Understanding Medical Savings Accounts (MSAs)
Medical savings accounts encompass various tax-favored arrangements introduced in the early 1990s. Specifically, a type of medical savings account (MSA) was established and regulated under the Internal Revenue Code during that period, eventually evolving into health savings accounts (HSAs).
Certain Medicare Advantage plans offer Medicare MSAs, overseen by the Centers for Medicare and Medicaid Services as per Medicare regulations.
Key Takeaways:
- Medical savings accounts created by states in the early 1990s were phased out by 2003 and replaced by HSAs.
- Existing Archer MSAs were retained, but new ones were prohibited.
- Employee HSAs can receive contributions from the employee, employer, or both.
- Qualified individuals under high-deductible Medicare Advantage plans can establish regulated medical savings accounts.
- Employers may aid employees in medical expense payment through tax-favored flexible spending arrangements (FSAs) or health reimbursement arrangements (HRAs).
Understanding Medical Savings Accounts (MSAs)
Medical savings accounts were initially introduced by states in the early 1990s and later included in a federal pilot program within the Health Insurance Portability and Accountability Act (HIPAA). They carried tax benefits under the Internal Revenue Code and set foundations for successive medical savings arrangements.
The original MSA type, utilized by self-employed individuals or small group plan members with high-deductible health plans (HDHPs), came to an end in 2003. However, Archer MSAs in place were allowed to persist, yet no new ones could be established.
Participants in high-deductible Medicare Advantage plans can leverage Medicare MSAs adhering to Medicare’s guidelines.
In 2003, the Health Savings Account (HSA) emerged as a tax-advantaged scheme within the Medicare Prescription Drug, Improvement, and Modernization Act, aligning with MSA rules regarding eligibility, deductibles, contributions, and tax treatment. Unlike the original MSAs, a broader spectrum of individuals qualify for HSAs, catering to employed, self-employed, and unemployed individuals. Contributions to HSAs can be made by employees, employers, or both.
Some employers offer tax-favored healthcare saving programs such as HRAs funded by employers and FSAs funded by employees or employers, or a combination.
History of Medical Savings Accounts (MSAs)
Medical savings accounts aimed to mitigate the high healthcare costs for Americans, with the first MSAs funded by individuals or employers exclusively. The original MSAs were limited to self-employed individuals or small groups with under 50 members, subject to eligibility, contribution, and fund usage regulations contingent on enrollment in high-deductible health plans (HDHPs).
HSAs succeeded these arrangements, maintaining similar structures and rules to MSAs, including the HDHP coupling requirement.
Types of Medical Savings Accounts (MSAs)
Medicare Medical Savings Accounts (MSAs)
High-deductible Medicare Advantage (MA) plans offer Medicare MSAs, where plan deposits are made to insured individuals’ MSAs for early medical care coverage even before the deductible threshold is met. These MSAs resemble HSAs, granting users the choice of healthcare providers and services while allowing funds to cover services beyond Medicare coverage towards meeting deductibles.
Supplementary benefits like dental care, vision care, and long-term care may be covered by specific Medicare MSAs at an additional cost, excluding prescription drugs that mandate enrollment in Medicare Part D.
Medicare MSA participants can use account funds for medical expenses preemptively before reaching their insurance plan’s high deductible.
Archer Medical Savings Accounts (MSAs)
Operational until 2008, Archer MSAs were established by self-employed individuals or small businesses with under 50 employees covered by HDHPs, structured as tax-exempt trusts or accounts with U.S. financial institutions. While resembling original MSAs (discontinued in 2003), new Archer MSAs ceased post the 2007 law expiration, permitting existing accounts to retain operations.
Contributions to Archer MSAs were tax-deductible, extending to currently active Archer MSA accounts regardless of itemization, with tax exemption on contributions, interest, earnings, and distributions for medical expenses. Unspent balances roll over annually and are portable for job changes, enabling additional deposits for eligible participants.
Special Considerations
In 2003, the Health Savings Account (HSA) became a permanent feature for individuals enrolled in HDHPs under the Medicare Prescription Drug Improvement and Modernization Act.
Contributions to HSAs reduce federal taxable income, available to those with HDHPs, regardless of employment status. Employer or self-employed contributions are tax-exempt for employees, with direct contributions by individuals being tax-deductible. Funds can be deposited until the tax filing deadline, ensuring tax-free distributions for qualified medical expenses.
HSAs are vested, allowing unspent funds to rollover annually without forfeiture. The IRS establishes yearly contribution limits, with older individuals eligible for additional contributions annually and Medicare-enrolled individuals leveraging remaining HSA balances for tax-free medical expenditure coverage.