What is MSA or medical savings account scheme?

Medical Saving Accounts or MSA in short is a saving accounts program prevailing in USA designed to cater to your medical needs. This savings account is generally linked to self-employed people. The money deposited in this account shall not attract any tax deduction if it is used for paying qualified medical expenses.

The Medical Savings Accounts must be combined with a high deductible HDHP i.e. a high deductible health plan. Money withdrawn from this accounts goes to pay deductible expenses occurred in a given year. Expenses arising out of medical care such as dental care, vision care, disability and long-term care are covered under this account, irrespective of billed through insurance cover or otherwise.

If your medical expenses exceed the deductible plan in a given year, the HDHP will pay the balance in that year. Balance remaining in the MSA at the end of the financial year, can be carried forward to the next year or if you decide to withdraw it will be treated as taxable income.

The MSA scheme was initiated with the purpose of problems arising out of over insurance covering. It was believed that over insurance is inflating medical care expenses. It was also reasoned that the cost of health care will decrease if people pay their medical expenses themselves and not by third parties. This scheme was intended to benefit small business establishments employing less than 50 people and self employed.

In the early 1990s, organizations like National Centre for Policy Analysis, Golden Rule Insurance Company pressed for a law that would permit contributions to a medical savings account that would be free of any taxation. Though nothing materialized at that time, an MSA pilot program was passed by the congress as part of Health Insurance Portability and Accountability Act (HIPAA). By 1993 most of the states had formed MSA legislation that offered tax exemption to MSA holders.

The Internal Revenue Service (IRS) calls the MSA for business or self-employed person as an “Archer MSA”. This term points to Congressman Bill Archer from Texas who sponsored HIPAA amendment in 1966 for creating these accounts. Considered as an IRS pilot program, it is periodically extended by US Treasury Department.

Medical expenses occurred out of long-term care coverage, health care contribution coverage of any form required under federal law, coverage paid while collecting unemployment benefit are best paid through Medical Savings Account. The risk an MSA account holder has to contend with is the medical expenses surpassing the contribution they can afford.

MSA scheme is defined as IRS-related trust account created for the sole purpose of gaining tax exemption on medical expenses. After attaining a certain age limit, IRS provisions allow the contributor to maintain a standard IRA retirement account. Contributing for medical savings will not apply any cap on normal IRA Contributions.

Before you contribute to this account you have to meet many qualifications, some of them are executed with the help instruction given in an IRS form 8853. Medical and dental expenses would be termed as qualified medical expenses. Situations such as self employed person remaining unemployed will also qualify.

Health Savings Accounts (HSA) scheme was created as a part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Health Savings Accounts (HAS) has superseded the MSA scheme now. The MSA itself has become outdated.