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.

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:

  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:

  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.