HSA and MSA Details

Recent legislation has made available a new type of health care system: the Health Savings Account. This is a program similar to the traditional Medical Savings Account, but with several changes that make it a much more appealing program for you.

Comparison of Medical Savings Accounts (MSA) and Health Savings Accounts (HSA)

Medical Savings Accounts / Health Savings Accounts Benefits

1. Contributions are 100% tax deductible
2. Interest or other earnings on the assets are tax free, money grows tax deferred
3. Money saved can be used for qualified medical expenses (for a list of the qualified expenses go to page 4 of the IRS Publication 502) tax free for life
4. MSA/HSA funds can also be used to pay COBRA or other medical insurance premiums during periods of unemployment or temporary layoff
5. Contributions remain in your MSA until you use them. At age 65, unused MSA/HSA money can be withdrawn for non-medical reasons without penalty (similar to an IRA, ordinary income tax will be charged on the money withdrawn for non-medical reasons)

Why were MSA's / HSA's created?

MSA's/HSA's were created in response to the rising cost of health care, and the great number of individuals and families with no health care insurance of any kind. However, MSA's were far more restrictive and only available to self-employed and small employers. The intent of Congress in passing the HSA legislation was to provide a financial incentive for employers of all sizes and individual consumers to provide health insurance and put health care decisions back in the hands of the consumers. MSA's and HSA's and part of a movement towards Consumer-Driven Healthcare.

MSA's/HSA's will allow employees to retain contributions made on their behalf in the event they change employment. Also, unlike some plans that provide benefits to pay for non-covered medical expenses, MSA/HSA assets cannot be lost if not used within a one-year period. Assets can be carried over from year to year with the opportunity to save unused funds as an additional retirement account.

How do Medical Savings Accounts / Health Savings Accounts work?

There are two basic parts to MSA's / HSAs...

1. Qualified High Deductible Health Plan (QHDHP) -

One key element of MSA's and HSA's is the requirement that a QHDHP be in place to cover the individual or family that would benefit under such account. Such a policy provides important health care benefits, but with a relatively modest premiums.

The requirements of a Qualified High Deductible Plan for an HSA for the Tax Year of 2004 are as follows:

For tax year 2003, an MSA Qualified high deductible plan is defined as one having an annual deductible amount of $1,700 to $2,500 for an individual, and $3,350 to $5,050 for a family, and having an out-of-pocket expense maximum of $3,350 for individual coverage, and $6,150 for family coverage. For tax year 2004, an MSA Qualified high deductible plan is defined as one having an annual deductible amount of $1,700 to $2,600 for an individual, and $3,450 to $5,150 for a family, and having an out-of-pocket expense maximum of $3,450 for individual coverage, and $6,300 for family coverage. Use our MSA Contribution Calculator.

2. Savings Account -

A Health or Medical Savings Account is a tax exempt account with a financial institution in which you accumulate savings to pay for medical expenses. Contributions are tax deductible and income earned on funds in the HSA grow tax-deferred. An HSA/MSA allows you to enjoy tax reductions while having affordable premiums without risking your insurance protection. The account can be used for qualified medical expenses until the deductible has been met and insurance begins to kick in. Funds can also be used for dental, vision, and other services that may not be covered under the High deductible health insurance policy.

What may an MSA / HSA be used for?

Amounts that have accumulated in an HSA are intended to be withdrawn and used for actual medical expenses (for a list of the qualified expenses go to page 4 of the IRS Publication 502) . If amounts contained in an MSA/HSA are not needed for medical purposes, they may, however, be withdrawn penalty-free for other uses after the individual reaches age 65, or if death or disability occur.

Otherwise, a 15 percent penalty applies(for MSA's) and a 10 percent penalty applies (for HSA's). All non-medical distributions are included in ordinary income for tax purposes. In addition, MSA/HSA savings can - like IRA assets -be rolled over to another MSA/HSA once every 12 months, but may not be combined with IRA assets.

Who must receive a contribution?

If an employer contributes on behalf of any employee, a contribution must be made on behalf of all employees having comparable health insurance coverage. A substantial penalty applies if the employer should discriminate by not providing comparable (in amount or percentage) contributions for other employees. There are however, exceptions for part-time employees.

Who receives a decedent's unused MSA / HSA assets?

Like an IRA, the assets in an MSA/HSA become the property of a named beneficiary upon the accountholder's death, or go to their estate if no beneficiary is name. A spouse beneficiary can treat such assets as their own account, while a non-spouse must include them as ordinary income for taxation purposes.

Do MSA's require reporting?

Yes, MSA and HSA contributions made by an employer must be reported on an employee's tax return, and reported by the employer to the IRS. (A financial organization through which an employer has set up an MSA or HSA must also provide reports to the IRS.)