If you’re like most Americans, you’re lacking in two key areas that medical savings accounts (MSA’s) may help you with:
saving money, and
paying out-of-pocket medical expenses.
MSA’s can help with both, though only if you meet the qualifiers established when health savings accounts (HSA’s) were signed into law. Think of HSA’s as an expansion of the MSA program, clearing the way for even more people to take advantage of this tax deferment opportunity for qualifying medical expenses.
What is a Medical Savings Account (MSA)?
A medical savings account, or MSA, is an opportunity to cover your medical expenses with tax-free income. An MSA may only be established for individuals covered by a high-deductible health plan (HDHP). Whatever amount you (or your employer) contribute to the MSA throughout the year is considered tax-free income. It remains tax-free if and when you withdraw said funds to pay for qualifying medical expenses. These withdrawals count toward the HDHP deductible. Once this deductible has been reached via qualifying MSA withdrawals, the HDHP covers any additional medical expenses incurred the remainder of the year.
MSA’s were signed into law in 1996 under the Kassebaum-Kennedy bill during President Bill Clinton’s administration. They were made available only to self-employed individuals or businesses with 50 or fewer employees. Because of these limitations, HSA’s (health savings plans) were signed into law in 2003 – the same concept as an MSA, but clearing the way for anyone to take advantage of this tax-deferment program.
What is a High-Deductible Health Plan (HDHP)?
An HDHP is a health insurance plan that comes with a higher deductible than most insurance plans. However, because the deductible is so high, the premiums are relatively low. MSA’s must be set up in conjunction with an HDHP.
What Are the Pros and Cons of an MSA?
PROS: Any out-of-pocket medical expenses you incur with a high-deductible health plan are tax-free, meaning you will not be taxed on whatever contributions/withdrawals you make with your MSA throughout the year. If you are a relatively healthy person with few medical expenses, MSA’s are a great way of saving tax-free money that you can access without tax or penalty once you reach retirement age.
CONS: If you incur medical expenses on a regular basis, MSA’s can be costly, as you are required to carry the HDHP. Your premiums may be low on the HDHP, but the deductible is so high that, even with tax-deferred payments via the MSA, you will have a hefty out-of-pocket expense. In other words, if you do have serious medical issues, you may be better served by a regular insurance plan with a higher premium, but with a lower deductible.
How Can I Qualify for an MSA?
To qualify for an MSA you must have been an active participant in the program prior to January 1, 2008. You may qualify from that date forward if, and only if, you became a participant in a high-deductible savings plan through a participating employer. The new alternative for individuals is the HSA (health savings account).
What is an Archer MSA?
An Archer MSA is simply a reference to the sponsor of the bill that established MSA’s in 1996 – Congressman Bill Archer of Texas.
Who Makes Payments Into My MSA?
If your participation in an MSA is through your job, your employer makes contributions to the account. If your employer does not make such contributions, or you are self-employed, you make the contributions. However, at no time in a given year may and your employer both make contributions to your MSA.
Is There a Maximum Amount That May be Contributed to an MSA in a Given Year?
Yes, contributions to your MSA cannot exceed 75 percent of your HDHP’s annual deductible. Contributions also cannot exceed the total income you received from the employer through whom you have your HDHP.
What if I Contribute More Than the Allowable Amount into my MSA?
You will be taxed for the excess contributions.
Under What Circumstances May I Withdraw Tax-Free Funds From my MSA?
Most medical expenses qualify under the MSA guidelines, including basic medical care, dental care, vision care and long-term care needs. This excludes over-the-counter drugs not prescribed by a physician.
Must I Itemize my Deductions on my Tax Return in order to Receive Deductions for MSA Contributions?
No, you need not itemize your deductions in order to claim tax-deferred contributions to an MSA. However, you must report your contributions on Form 8853.
If I Change Employers, Do I Lose the Contributions I Have Made to my MSA?
Your MSA is mobile so you will not lose the funds you have contributed with an employer, whether you change employers or simply leave the work force. That said, you cannot make further contributions to the MSA unless you go to work for an employer that has a qualifying MSA program.
What Happens to my Contributions if I do not Withdraw the Funds for Use by the End of the Year?
Unused MSA contributions roll over to the next year.
Can I Withdraw MSA Contributions from the Account for Non-Medical Expenses?
Yes, you may withdraw MSA funds at any time. However, you will be taxed and penalized if the funds are used for non-qualifying medical purposes.
What Happens to my Contributions Once I Reach Retirement Age?
Once you reach age 65, any funds you have in your MSA may be withdrawn, tax-free. Any non-qualifying withdrawals made before that time (for non-medical expenses) result in taxes and penalties.
What Happens to the Funds in my MSA in the Event of my Death?
Your MSA is automatically transferred to your named beneficiary. If it is your spouse, it becomes his or her MSA. If it is not your spouse, the MSA is dissolved and the funds are made available to the beneficiary, but as taxable income.
What is a Medicare Advantage MSA?
A Medicare Advantage MSA is simply an MSA plan available to Medicare participants. Medicare makes the contributions to this type of MSA account.
