Medical Savings Accounts (MSAs) were one of the first health accounts to pioneer the current movement toward Consumer Driven Health Plans. They were both authorized and constrained by federal legislation that will expire at the end of 2003. Employee contributions to an MSA are exempt from federal income tax, social security tax and (in many states) also state income tax. Employee contributions remain subject to Social Security tax, so employee-funded MSAs are generally less desirable.
Medical Savings Accounts are similar to Health Care Reimbursement Accounts in some respects. Both are tax-exempt accounts controlled by an individual and used to pay health care bills. Also, both are flexible with respect to which health care providers or services are used — often allowing any medical expenses that would be deductible under the IRS code.
However, Medical Savings Accounts differ from Health Care Reimbursement Accounts in several key respects. Some of these differences come from the legislation that expires at the end of 2003 and some of the differences come from market trends. The following are the key differences between MSAs and HCRAs:
- MSAs are accompanied by a high-deductible health insurance policy, not a generous low-deductible insurance policy.
- MSA funds that are unspent at the end of the year “roll over” to future years and are not lost.
MSAs allow individuals to withdraw funds for purposes other than health care (after payment of taxes and a 15% penalty).
- MSAs move with an employee if he/she changes employers.
- Under legislation that will expire in 2003, MSAs can only be purchased by self-employed individuals or offered by employers with under 50 employees.
- Under legislation that will expire in 2003, MSAs cannot be funded by a mix of employer and employee contributions.
- Under legislation that will expire in 2003, MSA contributions cannot be more than 65% of the accompanying insurance deductible for individual coverage or 75% for family coverage.
MSA-type accounts are widely used in Singapore, China, and South Africa, but MSA enrollment has been limited in the United States thus far. MSA opponents say that this is because MSAs are unattractive. MSA advocates say that this is due to the federal restrictions on MSAs. With respect to the advocates’ argument, HMOs were restricted by federal regulations three decades ago. When these restrictions were lifted, HMO enrollment skyrocketed. The same trend could happen with MSAs. We will discuss the pros and cons of MSAs when we discuss the pros and cons of Consumer Driven Health Plans in general.
If the Medicare reform bill being deliberated by Congress as of July, 2003 passes, then Medical Savings Accounts will be replaced by Health Savings Accounts (HSAs). HSAs would be virtually the same as MSAs, but with fewer restrictions. HSAs can be offered by any size employer and both employer and employee can contribute to an HSA.