If you're reading this, there's a good chance you've heard of health savings accounts (HSAs). If you haven't, please check out the rest of our Learning Center to get caught up.
Maybe you've also heard of medical savings accounts (MSAs - also known as Archer MSAs). They certainly sound like the same concept, and they're both tax-advantaged accounts where you can save money for future medical expenses. But they follow different rules, and you're much more likely to have access to an HSA than an MSA.
MSAs were created at the federal level in 1996, by the Health Insurance Portability and Accountability Act, and were the precursor to today's HSAs. The law allowed people who had high deductible health plans to contribute pre-tax money to an MSA. The accounts were introduced as a pilot program, and the law capped the number of accounts that could be opened at 750,000 — although fewer than 250,000 tax filers opened MSAs.
The Medicare Prescription Drug Improvement and Modernization Act of 2003 introduced HSAs as a more widely available replacement for MSAs. They became available in 2004 and utilization of HSAs has been increasing steadily ever since.
You're only MSA-eligible if you already had the MSA as of the end of 2007, or if you enroll in eligible coverage via a small employer that offers an MSA. So, new MSA accounts are no longer allowed, but if you (or your employer) have had an MSA since 2007 or earlier, you can continue to contribute to it.
MSAs and HSAs are a lot alike....
To make contributions -- or have contributions made on their behalf -- an enrollee must have a high deductible health plan (HDHP) and no other health coverage, with the exception of certain supplemental coverage.
Also, contributions to both MSAs and HSAs are pre-tax, and employer contributions to the accounts aren't counted as income. Plus, earnings grow tax-free.
In terms of withdrawals, money can be withdrawn tax-free to pay for qualified medical expenses. And money withdrawn for other purposes is taxed, with a 20% additional tax applied if the person is under 65.
Finally, both HSAs and MSAs can be used as retirement accounts if there's money remaining in the account after age 65.
But there are some differences...
For starters, contributions to an MSA can be made by the employer or the employee, but in any given year, only one or the other may make contributions. In contrast, HSA contributions can be made by the account holder and/or employer, or by anyone else who wants to contribute on the account holder's behalf. And contributions in a given year can come from any combination of sources.
There are different requirements for the HDHP. The minimum deductible requirements are higher for plans that are MSA-eligible, but the maximum out-of-pocket amount can be significantly higher under an HSA-qualified plan. In 2018:
- An MSA-qualified health plan must have a deductible between $2,300 and $3,450 for a single individual, and between $4,550 and $6,850 for family coverage. The out-of-pocket maximum can't exceed $4,550 for an individual, or $8,400 for a family.
- An HSA-qualified health plan must have a deductible of at least $1,350 for self-only coverage, and $2,700 for family coverage. But the out-of-pocket maximum can be as high as $6,650 for an individual, or $13,300 for a family.
MSAs were only available to self-employed individuals and to employees of small businesses with no more than 50 employees. The majority of the account holders were self-employed. In contrast, the majority of people with HSA-qualified high-deductible health plans obtain their coverage from a large employer.
HSA contribution limits are adjusted by the IRS each year, but they apply uniformly to all account holders, and only vary based on whether the HDHP provides self-only coverage or family coverage. In 2018, the contribution limits are $3,450 and $6,900, respectively.
But MSA contribution limits are based on the health plan's deductible: A person with self-only coverage can contribute up to 65% of the amount of the deductible, while a person with family coverage can contribute up to 75% of the amount of the deductible.
As you've noticed, this article focuses on Archer Medical Savings Accounts (MSAs), which are not the same thing as Medicare MSAs. If you're looking into MSAs, be sure to speak with a qualified financial professional to see which is right for you.
Tax Facts is a weekly column offering straight up, no-nonsense HSA tax and account tips, written in everyday language. Look for it every Tuesday, exclusively on the HSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.