What is a Medical Savings Account?

What is a Medical Savings Account?
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A medical savings account is a plan that allows participants to set money aside for the express purpose of paying health care expenses. In 2016, more than 20 million Americans participated in health savings accounts, up significantly from 2006, when only 3.2 million were enrolled in these types of accounts. But it might not be the best option for everyone since often it operates in conjunction with a high-deductible medical insurance plan.

What Is a Medical Savings Account?

Generally, an employee signs up to participate in an MSA through an employer. After sign-up, the employer deducts a designated amount from each paycheck before taxes have been taken out, and deposits that money into a savings account. The worker is then given a debit card that can be used when paying medical bills, office copays, prescriptions and any other qualifying purchases. This frees the employee up to choose a medical insurance plan with a high deductible, since the card can be used to pay bills that add up while waiting to meet those deductibles each year.

What Is the Difference Between an HSA and an MSA?

In its early days, health savings accounts were known as medical savings accounts, but in recent years HSAs have begun to dominate the landscape. The MSA program has come to an end, which means no new MSAs can be set up. However, existing MSAs are allowed to continue. MSAs were limited to small businesses and self-employed individuals, whereas HSAs are available to any business that wants to set one up. Consumers can even set up individual HSAs through a financial institution. Unlike an HSA, MSAs can only accept contributions from either an employee or an employer in a given tax year, not both.

Medical Savings Account Contribution Limits

Before you start planning to use your MSA as an investment account, though, the IRS limits the amount you can put in each year. Another big difference between HSAs and MSAs is the way these limits are handled. In 2018, participants in MSAs are limited to saving 65 percent of their deductibles for individuals, and 75 percent for family plans. HSAs have limits, as well. In 2018, that limit for individuals is $3,450 and $6,900 for family coverage. These amounts are subject to change from one year to the next, so you may need to revisit the amount you choose during the open enrollment period every year. Any amount you pay over the limit is subject to a 6 percent excise tax. If you only pay $100 extra one year, you’ll be hit with a $6 penalty.

Can I Use My MSA to Pay Off Old Medical Bills?

Once you have your HSA card, you can begin paying medical bills incurred from that point forward. However, you can’t use your account to pay off bills for visits that took place before you joined the plan. But your funds will carry over from this year to the next and beyond, which means you can pay this year’s medical bills next year, although you may incur the wrath of your medical provider by taking too long to pay.

Can You Withdraw from MSA for Nonmedical Expenses?

Due to the tax-free nature of MSAs, you’ll only be able to use the money in your account for IRS-qualified medical expenses. Although these savings plans are a great way to set money aside for the future, since they rollover from one year to the next, you can’t simply withdraw the funds to pay for retirement once you reach a certain age. But you will have the comfort of knowing that you’ll have funds set aside to pay for medical expenses if someday you find that you need them.

Things You Can Use Medical Savings Account For

The good news is, there are plenty of items that do qualify for the use of your MSA account. Those are detailed in Section 213(d) of the IRS Code and include medical, dental and vision care visits; contact lenses and eyeglasses; braces; prescription medications; and even television equipment to assist the hard-of-hearing. Over-the-counter medications are not covered with the exception of items like vitamins that are prescribed by a health care professional.

Medical savings accounts may have become health savings accounts over the years, but both types of plans have the same purpose. They allow workers to withdraw a certain amount of money from each paycheck to take care of medical expenses. Whether you combine it with a high-deductible insurance plan or simply use it to set money aside for future health care expenses, it can be a great way to save pretax funds.