Every year the Medicare program will determine the dollar amount it will make available as payment for one year of a beneficiary's program benefits, similar to the way per capita payments to managed care organizations are determined. A Medicare beneficiary wishing to acquire an MSA plan will first choose a high-deductible health care insurance policy, from the private market, to link with the savings account. At a minimum, all MSA plan insurance policies must cover the standard Medicare Part A and B benefits. Insurers determine what, if any, additional health care services will be covered by the policy. Medicare will pay the premium cost of the insurance directly to the company selling the policy.
Savings account deposits and interest earned are free of federal income taxation.
Qualified spending from an account is also free of taxation. Payments for Medicare-covered health care services made by the beneficiary from the MSA plan savings account will be credited toward the cost of the insurance policy's deductible. At the insurer's option, payments for supplemental benefits included in the policy may also be credited toward the deductible. If the amount in an MSA plan savings account is less than 60 percent of the cost of the insurance policy deductible, nonmedical spending from MSAs is subject to both federal income taxation and an additional 50 percent tax penalty. If the amount in the savings account exceeds 60 percent of the cost of the insurance deductible, amounts above the 60 percent threshold may be used penalty-free for any purpose, although such spending will be taxed as income.