Comparing Health Savings and Medical Savings Accounts

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Both health savings accounts (HSAs) and medical savings accounts (MSAs) can help to lower costs while providing health care coverage. These plans are well suited for people who are relatively healthy and want to control how they get care. However, there are differences between an MSA and an HSA plan.

As health care costs rise, be sure you understand the options you have for managing your expenses.

Key Takeaways

  • Both health savings accounts (HSAs) and medical savings accounts (MSAs) can help to lower costs while providing health care coverage.
  • HSAs are an option for those who have an individual or employer-provided health plan that has high deductible limits (HDHPs).
  • Medicare MSAs are an option for individuals on Medicare. After you enroll in Medicare, you can no longer contribute to an HSA.
  • Keep in mind that the IRS may impose other restrictions on HSAs and MSAs not listed here. Tax laws can change often.

The Main Types of HSAs and MSAs

There are three main types of HSAs and MSAs.

HSA plans are available to those who have a high-deductible health plan (HDHP). These plans can be paired with employer-provided or individual health plans.

Archer MSA plans were an older version of the current HSAs. These days, this plan is not common. But some people do still have these accounts.

Medicare MSA plans have the same structure as the Archer MSA. This plan is designed to help pay costs for a person who is covered by Medicare. For most people, the primary MSA available is a Medicare MSA.

Who Can Join These Plans?

The IRS defines who is eligible to use each type of account. You need to meet specific criteria to qualify. In general:

  • You can’t contribute to an HSA after you go on Medicare.
  • You can only use a Medicare MSA if you’re on a high-deductible Medicare Advantage Plan (Part C).
  • Standard Archer MSAs are not widely available after 2007.

Other restrictions may also apply. Talk to a certified public account (CPA) or insurance expert who knows your situation. This can help you decide what's right for you.

Similarities of HSA and MSA Plans

The HSA and MSA programs described above can help to offset health-related expenses. The plans share several features.

Tax Benefits

Funds may grow in your account without generating taxable earnings each year. Also, in some cases, you may be able to pay for health care with tax-advantaged dollars. This assumes you meet all IRS requirements.

Potential Tax-Free Withdrawals

Distributions may come out tax-free if you pay for qualified medical expenses. What if you don’t use the funds for qualified medical expenses? Then you may have to pay income tax and additional taxes on the amount you withdraw.

Contributions

If you’re eligible to contribute to an HSA or Archer MSA, this may reduce your taxable income. Employer contributions don’t qualify for a deduction. At the same time, they are generally not treated as income. With Medicare MSAs, you don’t put in any money; your health plan does it for you.

Using Your HSA and MSA Funds

The HSA and MSA plans may also give the holder the option to leave funds in the account to grow. Unlike Flexible Spending Accounts (FSAs), there’s no “use it or lose it” feature with an HSA or MSA. That means you can build up savings for later in life; or, you can use the money now.

The older you get, the more likely you are to pay more health care expenses. So it sure doesn’t hurt to have extra savings available. Some call this “rolling over” funds for the next year. But in reality, there's nothing you need to do. You just have to leave the money alone.

With most accounts, you get a debit card or a checkbook to pay for qualified medical expenses. That allows you to pay providers or buy medical supplies independently. Just be sure to save receipts for any withdrawals.

HSA Highlights

HSAs are an option for those who have an individual or employer-provided health plan that has high deductible limits (HDHPs).

Premiums: HDHPs typically have lower monthly premiums than other options, That's because of the high deductible. As a result, they attract cost-conscious employers and individuals. This includes those who are self-employed.

HDHPs: To qualify as an HDHP, plans must meet specific criteria. This includes, but is not limited to the following:

  • The minimum deductible for 2021 is $1,400 for individual coverage; $2,800 for family coverage.
  • The maximum out-of-pocket expense is $7,000 for individual coverage for 2021; $14,000 for family coverage.
  • Details vary by insurance provider and plan offerings.

Contribution limits: Those who are eligible can contribute based on the type of health coverage they have. HSAs are individual accounts. There’s no such thing as a joint or family HSA, even if you have family coverage.

  • The maximum annual contribution for individual coverage is $3,600 for 2021.
  • The maximum annual contribution for family coverage is $7,200 for 2021.
  • Those over age 55 may be able to make an additional catch-up contribution of $1,000.

Medicare MSA Highlights

Medicare MSAs are an option for individuals on Medicare. After you enroll in Medicare, you can no longer contribute to an HSA.

Premiums: You may pay zero premiums if you use a high-deductible Medicare Advantage Plan. As a result, you typically face higher deductibles and up-front out-of-pocket expenses.

Contributions: Your health care plan deposits funds into your Medicare MSA. You can’t make contributions yourself. Those contributions typically arrive at the beginning of the year; you may get prorated contributions if you join a plan later in the year.

The idea with a Medicare MSA is that you use the funds from your account to pay for qualified expenses until you reach your deductible. But not all “qualified” expenses are applied to your deductible. Also, your deductible is typically more than you receive in your account. As a result, you may need to come up with funds on your own to pay for a portion of your expenses.

Once you reach your deductible, the plan should pay all of your Medicare-covered Part A and Part B health care costs. Be sure to verify coverage details with your providers.

Archer MSA Highlights

HSAs have largely replaced non-Medicare Archer MSAs, One reason for this is that HSAs are more flexible than Archer MSAs.

Availability: Archer MSAs were first available to small businesses with 50 or fewer employees and people who were self-employed. After 2007, new Archer MSAs are restricted; however, it may still be possible to start a new account in some cases. It depends on your situation.

Note

Unlike Archer MSAs, HSAs are widely available for many people. It doesn't matter whether you're self-employed, at a small business, a large enterprise, or other organization.

Contributions: Archer MSAs also restrict who can contribute to an account: In a year, it can be either the account owner or the employer can contribute. It can't be both. Plus, you need to be covered by an HDHP for the full year to be eligible. And you can only contribute up to 75% of your HDHP annual deductible. It's 65% for self-only plans.

The Bottom Line

Keep in mind that the IRS may impose other restrictions on HSAs and MSAs not listed here. Tax laws can change often.

The IRS or your insurance provider may handle your situation differently. You should always consult with a CPA or tax attorney before making decisions about your money. Ask an insurance representative licensed in your area for details on health coverage before you choose a plan.