What is happening out there in the real world is lots and lots of workers’ comp claims are being settled with Medicare set-asides where the injured worker or their family are being given a sometimes large MSA trust account that has been approved by the Centers for Medicare and Medicaid Services (CMS) for use to pay work-related medical expenses.
Some claimant attorneys were advising their clients these funds are “part” of the settlement—that advice is sort of right and sort of misleading. It is misleading if the worker thinks he can take the money and casually use it for anything he wants. Nothing can be further from the truth. All monies in the set-aside have to be used carefully and has to be reported annually to the Feds. Failure to do so may result in a claimant being audited and sued by them—and once John Q. Injured Worker gets into a problem with the Feds, they are certain to turn around and want to sue the attorney or insurance carrier/third-party administrator if they can point liability at them. We recommend caution be used at every step of this path.
We have also heard of claimant attorneys who have sought to take a fee on the amount of the set-aside—such a practice is specifically barred by U.S. law. For example, if the settling parties submit a set-aside proposal to CMS which indicates claimant will need $100,000 worth of work-related medical expenses that would otherwise be reimbursable under Medicare and the settling parties assert it will cost $20,000 in administrative and attorney fees to establish and administer the Medicare set-aside arrangement proposal, CMS will only review the reasonableness of the $100,000 figure. CMS will not review whether or not the $20,000 in administrative and attorney fees are reasonable nor will CMS permit the settling parties to add $20,000 amount to the $100,000 set-aside amount. Therefore, if CMS approves the proposal for a $100,000 set-aside, the settling parties administrative and attorney fees cannot be charged to/against the set-aside. We have also not heard of any rulings where an arbitrator or the Illinois Commission has approved a settlement where the claimant attorney is seeking a fee on the future medical bills that have not yet been paid.
We caution our readers the injured worker has to be advised Medicare set-aside monies cannot be used until the worker is eligible for Medicare benefits. Once the worker is eligible to receive Medicare benefits, the monies supplant the federal benefitthe monies have to be used to pay Medicare-covered medical or other expenses related to the work injury or management of the MSA until they are used up. Most important, the injured worker has to annually report what they do with the money to CMS.
CMS recommends non-professional administrators look to Medicare's publications, such as "Medicare and You," for general guidance about Medicare issues. This document is available from their offices and on the web at http://www.medicare.gov/Publications/Pubs/pdf/10050.pdf. You may note this lengthy document does not directly address the issue that is the subject of this article. This document and any of Medicare’s other publications, are available from local Social Security office; or from Medicare, by calling 1-800-633-4227 or by visiting Medicare’s web site at http://www.medicare.gov.
We are advised the folks who set up the set-aside generally provide pamphlets and forms for the injured worker or their families to understand the rights and responsibilities they face in this process. In pro se settlements, we recommend the WC claims person discuss the issues with claimant and document those discussions to protect yourself from future liability. For lawyers on both sides who are involved in a settlement with a self-administered MSA, we suggest you insure claimant has been fully advised about the requirements.
For the statutory outline of what is going on, Medicare regulations found in Title 42 of the Code of Federal Regulations §411.46 state Medicare will not pay for covered medical services related to the work-related injury until the set-aside funds have been exhausted. All set-aside funds must be used to pay for all Medicare-covered services and supplies related to the work injury. Examples of some items that Medicare does not pay for are: acupuncture, routine dental care, eyeglasses or hearing aids. Therefore, these items can not be paid from the set-aside account. If payments from the set-aside 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 set-aside account and then properly exhausted.
A CMS Medicare contractor will monitor all expenditures from the set-aside account upon receipt of the annual self-attestation letter the injured worker is required to submit. Once the lead contractor has confirmed set-aside funds have been exhausted appropriately, Medicare then begins paying for Medicare covered-services related to the work-related injury.
Establishing and Using a Medicare Set-Aside Account
As part of the workers’ comp settlement, set-aside funds are placed in an interest-bearing account, separate from the worker’s personal savings or checking account. This is typically done by the Medicare set-aside provider, who prices the trust and sets it up with funds or an annuity paid for by the insurance carrier/third-party administrator. That provider should also outline what the injured worker is to do with the monies, along with when and how to spend them and how to report all of it to CMS on an annual basis.
As an administrator of the self-administered set-aside account, the injured worker is 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 set-aside account.
The injured worker may use the set-aside account to pay for the following costs directly related to the account:
• Photocopy charges
• Mailing fees/postage
• Any banking fees related to the account
Annually, the worker must sign and forward a copy of the form providing self-attestation that payment from the set-aside account was made appropriately for word-related injuries that would otherwise be reimbursable by Medicare. The annual accounting has to be submitted no later than 30 days after the end of each year, beginning one year from the establishment of the set-aside account. Annual self-attestation should continue through depletion of the set-aside account to the CMS lead Medicare contractor.
CMS policies further restrict the use of MSA funds. Payment of fees for attorneys, 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.
In the case of non-professionals administering set-aside's, CMS will accept a completed annual self-attestation form in which the set-aside administrator verifies 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 the set-aside amount approved by CMS to fund a set-aside must be placed in a separate interest bearing account.
State Law Requirements
CMS takes the position non-professionals administering set-aside'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.
Typical fiduciary powers include, but are not limited to:
• The power to invest/reinvest in securities such as stocks, bonds, or other property, including purchase/sale of annuities, life estates, remainder interests, options on securities, insured money market funds;
• The power to hold investments in the name of a nominee;
• 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;
• The power to retain any property (whether or not income producing) that may be transferred to the trust or custodial arrangement;
• The power to borrow money for any purpose connected with protection, preservation or improvement of the trust or custodial arrangement, or enhancement of the benefits to 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;
• The power to pay, compromise or adjust any claims by or against the trust or custodial arrangement;
• The power to pay tax obligations of the trust, custodial arrangement or beneficiary from assets held by the trust or custodial arrangement;
• 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
• Other powers that may be allowed or granted under state law or in the governing trust or custodial agreement itself.
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.
CMS only requires 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.
IRC §104(a)(2) provides damages received on account of a physical injury or illness, including WC settlement proceeds, are excluded from the taxpayer's income. 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.
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 set-aside's.
Eugene Keefe is a principal with Keefe, Campbell and Associates, a Chicago-based worker's compensation defense firm. This column was reprinted with his permission from the firm's newsletter to clients.