
Medicare regulations found in Title 42 of the Code of Federal Regulations §411.46, state that Medicare will not pay for services related to this work-related injury until the WCMSA funds have been exhausted. Your WCMSA funds must be used to pay for all Medicare-covered services and supplies related to the work injury. A CMS lead Medicare contractor will monitor your expenditures from the WCMSA account upon receipt of the annual self-attestation letter that you are required to submit. Once the lead contractor has confirmed that the WCMSA funds have been exhausted appropriately, Medicare will begin paying for covered-services related to the work-related injury.
Instructions for establishing and administering a WCMSA account are listed below. If you have any questions regarding these requirements, please contact the CMS lead Medicare contractor at the following address:
[Name and address of appropriate lead contractor]
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.
State Law Requirements
Every state has laws governing trusts and fiduciaries. Whether the claimant's set aside funds are administered in a MSAT or MSAC, the professional administrator will be considered a fiduciary under the law. Further, CMS takes the position that non-professionals administering SMSA's are subject to the same standards and duties as professional fiduciaries. Therefore, it is safe to say that anyone administering any type of MSA must comply with all applicable state trust and fiduciary laws.
These laws will typically require professional trustees to meet certain requirements; and be licensed as professional trustees. In most states, other professional fiduciaries, such as MSAC custodians, do not necessarily have to be licensed as "trustees."
Trustees, custodians and other fiduciaries derive their powers and authority from state law. The particular state's Fiduciary Powers Act or other similar legislation will define these powers, often in broad terms. Generally, these statutes will confer sufficient powers and authority for complete and efficient administration of the trust or custodial arrangement. Additional or more specific powers may also be conferred in the trust or custodial agreement itself.
Typical fiduciary powers include, but are not limited to:
1. The power to invest and reinvest in securities such as stocks, bonds, or other property, real or personal, including the purchase or sale of annuities, life estates and remainder interests, options on securities, and insured money market funds;
2. The power to hold investments in the name of a nominee;
3. The power to make distributions of the assets of the trust or custodial arrangement in money or in kind, or partly in money and partly in kind;
4. The power to retain any property (whether or not income producing) that may be transferred to the trust or custodial arrangement;
5. The power to borrow money, with or without interest, for any purpose connected with the protection, preservation or improvement of the trust or custodial arrangement, or the enhancement of the benefits to the beneficiaries; and the power to create one or more mortgages on, or pledges of, any part or all of the property held in the trust or custodial arrangement;
6. The power to pay, compromise or adjust any claims by or against the trust or custodial arrangement;
7. The power to pay tax obligations of the trust, custodial arrangement or beneficiary from assets held by the trust or custodial arrangement;
8. The power to execute, acknowledge and deliver any and all instruments in writing that may be advisable or necessary to carry out any of the trustee's or custodian's powers and duties; and
9. Other powers that may be allowed or granted under state law or in the governing trust or custodial agreement itself.
Fiduciaries are usually granted the authority to exercise their own discretion in making decisions regarding the administration of the trust or custodial arrangement. That discretion may be quite broad, where the governing trust or custodial agreement refers to the fiduciary's "sole and absolute discretion" or uses similar language. Similarly, the fiduciary's discretion may be limited, either generally or by specific limitations, such as a provision prohibiting the fiduciary from making cash distributions directly to a beneficiary. A fiduciary's exercise of discretion is always limited by the fiduciary's powers.
Fiduciaries are also subject to legal standards and duties in the exercise of their discretion, powers and authority. Fiduciaries are held to a legal standard of conduct, usually that of a prudent person dealing with the property of another. Under this standard of conduct, fiduciaries owe a duty of care to their current, contingent and remote beneficiaries. Any failure to maintain this standard of care can constitute an actionable breach of fiduciary duty, subjecting the fiduciary to liability for any losses sustained by the MSA or any of its beneficiaries.
The standard of conduct applicable to fiduciaries includes, but is not limited to: the obligation to invest trust or custodial arrangement assets at an acceptable level of risk and rate of return; the obligation to keep proper records and provide accountings to beneficiaries; the obligation to avoid exposing trust or custodial arrangement assets to other unreasonable risks of loss; and the obligation to adhere to the terms and purposes contained in the trust or custodial agreement. Above all, fiduciaries are required to avoid the commingling of trust or custodial arrangement assets with those of any other person or entity; and especially to avoid commingling with assets belonging to the fiduciary.
In making investment decisions, an MSA fiduciary must consider that the funds in the MSA must be highly liquid; and that there is little, if any, risk tolerance. The set aside funds in the MSA must be available for predicted future injury-related medical expenses of the type normally covered by Medicare. In addition, unexpected and significant medical expenses can, and often do arise.
If a significant portion of MSA assets are tied up in long term investments, such as CD's or deferred annuities, liquidation of these assets to provide emergency funds for the claimant's medical expenses could result in delays, early withdrawal penalties or unnecessary tax liabilities. Similarly, if MSA assets are invested in stocks or other volatile securities, a sudden need to liquidate those holdings could result in significant losses due to market fluctuations and capital gains tax liabilities.
It is generally advisable to invest the majority of MSA assets in stable, low risk investments, such as insured money market accounts. Rates of return may only be in the 1%-4% range, but this would normally be considered acceptable, given the low level of risk. Further, investments should be diversified to reduce the risk of significant losses due to the poor performance of any single investment vehicle.
CMS only requires that MSA assets be placed in an "interest bearing account." However, state fiduciary and trust laws require administrators to exercise due diligence in deciding on any investment of MSA assets. This requires a careful investigation and comparison of available investments, including analysis of each investment's individual characteristics and performance history. Non-professional administrators are strongly advised to seek the help of a professional, certified investment advisor in choosing an appropriate investment portfolio for MSA assets.
CMS does not require that MSA's be administered according to any formal written instrument, such as a trust or custodial agreement. As a result, many non-professional SMSA administrators act with only CMS' self-administration guidelines as a reference.
Regardless of CMS' rather lax position on this issue, no professional fiduciary should ever undertake administration of any set aside funds without a formal written trust or custodial agreement in place. Without a formal written governing instrument, the professional fiduciary will lack clear guidance regarding fiduciary powers and the exercise of discretion. Responsible professional fiduciaries will always require an opportunity to review and edit the governing trust or custodial agreement before consenting to serve as trustee or custodian. Otherwise, the fiduciary will risk potential exposure to substantial liability, even to the point where such exposure could violate the terms of the fiduciary's bond or insurance coverage.
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.
Obtaining an EIN number is a fairly simple procedure. The fiduciary simply completes an IRS Form SS-4 and submits it by fax to the appropriate regional IRS office. Form SS-4 can also be completed and submitted by telephone or over the Internet at the IRS' website: www.irs.gov .
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.
 CMS requires submission and review of the WC settlement agreement and a Medicare Set-Aside Arrangement whenever the WC settlement meets the following review criteria: 1) the claimant is currently eligible for Medicare; or 2) the claimant is reasonably expected to become eligible for Medicare within 30 months of a WC settlement valued at more than $250.000, including indemnity.
John J. Campbell, the founder and principal attorney of the Law Offices of John J. Campbell, P.C., has practiced law for 19 years and has practiced in the area of Medicare Set-Asides since 1996. Mr. Campbell is certified as an Elder Law Attorney by the National Elder Law Foundation;* and is a Medicare Set-Aside Consultant Certified (national certification through the Commission on Health Care Certification).* Mr. Campbell is licensed to practice law in Colorado and is also licensed and on inactive status in Missouri. He is a member of the Colorado Bar Association (Trust & Estate Section and Elder Law Section), the Arapahoe County Bar Association, the Missouri Bar Association, the National Academy of Elder Law Attorneys, The National Structured Settlements Trade Association and the National Alliance of Medicare Set-Aside Professionals. His areas of concentration include elder law; estate, disability and long term care planning; probate; guardianship and conservatorship; Medicare, Medicaid, Medicare Set-Aside Arrangements, and the preservation of public benefits in catastrophic third party liability and worker’s compensation settlements. Mr. Campbell has published numerous articles and has presented numerous seminars on issues relating to Medicare Set-Aside Arrangements across the country.
*The State of Colorado does not certify attorneys as experts in any field
The Law Offices of John J. Campbell, P.C. is pleased to introduce THE COMPLETE MSA TRAINING COURSE! This comprehensive study course provides thorough core training on Medicare Set-Asides and related issues. "The Complete MSA Training Course Book" is also available separately in hard copy or on CD Rom. For more information, CLICK HERE.
The National Alliance of Medicare Set-Aside Professionals (NAMSAP) is dedicated to ensuring the highest quality of services and standards of practice for the Medicare Set-Aside industry. NAMSAP is the first non-profit organization in the country serving professionals in Medicare Set-Aside practice. For complete information about NAMSAP, visit their web site: www.namsap.org
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