What Is a Medical Savings Account (MSA)?

Medical savings accounts (MSA) were first created by several states in the early 1990s. By 1996, these plans became a federal pilot program within the Health Insurance Portability and Accountability Act (HIPPA). Medical savings accounts (MSA), which required annual Congress reauthorization, were phased out in 2003.

Medical savings accounts (MSA) are the predecessors of health savings accounts (HSAs), which were established in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act.

MSAs and HSAs both have similar deductibles, tax treatment, and may have acted as retirement accounts. People who are covered by Medicare can still use MSAs.

Understanding Medical Savings Accounts

Medical savings accounts were put in place to take care of the high cost of health care expenses.

Funding for medical savings accounts were made by the individual or by the employer, but not by both. MSAs were limited to the self-employed or employer groups with 50 or fewer employees who were enrolled in a high deductible health insurance plan (HDHP) and met other eligibility requirements. 

A medical savings account were tax-deductible savings accounts which the owner could use for qualified health expenses without incurring taxes or penalties. This would later apply to health savings accounts after they replaced MSAs. Both require the coupling of the account with an HDHP. Also, both serve as retirement accounts which could be drawn from without penalty at age 65 and older.

Key Takeaways

  • Medical savings accounts were created by several states in the early 1990s and became a federal pilot program within the Health Insurance Portability and Accountability Act. 
  • MSAs Health savings accounts replaced MSAs after they were phased out in 2003.
  • These accounts were put in place to take care of the high cost of health care expenses.
  • Funding for medical savings accounts were made by the individual or by the employer, but not both.

Medicare MSAs

The Medicare MSA is similar to a traditional HSA, allowing users to choose their healthcare providers and services. The idea behind a Medicare MSA is that users can combine it with a high-deductible insurance plan to pay for their healthcare expenses. The plan pays after the insured party reaches the high deductible. Deposits are made via the plan to the insured's MSA, allowing him or her to use the funds to pay for medical care even before the deductible is reached.

People who are enrolled in the Medicare MSA can use funds from the account to pay for medical expenses even before reaching the high deductible of their insurance plan.

Archer MSAs

Self-employed individuals and small businesses with less than 50 employees were able to create medical savings accounts, known as Archer MSAs, which would have worked in the same way as a group MSA. The name honors Bill Archer, the congressman who sponsored the amendment which created them. The program to create an Archer MSAs expired as of Dec. 31, 2007. Because they were discontinued, no other Archer MSAs were open after that year. However, existing accounts may have continued funding and use.

Insured parties were able to make deposits into the MSA to cover the cost of medical care. Any deposits made were tax-exempt. Balances that were unused during the tax year were able to be rolled over to the next year.

Replacing Medical Savings Accounts 

In 2003, the Medicare Prescription Drug Improvement and Modernization Act allowed the creation of health savings accounts (HSA). These accounts became a permanent feature of the tax code. 

Account contributions reduce the federal income tax adjusted gross income (AGI) and are allowed for both standard and itemized deductions. Also, similar to an IRA, funding can be anytime between the beginning of that calendar year and before the tax deadline for that year.

The HSA is a fully vested tax-advantaged account and not subject to forfeiture if funds remain unspent at the end of the year. Using an HSA, an individual can pay for medical and dental expenses. MSA qualified health insurance plans generally had to have a minimum deductible level of $1,700 for an individual and $3,450 for families. HSA qualified HDHP deductibles are updated each year. 

HSAs are available to any eligible individual with an HDHP regardless of whether they are currently working, self-employed or employed by a small or large company. 

The employee and the employer will fund the account, and account funds cannot pay for insurance premiums. Annual contributions may not exceed more than 65% of the health plan deductible for individuals and 75% for families. Contribution levels readjust each year, and eligible individuals and families may contribute up to 100% of the allowable contribution. Also, HSAs allow for catch-up contributions for qualified individuals age 55 to 65 years old.