Is an MSA Technically a Trust?

Medicare Set-Aside Blog, Medicare Set-Asides, MSA Administration, MSP News on November 17, 2016
Posted by Jennifer Jordan, JD, MSCC

In the early days of Medicare set-asides, we used to see the word “trust” thrown around quite freely. But from a legal perspective, the word trust carries very specific legal connotations that people didn’t want attached to MSAs, so little by little we saw the use of the word disappear. If professionally administered, you will note that those vendors refer to themselves as custodians rather than trustees. But given recent court opinions, we may need to revisit the concept.

In 2015, a bankruptcy court in Pennsylvania ruled that certain assets of the petitioner were excluded from his bankruptcy estate as they were derivative products of his MSA which the court determined to be a trust for which the claimant was merely the trustee. Due to the highly restrictive language in the settlement agreement, which is governed by contract law in addition to workers’ compensation laws, limiting his use, instructing him on where to keep it and outlining the ramifications to his Medicare benefits, the court determined that he did not have beneficial ownership of the contents and was instead merely holding the money for the benefit of his medical providers. Because many of those medical providers were also listed among the creditors, the court implied that the petitioner as trustee may have breached his fiduciary duty to them by purchasing these items with MSA money that he was looking to exclude from his bankruptcy estate but that was not a matter for this court to decide. Regardless, that was the first time we saw the word trust in conjunction with Medicare set-asides in years.

The Court of Appeals of North Carolina arrived at a very similar conclusion with regard to not counting MSA funds as “countable resources” for Medicaid qualification purposes. Because the petitioner’s WC settlement agreement similarly restricted her use of the MSA funds, the court found that the MSA funds were not “legally available” to her “without legal restrictions.”  As we saw In re Arellano, claimants have unrestricted access to self-administered MSA funds and clearly can spend them on things other than related Medicare services. Because we have yet to hear of any real enforcement on the government’s part, it is difficult to agree with the court’s conclusion here.  But given that the petitioner needs Medicaid for reasons other than treating her work injury, the MSA should not serve as an impediment and this is the right overall outcome. Had it been placed in a special needs trust to begin with, this would not be an issue.

The important take away here is that even after 15 years of MSA “enforcement” in WC, the federal government has done nothing to protect MSA assets from creditors, divorce proceedings, child support claims, etc. CMS approves in excess of $1.5 billion dollars’ worth of WCMSAs annually and that money is not restricted in any way other than by the WC settlement agreement and state WC order in some jurisdictions. Given that this entire exercise is to protect Medicare’s interests, you’d think the government would take measures to keep it from being misspent or redistributed by other courts. If the government can’t be bothered reclassifying MSA funds as an excluded class of assets, then I don’t think the courts should be recognizing fictions limitations on MSA funds to get to the result it wants.  We can’t keep legislating MSA issues from the bench, particularly with the increased threats of CMS expanding its MSA review program to liability settlements. Congress really needs to clarify how the MSA funds should be treated to avoid further unnecessary litigation and to ensure these funds are protected and used for the purpose for which they were intended. Without this final piece of the puzzle, this whole MSA exercise is an expensive, unproductive exercise in futility.


In re Arellano, 2015 Bankr. LEXIS 9 (1/5/15)

Williford v. N.C. HHS, 2016 N.C. App. LEXIS 1163  (11/14/16)