Medical Savings Account

Wednesday, April 10, 2024 23:15 Posted by Admin

When it comes to paying for medical expenses, medical savings accounts (MSAs) are a common tax-advantaged vehicle created to help people keep their health costs low. More specifically, the term ‘medical savings account’ refers to a specific form of medical savings account (MSA) that was created in the early 1990s under the Internal Revenue Code. The original MSA was developed to be used by those who were either self-employed or participants in a small group plan and a part of a high-deductible health plan (HDHP).

Health savings accounts, or HSAs, are another option for managing medical expenses. While MSAs are largely meant for those enrolled in a high-deductible Medicare plan, HSAs are more intended for people who are enrolled in a typical high-deductible health plan.

Though, there is much more to understand about medical savings accounts and health savings accounts. With that said, let’s dive in and take a deeper look at MSAs vs. HSAs to understand which option is right for you.

What is a Medical Savings Account (MSA)?

Medical savings accounts were originally developed back in the early 1990s as a way to make healthcare more affordable for American citizens. The original MSAs were funded by either the employer or the individual, but not both. They were reserved for self-employed individuals or small groups with 50 or less employees. The main advantage of an MSA is that the contributions used to pay for qualifying future medical expenses are tax-free.

In the early 2000s, MSAs were largely phased out and replaced by health savings accounts (HSAs). However, there are two main types of MSAs that still exist.

Types of Medical Savings Accounts

The two main types of medical savings accounts that still currently exist are: Archer MSAs and Medicare MSAs. However, since the original MSAs were phased out in 2003, Archer MSAs were grandfathered in but are not available for new enrollees.

Archer Medical Savings Accounts

Prior to 2008, both self-employed people and small businesses with 50 or fewer employees that were covered by high-deductible health plans were able to have MSAs, called Archer MSAs. These were established as tax-exempt trusts or custodial accounts with financial institutions in the U.S. They functioned essentially the same as the original MSAs and are almost extinct nowadays.

After December 31, 2007, no new Archer medical savings accounts were created. Though, existing accounts could continue to both receive and dispense funds. The IRS reduced those who qualified for an Archer MSA to only the following groups:

  1. Active members for any tax year ending prior to 2008, or
  2. Active members for a tax year ending after 2007 but with coverage under an HDHP of an Archer MSA contributing employer.

For accounts that have been legacied, individual contributions into Archer MSAs are tax-deductible and contributions by the employer are not taxable to the employee. At the end of the year, all remaining funds do roll over to the next year.

Medicare Medical Savings Accounts

Medicare MSA plans are the only other form of medic al savings accounts out there. They are structured the same as Archer MSAs, but are designed to help pay medical expenses for someone with Medicare coverage. In order to be eligible for a Medicare MSA, you have to be enrolled in Medicare and also be under a high-deductible health plan (HDHP).

These plans are essentially the same as health savings accounts (HSAs), but for those that are on Medicare. To qualify for Medicare, you must be at least 65 years old or have a disability or distinct condition. Like HSAs, Medicare MSAs let you choose your healthcare provider and services. However, while you can use Medicare MSA funds for services that aren’t covered under Medicare, only Medicare services will be counted towards your deductible.

Instead of the account holder adding funds to the account, the Medicare program is responsible for the contributions made to a Medicare MSA. Like Archer MSAs, all funds taken out of a Medicare MSA are not taxed so long as they are used to pay for qualified services.

What is a Health Savings Account (HSA)?

Although both medical savings accounts and health savings accounts can save you money while delivering health care coverage, unless you are on Medicare or you were grandfathered into an Archer MSA, an HSA is most likely the plan that you will come across.

A Health savings account, or HSA, is a popular tax-advantaged savings plan for your medical expenses. They were created to largely replace the almost-extinct Archer medical savings account. These plans are available to individuals who are under a high-deductible health plan and can be combined with an individual health plan or one that is employer-provided.

With that said, here are some key features of health savings accounts to be aware of:

  • Less restrictive eligibility. The main requirement to be eligible for an HSA is that you are also enrolled in a HDHP. However, you also cannot be claimed as a dependent on someone else’s tax return and cannot be on Medicare.
  • Tax-free withdrawals for qualified medical expenses. The major advantage to HSAs is that you can add your pre-tax money and then withdraw that money tax-free to fund qualified medical services.
  • Anyone can make contributions and all unused funds roll over to the following year. The HSA account holder and anyone else (including an employer and even a family friend) can contribute to the HSA. Any funds leftover in the HSA will roll over to the following year. Plus, these are accounts are portable, meaning you can take them with you if you switch jobs.
  • Your contributions are invested. Instead of just sitting in an interest-earning deposit account, when you add money to a health savings account, it gets invested in stocks, mutual funds, and bonds. Although this does increase your risk, it offers the potential of greater returns long term.

The most important takeaway from all this is that an HSA will give you the same chief benefit of an MSA – the ability to save and pay for qualified medical services, tax-free. They also carry the added benefit of being more readily available, as MSAs are virtually extinct nowadays.

MSAs vs. HSAs

While MSAs and HSAs are relatively comparable, their dissimilarities lie in the details. When choosing between a medical savings account and a health savings account, consider this:

  • A health savings account is likely the ideal choice for you if: you are someone who is mostly healthy, is covered under a high deductible health plan, and desires a tax-advantaged way to save money on your healthcare,
  • A Medicare MSA is worth considering if you are currently enrolled in a high deductible Medicare plan are desire a tax-advantaged savings account for future medical expenses.

Keep in mind that laws change often and the IRS may have additional restrictions on both MSAs and HSAs than what we’ve listed here. Before you choose a plan, it’s highly advised that you speak with a licensed, insurance representative.

Have more questions about medical savings accounts and health savings accounts? Whether you’re located in California’s Bay Area or anywhere else in the United States, the experienced brokers at Taylor Benefits Insurance Agency can help! We’ll outline your options, go over all the fine details, and help you choose the right tax-advantaged savings plan for you and your family.

So, what are you waiting for? Don’t hesitate – contact us now to get the process started.  

Written by Todd Taylor

Todd Taylor

Todd Taylor oversees most of the marketing and client administration for the agency with help of an incredible team. Todd is a seasoned benefits insurance broker with over 35 years of industry experience. As the Founder and CEO of Taylor Benefits Insurance Agency, Inc., he provides strategic consultations and high-quality support to ensure his clients’ competitive position in the market.

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