Medical savings account

In the United States, a medical savings account (MSA) is an account, generally associated with self-employed individuals, in which tax-deferred deposits can be made for medical expenses. Withdrawals from the MSA are tax-free if used to pay for qualified medical expenses. One requirement, listed in US IRS Pub 969, is that an MSA must be coupled with a high-deductible health plan (HDHP). Withdrawals from this account go toward paying the deductible expenses in a given year. The MSA account funds can cover, whether provided through the qualifying insurance or otherwise, for accidents, disability, dental care, vision care, and long-term care.

If the HDHP deductible is met with funds from the MSA in that year, the high-deductible policy will pay the remaining covered medical expenses for that year. If there are funds remaining in the account at the end of the year, the funds can either roll over into the MSA for the following year or can be withdrawn as taxable income. A very different medical savings plan for non-self employed individuals is called the health savings account or HSA.

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History

The idea of the MSA appears to have come from health care analysts that were concerned about the problem of "overinsurance." They reasoned that overinsurance was raising the cost of health care expenses. They further reasoned that if patients (as opposed to third-party payers) paid their own medical expenses, then the cost of health care would decrease.

During the early 1990s, think tanks like the National Center for Policy Analysis in Dallas, TX and insurance companies like Golden Rule Insurance Company in Indianapolis, IN began to promote the passage of a MSA law that would allow for contributions to the savings account to be tax-free. Even though the US Congress was under Republican control and even though the MSA was central to the Republican Party's health care agenda, a federal MSA law failed to materialize during the 1990s. However, Congress did pass an MSA pilot as a part of the Health Insurance Portability and Accountability Act (HIPAA) in 1996. In the meantime, some states did pass MSA legislation during the 1990s. Missouri was the first state to do so in 1993. By 1998, 25 states had some form of MSA legislation offering a state tax break to those who would open an MSA.

At this time, there are very few, if any, financial institutions opening new MSA's. This is because of the creation of the Health Savings Account (HSA) in 2003. The HSA is available to everyone who participates in a qualifying High Deductible Health Plan (HDHP), not just the self-employed or small corporations.

The MSA for the self-employed person or business is now called an 'Archer MSA' by the Internal Revenue Service (IRS). The 'Archer MSA' term refers to the sponsor of the HIPAA amendment creating the accounts in 1996, Congressman Bill Archer of Texas.

Advantages

This plan for the self-employed essentially exists to fund a tax exempt account for medical expenses incurred before an associated 'high deductible' insurance plan begins to cover those expenses. This allows the self-employed to buy a 'catastrophic insurance' plan at much lower monthly premiums, and still cover medical expenses out of their personal MSA account with tax exempt contributions the individual account holder made to that account. The risk is that an MSA account holder may find that their medical expenses outstrip the contributions they can afford to make. The advantage is that you can invest any money added to the account, so amounts contributed roll over to another year that have accumulated over the deductible level can be used for qualified investments and grow tax free. This account may be convertible into a standard IRA savings plan after a specified age threshold is reached. The amounts contributed for medical savings do not impose a cap on standard IRA contributions.

You can treat premiums for your long-term care coverage, health care coverage while you receive unemployment benefits, or your health care continuation coverage, required under any federal law, as qualified medical expenses which can be paid out of your Archer MSA.

Purpose

The Archer MSA is intended to be used by self-employed individuals and their few employees running a small business who are eligible to participate in the plan. These individuals will be on the pioneering edge of health care cost management, since this plan is entirely self-directed, including its initial setup, and compliance with the plan thresholds.

Source

The MSA is generally a defined trust account that is set up solely as an IRS related tax exempt financial instrument for medical expense purposes.

See current IRS Publication 969 [1], See Current IRS Form 8853 [2].

However, after a contributor attains a certain age, current IRS provisions allow this account to be maintained as a standard IRA retirement account. This is worth looking into from a maximum contribution standpoint.

Health care cost management

A High deductible health plan (HDHP), has much lower monthly premiums, but much higher out-of-pocket expenses. An Archer MSA is only available in tandem with an HDHP offered in your state.

Limits

The following limits for annual deductibles and the maximum out-of-pocket expenses for high deductible health plans for 2005 are set as a range. The range of Minimum, and Maximum coverage, as well as annual deductible out-of-pocket expenses are currently listed in IRS Publication 969 as:

Self-only deductible Minimum $1,750; Maximum $2,650; Maximum out-of-pocket expenses $3,500.

Family deductible Minimum $3,500; Maximum $5,250; Maximum out-of-pocket expenses $6,450.

Under the MSA the yearly contributions are based on the insurance plan deductible it is tied to. This minimum is set by the required insurance policy with a Non-deductible level amount of at least $5000.

Qualifications

There are very specific qualifications to be met before making any contributions and in part those are performed using a worksheet in the IRS Form 8853 instructions. Qualified medical expenses are those expenses that the plan is designed to pay which would generally qualify for the medical and dental expenses deduction. These are discussed in Publication 502, Medical and Dental qualified medical expenses [3]. Other personal conditions, such as a period of non-employment as a self-employed individual, allow the payments for the high deductibe insurance policy itself to qualify to be paid from the plan.

Tracking

IRS Form 1099MSA and Form 8853 are used to report some annual transactions related to your Medical Savings Account.

According to IRS you should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee (bank or other financial institution) showing the amount you (or your employer) contributed during the year. You should receive your employer’s contributions, if any, also.

See also

• Flexible spending account
• Health Reimbursement Account
• Health Savings Account

Future of the Archer MSA Program

In 2003 the Health Savings Account (HSA) was created. Since HSA's are a more widely available version of the MSA the original program is by and large obsolete. The exception to this is the state of California where MSA contributions are deductible on a state level and HSA contributions are not. Since the Archer MSA is a pilot program it must be extended by the US Treasury Department on a periodic basis. The present extension of the program is for the time period ending December 31, 2007. It is uncertain at this time whether the IRS/Treasury will grant another extension at this time. However, if the program is ended the balances in existing MSA's would be rolled over into HSA's as anyone who was eligible for an MSA is also eligible for an HSA.

External links

• U.S. Treasury site on HSAs
• 2006 HSA Contribution Limits
• List of HSA Providers by State
• Healthsavingsinfo.com gives arguments pro and con on HSAs
• Health Decisions HSA Page HSA news, events and consumer resources. Sponsored by the insurance trade association America's Health Insurance Plans
• HSA for America Page Plan provider offering HSA information.
• Health Savings Accounts vs. Health Reimbursement Accounts vs. Medical Savings Accounts vs. Flexible Spending Accounts - helpful PDF chart comparing these, but has not been updated since 2005
• Commentary/Commentaire: It's time to consider Medical Savings Accounts, David Gratzer, CMAJ, July 23, 2002; 167(2). Article in Canadian peer-reviewed medical journal arguing for MSAs. Footnotes give many links to free full-text articles arguing both sides. Gratzer is now a senior fellow at the Manhattan Institute.
• Consumer-Directed Health Care, Bloche M. G., N Engl J Med 2006; 355:1756-1759, Oct 26, 2006. Perspective
• Health Savings Accounts — The Ownership Society in Health Care, Robinson J. C., N Engl J Med 2005; 353:1199-1202, Sep 22, 2005. Perspective FREE Full Text
• Do High-Deductible Health Plans Threaten Quality of Care? Lee T. H., Zapert K., N Engl J Med 2005; 353:1202-1204, Sep 22, 2005. Perspective. FREE Full Text