Spending Medicare Set-Aside (MSA) money on anything other than injury-related medical expenses isn’t technically a criminal act, but it carries serious financial consequences. The funds in your MSA account are earmarked to cover future medical costs related to your workers’ compensation injury, and if you use them for other purposes, Medicare can refuse to pay for that medical care until you’ve spent the equivalent amount out of your own pocket.
What Happens If You Misspend MSA Funds
An MSA exists because of a core principle in federal law: Medicare is a “secondary payer,” meaning it doesn’t cover medical expenses when another source of payment exists. When you settle a workers’ compensation claim, part of that settlement is set aside specifically to pay for future Medicare-covered treatment related to your injury. The money belongs to you, and no one will arrest you for spending it on rent or a car. But Medicare treats that money as if it’s still available for medical care regardless of how you actually spent it.
If you drain your MSA on non-medical expenses, Medicare will not step in to cover the treatment those funds were meant to pay for. You’ll be responsible for those costs yourself until you’ve effectively replaced the amount you misused. Federal regulations make clear that Medicare will not make payments for items and services when payment “has been made or can reasonably be expected to be made” under a workers’ compensation plan. In practical terms, this means Medicare looks at the total amount that was allocated in your MSA and expects that full amount to be spent on qualifying medical care before it picks up any injury-related bills.
What You Can Legally Spend MSA Funds On
MSA funds can only be used for Medicare-covered medical expenses directly related to your workers’ compensation injury. This includes payments for doctors, surgeons, and other medical practitioners who treat your injury. Prescribed medications qualify, but over-the-counter drugs generally do not. Diagnostic and treatment devices like blood sugar test kits, wheelchairs, crutches, and oxygen equipment are covered when they relate to the injury. Transportation costs to and from medical appointments, including bus fares, mileage, and ambulance service, also qualify.
The key restriction is the connection to your specific injury. Even if an expense would normally be covered by Medicare, it can only come out of your MSA if it’s related to the condition from your workers’ compensation claim. A knee replacement for an unrelated problem, for example, wouldn’t be an appropriate MSA expense even though Medicare would typically cover it.
How CMS Tracks Your Spending
The Centers for Medicare and Medicaid Services (CMS) requires anyone self-administering an MSA to submit annual attestation letters confirming the funds were used correctly. CMS provides specific forms for this: an Account Expenditure letter for lump sum accounts and a separate version for structured annuities, along with a Transaction Record Sample for tracking every deposit and withdrawal. You can submit your annual attestation electronically through your Medicare.gov account.
Every expense needs documentation. CMS recommends using their Self-Administration Toolkit, which walks you through setting up the account, tracking spending, and managing the process all the way through until the funds are fully exhausted. If your records don’t match up or you can’t demonstrate that funds went toward qualifying medical expenses, you risk losing Medicare coverage for your injury-related care.
Self-Administration vs. Professional Administration
You have two options for managing your MSA: handle it yourself or hire a professional administrator. Self-administration saves money upfront but puts the full burden of compliance on you. You’re responsible for paying providers, keeping receipts, tracking balances, and filing annual attestations with the Benefits Coordination and Recovery Center.
Professional administrators set up a dedicated bank account for your MSA funds and handle payments directly. When you visit a pharmacy or doctor for injury-related care, the administrator receives the bill, applies any available discounts, and pays it automatically. You get a record of every transaction without having to manage the paperwork yourself. Some administrators report average savings of 21% on medical expenses through negotiated rates, with discounts reaching up to 60% on certain provider bills. Those savings matter because they stretch your MSA further, potentially leaving money in the account after all your medical needs are met.
The reporting piece is where professional administration really pays off. Administrators file all required CMS documentation automatically, which protects your Medicare eligibility. Improper reporting, even if your spending was legitimate, can jeopardize your future benefits.
What Happens When the MSA Runs Out
If you spend your MSA funds properly on qualifying medical expenses and the account reaches zero, Medicare begins covering your injury-related care as it normally would. This is the intended outcome. The MSA is designed to be a finite pool that, once properly exhausted, transfers responsibility back to Medicare.
If you misspend the funds, the math works against you. Medicare effectively treats the misused amount as still available, so you’ll need to pay for injury-related medical expenses out of pocket until you’ve spent an amount equal to what was originally in the MSA. Only then will Medicare begin covering those costs. For someone with a large MSA allocation, this could mean years of paying for surgeries, medications, and treatments entirely on your own.
Recent Changes to MSA Rules
CMS updated its Workers’ Compensation Medicare Set-Aside Reference Guide to version 4.5 in April 2026, and several recent policy changes affect how MSAs are handled. As of July 2025, CMS no longer accepts or reviews MSA proposals with a zero-dollar allocation, though parties can still determine on their own that a zero-dollar amount is appropriate if they maintain supporting documentation. Since April 2025, amended review requests can be submitted at any time after a case is approved, removing the previous one-year waiting period.
These changes don’t alter the fundamental rules around spending. The funds remain restricted to injury-related, Medicare-covered medical expenses, and the consequences for misuse remain the same: loss of Medicare coverage until the full allocation has been properly accounted for.