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What Is a Medical Savings Account?


Written by Sarah Berger | Published on 9/3/2020

 

Medical savings accounts are one of several types of tax-advantaged savings accounts designed to help consumers save on healthcare expenses. 

In recent years, though, medical savings accounts have been rapidly replaced with a similar type of savings account, called a health savings account. Still, certain types of medical savings accounts – such as Medicare medical savings accounts – are a prevalent part of the array of tax-favored health plans that are currently offered. 

This article explores what you need to know about medical savings accounts and health savings accounts, and which one might be the best fit for you.

In this article we will cover:

What is a medical savings account?

Medical savings accounts (MSAs) are tax-exempt accounts that are used to save exclusively for qualified, future medical costs and they require you to be enrolled in a high-deductible healthcare plan (HDHP). 

Medical savings accounts are relatively rare, and are restrictive in terms of eligibility. They share many of the same core characteristics of health savings accounts (HSAs), as they are both effective tools in lowering your healthcare costs by giving you tax breaks on the funds you use for medical expenses.

Types of medical savings accounts  

Medical savings accounts are primarily designed to help people who are self-employed or employees of small businesses pay for medical expenses. There are two main types of medical savings accounts: Archer MSAs (which have been severely limited since 2007) and Medicare MSAs. The main difference between the two plans is right in the name – if you are covered by Medicare, you cannot contribute to an Archer MSA, and will instead have to contribute to a Medicare MSA.

Archer MSAs feature the following core components: 

  • Contributions: You can fund an Archer MSA yourself or through your employer, but not both. 
  • Taxation: Your contributions are deductible, and employer contributions are not included in income. 
  • Distributions: You can use your Archer MSA to pay for qualified medical expenses and are not taxed.  

Meanwhile, Medicare MSAs feature the following core components:  

  • Contributions: Medicare MSA contributions can only be made by Medicare. 
  • Taxation: Your contributions to Medicare MSAs are not included in your income. 
  • Distributions: You can only use your Medicare MSA distributions to pay for the qualified medical expenses of the person who is enrolled in Medicare. Distributions are not taxed.

Who is eligible for a medical savings account? 

Since 2007, the use of Archer MSAs has been largely phased out, and you cannot be treated as an eligible individual for an Archer MSA unless you meet the following requirements:

  • You were an active participant for any tax year ending before 2008 or
  • You became an active participant for a tax year ending after 2007 by reason of coverage under a high-deductible health plan of an Archer MSA participating employer.

Understandably, these strict eligibility requirements severely limit who is eligible for an Archer MSA. Keeping that in mind, the chart below breaks down the eligibility for Archer MSAs, Medicare MSAs and HSAs, which are far easier to qualify for. 

Eligibility Requirements for Archer MSAs, Medicare MSAs and HSAs
Type of Plan  Eligibility Requirements 
Archer MSA (Note: Remember that eligibility to this plan has been severely restricted since 2007, and the following requirements primarily refer to pre-2007) 
  • You are an employee (or the spouse of an employee) of a small employer (defined by the IRS) that maintains a self-only or family HDHP for you (or your spouse).
  • You are a self-employed person (or the spouse of a self-employed person) who maintains a self-only or family HDHP.
Medicare MSA
  • You are enrolled in a high-deductible Medicare MSA Plan.
Health Savings Account
  • You are covered by a HDHP.
  • You cannot be enrolled in Medicare.
  • You cannot be claimed as a dependent on someone else’s tax return. 

As you can see, all of these plans require you to be enrolled in a HDHP, which the IRS defines as a plan that has a higher annual deductible than typical health plans and has a maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses. HDHP plans typically only cover preventive care before the deductible. 

The table below outlines the minimum and maximum annual deductibles for HDHPs for 2020. 

Minimum and Maximum Annual Deductibles for HDHPs
Self-only coverage  Family coverage 
Minimum annual deductible  $1,400 $2,800
Maximum annual deductible and other out-of-pocket expenses  $6,900 $13,800

Medical savings accounts vs. HSA

Medical savings accounts and health savings accounts are both tax-favored health plans that can help individuals on high-deductible health plans offset healthcare costs. MSA and HSA plans share the following benefits:  

  • You can claim a tax deduction from contributions made to your HSA or MSA without  itemizing your deductions.
  • Contributions remain in your HSA or MSA account until you use them, and the accounts are portable – you can take it with you from employer to employer.
  • Interest you earn from assets in your HSA or MSA account is tax-free.
  • Distributions of your HSA or MSA are tax-free as long as you use them on qualified medical expenses. 

While there are many similarities between the two, HSAs are much more flexible and more widely available. The chart below breaks down the biggest differences between HSAs and MSAs, aside from their differing eligibility requirements, which are noted above.

Archer MSA vs. Medicare Advantage MSA vs. HSA
Archer MSA  Medicare Advantage MSA HSA
Contribution limits 
  • You/your employer can contribute up to 75% of your HDHP’s annual deductible (65% if you are on a self-only plan).
  • Your contributions cannot exceed what you earned for the year from your employer through which you have your HDHP.
  • Generally, the amount your plan contributes is lower than your deductible. 
  • For 2020, the limit is $3,550 if you have self-only HDHP coverage.
  • For 2020, the limit is $7,100 if you have family HDHP coverage.
Who can contribute 
  • You or your employer – but not both. 
  • Your healthcare plan provider deposits money into your MSA.
  • Qualifying individuals or anyone else, including your employer or a family member.

Medical savings account vs. FSA  

Another popular type of tax-advantaged savings account you can use to pay for medical expenses is the flexible spending arrangement (FSA). These plans are popular because employment and federal income tax are not deducted from your FSA contributions, and employer contributions can be excluded from your gross income. However, money your employer contributes for long-term care insurance has to be counted as income. 

The main, underlying similarity between FSA and MSA plans is that distributions of your FSA or MSA are tax-free as long as they are used on qualified medical expenses.  However, there are many differences between FSAs and MSAs, of which the main ones are outlined in the chart below.

MSAs vs. FSAs: How They Compare
MSAs FSAs
Eligibility requirements 
  • You are an employee (or the spouse of an employee) of a small employer (defined by the IRS) that maintains a self-only or family HDHP for you (or your spouse).
  • You are a self-employed person (or the spouse of a self-employed person) who maintains a self-only or family HDHP.
OR
  • You are enrolled in a high-deductible Medicare MSA Plan.
  • FSAs are employer-sponsored plans, so your employer must offer a FSA in order for you to participate. Self-employed people are not eligible. You do not need to be covered by a HDHP. 
Contribution limits 
  • For Archer MSAs, you or your employer can contribute up to 75% of the annual deductible of your HDHP (65% if you are on a self-only plan).
  • Your contribution amounts are limited to what you earned for the year from the employer providing your HDHP.
  • For Medicare MSAs, the amount your plan contributes is typically lower than your deductible.
  • For 2020, the maximum amount you can contribute to a FSA through a paycheck withholding is $2,750.
Flexibility 
  • Funds in MSAs are portable, and roll over from year to year. 
  • You typically have to forfeit any unused money in the account at the end of the year.
Tax reporting 
  • The IRS requires you to report your Archer MSAs on a variety of tax forms.
  • There are no reporting requirements for FSAs on your income tax return.
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