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What Is a Medical Savings Account?


Written by John Csiszar | Edited by Becca Stanek | Published on 10/25/2024


Medical savings accounts (MSAs) provide a way to pay for qualifying medical expenses. There are two types of MSAs: Medicare medical savings accounts, which are part of Medicare Medical Savings Account (MSA) Plans, and Archer medical savings accounts, which are no longer available to new account holders but still exist.

MSAs should not be confused with health savings accounts (HSAs), though the two have several similarities. HSAs are only for those in high-deductible private insurance plans, while MSAs are generally reserved for individuals enrolled in high-deductible Medicare plans (with the exception of those already enrolled in Archer MSAs). Functionally, however, MSAs and HSAs work in much the same way, with a few key differences.

Here’s what you need to know about medical savings accounts and how they work.

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What is a medical savings account (MSA)?

Broadly speaking, a medical savings account is an account that's designated to help pay for qualified health care expenses.

However, the term is often used to refer to a Medicare MSA, offered as part of a Medicare Medical Savings Account Plan in conjunction with a high-deductible health care plan. This special type of savings account allows those enrolled in the plan to access funds to cover health care costs before they reach their deductible.

The term MSA may also refer to the Archer MSA, which works in a similar manner but is funded by employers or self-employed individuals rather than by Medicare. Archer MSAs — which can no longer be opened — were available only to self-employed individuals or those working for a company with 50 or fewer employees.

Both types of MSAs require enrollment in a high-deductible health plan. Unlike some other health savings arrangements — like flexible spending accounts (FSAs) — the funds in an MSA remain in the account from year to year until withdrawn.

What are the types of MSAs?

There are only two types of MSAs: Medicare medical savings accounts and Archer medical savings accounts. That said, the only available MSA is the Medicare MSA as you can no longer open an Archer MSA.

Medicare Medical Savings Accounts

The purpose of the Medicare MSA is to help account holders pay the high deductibles of the accompanying health plan. Generally, anyone with both Medicare Part A and Part B can open a Medicare MSA, which is a type of consumer-directed Medicare Advantage Plan (Part C). However, there are certain restrictions. You cannot open a Medical MSA if any of the following apply to you:

  • You qualify for Medicaid.
  • You live outside the United States for more than 183 total days per year.
  • You’re enrolled in another Medicare Advantage Plan.
  • You are currently receiving hospice care.
  • You’re receiving benefits from an employer or union retiree plan that would cover the deductible for the Medicare MSA plan.
  • You’re part of the Federal Health Benefits Program (FEHBP).
  • You get benefits from the U.S. Department of Veterans Affairs or the U.S. Department of Defense (TRICARE program).

If you have a Medicare MSA, the government makes contributions on your behalf via Medicare. Contributions are made at the start of every year, and the amount you receive will vary based on your plan. You are in control of the funds and can choose which (if any) medical expenses to use the funds for.

Archer Medical Savings Accounts

Archer medical savings accounts were only available until 2007, after which new accounts could not be opened. However, those with existing Archer MSAs can still use their accounts as long as they were active participants before 2008 or if they became covered by working for an Archer MSA participating employer and being enrolled in a high-deductible health plan. Otherwise, Archer MSAs are no longer available.

Unlike Medicare MSAs, Archer MSAs are custodial or trust accounts. This means they are accounts held by one person or institution for the benefit of another — in this case, your employer. Custodial accounts have the additional distinction of being held for the benefit of a minor.

As with Medicare MSAs, the money in an Archer MSA can be used only to pay the qualifying medical expenses of the account beneficiary, their spouse and dependents.

How do MSA plans work?

Medical savings accounts are somewhat similar to health savings accounts in that they allow for tax-free growth of funds and tax-free withdrawals when made for qualified medical expenses.

However, contributions to Medicare MSAs are made by Medicare plans rather than individual account holders. Funds are still controlled by individuals and can be used for personal medical expenses. You won’t pay taxes on the money in your account or any interest it earns as long as the funds are used to pay for qualifying health care expenses.

Here's the general process to sign up for and use a Medicare MSA:

  1. Choose and sign up for a Medicare MSA plan if you're eligible.
  2. Establish an MSA with the specific bank selected by the plan.
  3. Receive deposits into the MSA from Medicare at the beginning of the year.
  4. Use your MSA funds for qualifying health care expenses such as doctor visits, home health care, durable medical equipment and skilled nursing care. Coverage related to prescription drugs, vision and dental care can be accessed at an additional cost.

Note that if you exceed your deductible, the MSA will cover your additional medical expenses, although you’ll pay coinsurance for most services after reaching your deductible. Any balance in your account at the end of the year will remain there for future health care expenses.

You won’t pay a premium for your MSA, but you will still be responsible for your Medicare Part B premium.

How to choose an MSA plan

The main goal of an MSA is to ensure you have enough money to pay your plan’s deductible. This protects you from incurring potentially thousands of dollars in medical costs per year before your coverage even fully kicks in. These huge medical bills can easily derail an average retiree’s monthly budget, so getting an MSA can be a life-changer.

Here are the factors you should consider when choosing an MSA plan:

  • Find out if a plan is available in your area: Call 800-MEDICARE (800-633-4227) or your State Health Insurance Assistance Program (SHIP).
  • Ask about the deductible: You can’t enroll in an MSA unless it’s attached to a high-deductible health plan. So be prepared to handle the high deductible if you enroll in an MSA. If a plan has a $7,000 deductible, for example, make sure that Medicare will pay enough money into your MSA to cover it or else you’ll end up paying out of pocket, which defeats the purpose of having an MSA in the first place.
  • Make sure you are eligible: Ensure that you aren’t disqualified from enrolling based on your participation in another plan or for another reason, as listed above.

Alternatives to medical savings accounts

A health savings account (HSA) is an obvious alternative to a medical savings account, and in many ways, it’s superior. But the big drawback when it comes to HSAs vs. MSAs is that you must fund an HSA yourself rather than having it funded by Medicare like an MSA.

But HSAs offer plenty of advantages, including the following:

  • Contributions are tax-deductible: With a Medicare MSA, you can’t take a tax deduction on contributions since they are provided by Medicare, and individual enrollees are not allowed to make their own contributions. But with an HSA, the contributions you make with your own money are tax-deductible.
  • With some HSAs, you can invest your assets: Some HSA providers allow you to invest at least a portion of your account value rather than having it sit in a low-interest savings account.
  • HSAs are readily available: HSAs have grown rapidly in popularity and are now available from numerous financial services firms. It's worth doing some research to choose the best HSA for your needs.

FSAs, or flexible spending accounts, are another health savings option. These plans, which are provided by employers, allow employees to set aside pre-tax funds to cover qualified medical expenses. If the funds are used for FSA-eligible expenses, withdrawals are also tax-free.

In many cases, however, FSAs are “use-it-or-lose-it” types of accounts, meaning any funds remaining in the account at the end of the year are forfeited, unlike with a medical savings account. That said, some FSAs allow a grace period or rollover of a certain amount to the following year.

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