Medical savings account (United States)
Encyclopedia
In the United States
, a Medical Savings Account (MSA) refers to an American medical savings account
program, 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. The MSA must be coupled with a high-deductible health plan (HDHP). Withdrawals from MSA go toward paying the deductible expenses in a given year. MSA account funds can cover expenses related to most forms of medical care, disability, dental care, vision care, and long-term care, whether the expenses were billed through the qualifying insurance or otherwise.
Once the plan deductible is met in a given year, the HDHP will pay any remaining covered medical expenses in that year. If there are funds remaining in the MSA at the end of the year, the funds can either roll over for the following year or can be withdrawn as taxable income.
MSAs have been superseded by Health Savings Accounts (HSAs), were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act
of 2003. Existing MSAs were grandfathered, however.
During the early 1990s, think tanks such as the National Center for Policy Analysis
and insurance companies such Golden Rule Insurance Company
began to promote passage of a law that would allow for tax-free contributions to a medical savings account. Even though the US Congress was under Republican control and the MSA concept 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 also pass MSA legislation. 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 open MSAs.
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
. The Archer MSA is considered an IRS pilot program that must be extended by the US Treasury Department on a periodic basis.
The plan enables a participant dual to fund a tax-exempt account for medical expenses incurred before an associated 'high deductible
' insurance plan begins to cover those expenses. The individual pairs the MSA with a 'catastrophic
insurance' plan, which has lower premiums than plans with lower deductibles.
The individual deposits funds in the MSA to cover medical expenses; these deposits are exempt from income tax. Any money added to the account can roll over to another year if unused. MSAs are investment accounts, they can accumulate over the deductible level, can be used for qualified investments, and grow tax free. The MSA 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.
Among the medical expenses that can be paid out of an MSA account are premiums for long-term care
coverage, health care coverage paid while receiving unemployment benefits, or any form of health care continuation coverage required under any federal law.
The risk is that an MSA account holder may find that their medical expenses outstrip the contributions they can afford to make.
(HSA) was created. Since HSAs 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 periodically by the US Treasury Department. The present extension of the program ended December 31, 2007. The US Treasury did not extend the program beyond this point, and as a result no new Archer MSA's may be opened. Current accounts can either be left open as is or converted to an HSA.
At this time there are no financial institutions opening new MSAs. 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.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, a Medical Savings Account (MSA) refers to an American medical savings account
Medical savings account
Medical savings account refers to an account in which tax-deferred deposits can be made for medical expenses.-In Singapore:Medisave was introduced in April 1984 as a national medical savings system for Singaporeans...
program, 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. The MSA must be coupled with a high-deductible health plan (HDHP). Withdrawals from MSA go toward paying the deductible expenses in a given year. MSA account funds can cover expenses related to most forms of medical care, disability, dental care, vision care, and long-term care, whether the expenses were billed through the qualifying insurance or otherwise.
Once the plan deductible is met in a given year, the HDHP will pay any remaining covered medical expenses in that year. If there are funds remaining in the MSA at the end of the year, the funds can either roll over for the following year or can be withdrawn as taxable income.
MSAs have been superseded by Health Savings Accounts (HSAs), were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act
Medicare Prescription Drug, Improvement, and Modernization Act
The Medicare Prescription Drug, Improvement, and Modernization Act is a federal law of the United States, enacted in 2003. It produced the largest overhaul of Medicare in the public health program's 38-year history.The MMA was signed by President George W...
of 2003. Existing MSAs were grandfathered, however.
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 such as the National Center for Policy Analysis
National Center for Policy Analysis
The National Center for Policy Analysis is a non-profit American conservative think tank whose goals are to develop and promote private alternatives to government regulation and control...
and insurance companies such Golden Rule Insurance Company
Golden Rule Insurance Company
Golden Rule Insurance Company is a UnitedHealthcare company based in Indianapolis, Indiana, U.S.A., and has offered insurance to individuals and families for more than 60 years...
began to promote passage of a law that would allow for tax-free contributions to a medical savings account. Even though the US Congress was under Republican control and the MSA concept 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
Health Insurance Portability and Accountability Act
The Health Insurance Portability and Accountability Act of 1996 was enacted by the U.S. Congress and signed by President Bill Clinton in 1996. It was originally sponsored by Sen. Edward Kennedy and Sen. Nancy Kassebaum . Title I of HIPAA protects health insurance coverage for workers and their...
(HIPAA) in 1996. In the meantime, some states also pass MSA legislation. 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 open MSAs.
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
William Reynolds Archer, Jr.
William Reynolds “Bill” Archer, Jr. is a former American lawyer and politician. Archer served two terms, from 1967 to 1971, in the Texas House of Representatives — changing from the Democratic to the Republican party in 1969 — and later represented Texas in the United States House as a Republican...
of Texas
Texas
Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
. The Archer MSA is considered an IRS pilot program that must be extended by the US Treasury Department on a periodic basis.
Purpose and advantages
The Archer MSA is intended to be used by self-employed individuals and small businesses with fewer than 50 employees. The plan is entirely self-directed, including its initial setup and compliance with the plan thresholds.The plan enables a participant dual to fund a tax-exempt account for medical expenses incurred before an associated 'high deductible
Deductible
In an insurance policy, the deductible is the amount of expenses that must be paid out of pocket before an insurer will pay any expenses. It is normally quoted as a fixed quantity and is a part of most policies covering losses to the policy holder. The deductible must be paid by the insured,...
' insurance plan begins to cover those expenses. The individual pairs the MSA with a 'catastrophic
Disaster
A disaster is a natural or man-made hazard that has come to fruition, resulting in an event of substantial extent causing significant physical damage or destruction, loss of life, or drastic change to the environment...
insurance' plan, which has lower premiums than plans with lower deductibles.
The individual deposits funds in the MSA to cover medical expenses; these deposits are exempt from income tax. Any money added to the account can roll over to another year if unused. MSAs are investment accounts, they can accumulate over the deductible level, can be used for qualified investments, and grow tax free. The MSA 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.
Among the medical expenses that can be paid out of an MSA account are premiums for long-term care
Long-term care
Long-term care is a variety of services which help meet both the medical and non-medical need of people with a chronic illness or disability who cannot care for themselves for long periods of time....
coverage, health care coverage paid while receiving unemployment benefits, or any form of health care continuation coverage required under any federal law.
The risk is that an MSA account holder may find that their medical expenses outstrip the contributions they can afford to make.
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. However, after a contributor attains a certain age, current IRS provisions allow this account to be maintained as a standard IRA retirement account.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 essentially those that would qualify for the medical and dental expenses deduction. These are discussed in IRS Publication 502. Other personal conditions, such as a period of non-employment as a self-employed individual, allow the payments for the high deductible insurance policy itself to qualify to be paid from the plan.Future of the Archer MSA Program
In 2003 the Health Savings AccountHealth savings account
A health savings account is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan . The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account...
(HSA) was created. Since HSAs 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
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
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 periodically by the US Treasury Department. The present extension of the program ended December 31, 2007. The US Treasury did not extend the program beyond this point, and as a result no new Archer MSA's may be opened. Current accounts can either be left open as is or converted to an HSA.
At this time there are no financial institutions opening new MSAs. This is because of the creation of the Health Savings Account
Health savings account
A health savings account is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan . The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending 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.
See also
- Flexible spending accountFlexible spending accountA flexible spending account , also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States...
- Health Reimbursement AccountHealth Reimbursement AccountHealth Reimbursement Accounts or Health Reimbursement Arrangements are Internal Revenue Service -sanctioned programs that allow an employer to set aside funds to reimburse medical expenses paid by participating employees...
- Health Savings AccountHealth savings accountA health savings account is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan . The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account...
External links
- IRS Publication 969
- IRS Form 8853
- U.S. Treasury site on HSAs
- Health Decisions HSA Page HSA news, events and consumer resources. Sponsored by the insurance trade association America's Health Insurance Plans
- 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 InstituteManhattan InstituteThe Manhattan Institute for Policy Research is a conservative, market-oriented think tank established in New York City in 1978 by Antony Fisher and William J...
. - 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