Medical Savings Account (MSA)

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What is a Medical Savings Account (MSA)?

A Medical Savings Account (MSA) is a type of savings account that is used to pay for qualified medical expenses. These accounts are typically paired with a high-deductible health plan and are used to pay for expenses not covered by the plan, such as deductibles and copays.

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Image showing the meaning of a medical savings account

Contributions to an MSA are made pre-tax and the funds in the account can grow tax-free. Withdrawals from the account are also tax-free as long as they are used to pay for qualified medical expenses. MSAs were created by the Small Business Job Protection Act of 1996 but are not widely used today.

How is Medical Savings Account (MSA) beneficial?

Medical Savings Accounts (MSAs) can be beneficial in a few ways: HBR’s healthcare benefits research

  1. Tax Advantages: Contributions to an MSA are made pre-tax and the funds in the account can grow tax-free. Withdrawals from the account are also tax-free as long as they are used to pay for qualified medical expenses.
  2. Cost Savings: MSAs are typically paired with high-deductible health plans, which can lead to lower monthly premiums. The funds in the MSA can be used to cover the high deductibles and copays associated with these plans.
  3. Control over Medical Expenses: MSAs give individuals more control over how their healthcare dollars are spent. They can choose to save money in the account for future expenses or use it to pay for current medical expenses.
  4. Encourage Consumers to shop for Best Prices: MSAs are often paired with high-deductible health plans, which can encourage individuals to shop for the best prices for medical services and treatments.

What is the process of setting up and using a Medical Savings Account (MSA)?

The process of setting up and using a Medical Savings Account (MSA) typically involves the following steps: SHRM’s MSA and HSA guidance

  1. Enroll in a High-deductible Health Plan: MSAs are typically paired with high-deductible health plans, so individuals must first enroll in one of these plans in order to be eligible for an MSA.
  2. Open an MSA Account: Once enrolled in a high-deductible health plan, individuals can open an MSA account through a bank, credit union, or other financial institution.
  3. Make Contributions: Contributions to an MSA can be made pre-tax by the individual, their employer, or both. The annual contribution limits for MSAs are determined by the IRS.
  4. Use the Funds: Funds in the MSA can be used to pay for qualified medical expenses, such as deductibles, copays, and certain types of medical equipment. Withdrawals from the account are tax-free as long as they are used for qualified medical expenses.
  5. Track Expenses: It is important to keep track of all expenses paid from the MSA account, as well as any contributions made, to ensure compliance with IRS regulations.
  6. Termination: MSAs can be terminated at any time and any remaining funds can be withdrawn for non-qualified expenses or rolled over into an HSA if the individual qualifies for one.

Understanding MSA and HSA options helps HR design tax-efficient health benefit packages that meet employee and compliance needs. Using objective assessments and a structured hiring plan drives improvement, helping organizations attract and retain top talent.

Frequently asked questions

A Medical Savings Account (MSA) is a tax-advantaged savings account designed to help individuals pay for qualified medical expenses. The original MSA program (Archer MSA) was available to self-employed individuals and employees of small employers paired with high-deductible health plans. MSAs have largely been superseded by Health Savings Accounts (HSAs) for most employer-sponsored benefit purposes.

An Archer MSA was an early, more restrictive predecessor to the HSA — limited to self-employed individuals and employers with 50 or fewer employees, with lower contribution limits and stricter rules. Health Savings Accounts (HSAs), introduced in 2003, replaced MSAs for most purposes: higher limits, available to all HDHP participants regardless of employer size, fully portable, and with no ‘use it or lose it’ rule. The MSA program is no longer accepting new participants (except Medicare MSAs).

Medicare MSAs are a Medicare Advantage plan option combining a high-deductible health plan with a savings account funded by Medicare. Medicare deposits money into the MSA each year to help pay for covered services. Beneficiaries use MSA funds to pay for qualified medical expenses before their deductible is met. Medicare MSAs are distinct from employer-sponsored MSAs and targeted at Medicare-eligible individuals.

Employers offering a qualifying HDHP can contribute to employee HSAs. Employee and employer contributions are tax-deductible; funds grow tax-free; withdrawals for qualified medical expenses are tax-free — the ‘triple tax advantage.’ Unused funds roll over indefinitely (no use-it-or-lose-it). Employees own the account and take it with them if they leave. 2024 contribution limits: $4,150 individual, $8,300 family.

An FSA (Flexible Spending Account) is a pre-tax account for medical expenses that is employer-owned, subject to use-it-or-lose-it rules (up to $640 carryover allowed), and not linked to HDHP enrollment. An HSA is employee-owned, rolls over fully, requires HDHP enrollment, and has higher limits. FSAs are available with traditional health plans; HSAs require HDHPs. Both provide pre-tax savings for medical expenses but with very different structures.

Effective communication: explain the triple tax advantage in concrete dollar terms (at the 22% bracket, a $4,150 HSA contribution saves ~$1,300 in federal taxes), clarify the HDHP requirement and how it affects the decision, show break-even analysis comparing HDHP+HSA vs. traditional plan at different health utilization levels, highlight the investment and retirement savings potential of unused HSA funds, and provide enrollment tools that help employees model the right choice for their situation.