Medical Savings Account (MSA): Meaning, History, Types

What Is a Medical Savings Account (MSA)?

The term medical savings account can refer to several tax-benefitted arrangements enacted since the early 1990s, including a specific type of medical savings account (MSA) authorized and regulated under the Internal Revenue Code. This type of account later evolved into a health savings account (HSA).

Some Medicare Advantage plans offer Medicare MSAs, which are regulated by the Centers for Medicare and Medicaid Services.

Key Takeaways

• Medical savings accounts, created by several states and later by a federal pilot program in the early 1990s, were phased out in 2003 and succeeded by HSAs and health savings accounts.
• Existing Archer MSAs were legacied in, but no new ones were allowed.
• Employee HSAs can receive contributions from the employee, employer, or both.
• Members of qualified high-deductible Medicare Advantage plans can establish medical savings accounts regulated by Medicare.
• Some employers offer tax-benefitted flexible spending arrangements (FSAs) or health reimbursement arrangements (HRAs) to help employees pay for medical expenses.

Understanding Medical Savings Accounts (MSAs)

Medical savings accounts (MSAs) were first created by several states in the early 1990s and later became a federal pilot program. These accounts enjoyed tax benefits under the Internal Revenue Code and served as models for succeeding medical savings arrangements.

The original type of MSA, used by self-employed individuals or members of small group plans with high-deductible health plans (HDHPs), was phased out in 2003. However, Archer MSAs were allowed to continue, although no new ones could be created.

Participants in high-deductible Medicare Advantage plans can use Medicare MSAs regulated by Medicare.

In 2003, health savings accounts (HSAs) were enacted and became a tax-benefitted arrangement similar to MSAs. HSAs are available to a broader range of individuals, including employed, self-employed, and unemployed individuals.

Some employers offer tax-benefitted programs like health reimbursement arrangements (HRAs) or flexible spending arrangements (FSAs) to help employees pay for medical expenses.

History of Medical Savings Accounts (MSAs)

Medical savings accounts were introduced to make healthcare services more affordable. The first MSAs were funded by the individual or the employer and were available to the self-employed or employer groups with 50 or fewer employees. Participants had to enroll in a high-deductible health insurance plan (HDHP) and used funds from the MSA tax-free for qualified medical expenses.

MSAs were succeeded by HSAs, which have similar structures and rules. HSAs also require coupling with an HDHP.

Types of Medical Savings Accounts (MSAs)

Medicare Medical Savings Accounts (MSAs)

Medicare MSAs are available with high-deductible Medicare Advantage plans (Medicare Part C). The MA plan deposits funds into the insured’s MSA, allowing them to pay for medical care before reaching the deductible. The Medicare MSA is similar to an HSA in terms of provider and service choice. However, only the cost of Medicare services counts toward the deductible.

Some Medicare MSAs may cover extra benefits for an additional cost, such as dental care, vision care, hearing aids, and long-term care. However, Medicare MSAs do not cover prescription drugs; Medicare Part D enrollment is required for prescription drug coverage.

Archer Medical Savings Accounts (MSAs)

Before 2008, self-employed individuals and small businesses with fewer than 50 employees could create Archer MSAs, which functioned similarly to the original MSAs. However, no new Archer MSAs have been allowed since 2007. Contributions to Archer MSAs are tax-deductible, and interest or other earnings and distributions for qualified medical expenses are tax-free.

Special Considerations

In 2003, health savings accounts (HSAs) were authorized to help individuals enrolled in HDHPs cover medical expenses. Contributions to HSAs reduce taxable income, and they are available to eligible individuals regardless of employment status. Employer or employee contributions to HSAs are excluded from taxable income. Self-employed and unemployed individuals can make tax-deductible contributions. Distributions from HSAs for qualified medical expenses are tax-free.

HSAs are fully vested accounts, and funds do not forfeit if unused at the end of the year. Individuals enrolled in Medicare cannot contribute to HSAs but can make tax-free distributions from existing HSAs to cover qualified medical expenses.

The IRS provides annual updates on HSA contribution limits and HDHP requirements.

Sources: Internal Revenue Service.