Be sure to understand the options you have for managing your expenses as health care costs rise.
The Main Types of HSAs and MSAs
There are three types of HSAs and MSAs. HSA plans are available to those who have a high-deductible health plan (HDHP). These plans can be paired with employer-provided or individual health plans. Archer MSA plans were an older version of the current HSAs. This type of plan is no longer common, but some people do still have these accounts. Medicare MSA plans have the same structure as Archer MSA plans. They’re designed to help pay costs for someone who is covered by Medicare. The primary MSA available for most people is a Medicare MSA.
Who Can Join These Plans?
The IRS defines who is eligible to use each type of account. You need to meet specific criteria to qualify. You can’t contribute to an HSA after you go on Medicare. You can only use a Medicare MSA if you’re on a high-deductible Medicare Advantage Plan (Part C). Standard Archer MSAs are not widely available after 2007.
Similarities of HSA and MSA Plans
HSA and MSA programs share several features.
Tax Benefits
Funds can grow in your account without generating taxable earnings each year. You may be able to pay for health care with tax-advantaged dollars in some cases if you meet all IRS requirements.
Potential Tax-Free Withdrawals
Distributions can come out of your account tax-free if you pay for qualified medical expenses. But you may have to pay income tax and additional taxes on the amount you withdraw if you don’t use the funds for qualified medical expenses.
Contributions
It can reduce your taxable income if you’re eligible to contribute to an HSA or Archer MSA. Although employer contributions don’t qualify for a deduction, they’re generally not treated as taxable income, either. You don’t put any money into a Medicare MSA. Your health plan does it for you.
Using Your HSA and MSA Funds
HSA and MSA plans may also give you the option to leave the money in the account to grow. There’s no “use it or lose it” feature with an HSA or MSA, unlike flexible spending accounts (FSAs). You can build up savings for later in life or use the money now. You get a debit card or a checkbook to pay for qualified medical expenses with most accounts. This lets you independently pay providers or buy medical supplies. Just be sure to save the receipts for any withdrawals.
HSA Highlights
HSAs are an option for those with an individual or employer-provided health plan with high deductible limits (HDHPs).
Premiums
HDHPs typically have lower monthly premiums than other options in exchange for the high deductible. They attract cost-conscious employers and individuals as a result, including those who are self-employed.
HDHPs
Plans must meet specific criteria to qualify as an HDHP. The minimum deductible for 2022 is $1,400 for individual coverage, and $2,800 for family coverage. This has not increased from 2021. The maximum out-of-pocket expense is $7,050 for individual coverage for 2022, increasing to $14,100 for family coverage. Details vary by insurance provider and plan offerings.
Contribution Limits
Those who are eligible can contribute based on the type of health coverage they have. HSAs are individual accounts. There’s no such thing as a joint or family HSA, even if you have family coverage. The maximum annual contribution for individual coverage is $3,650 for 2022. The maximum annual contribution for family coverage is $7,300 for 2022.
Medicare MSA Highlights
A Medicare MSA is an option for individuals on Medicare. You can no longer contribute to an HSA after you enroll in Medicare.
Premiums
You may pay zero premiums if you use a high-deductible Medicare Advantage Plan. But you typically face higher deductibles and up-front out-of-pocket expenses as a result.
Contributions
Your health care plan deposits funds into your Medicare MSA, which means you can’t make contributions yourself. These contributions typically arrive at the beginning of the year; however, if you join later in the year, you may get prorated contributions. The idea behind a Medicare MSA is that you use the funds from your account to pay for qualified expenses until you reach your deductible. But not all “qualified” expenses are applied to your deductible. Your deductible is typically more than you receive in your account, so you may have to come up with funds on your own to pay for a portion of your expenses. The plan should pay all your Medicare-covered Part A and Part B health care costs after you reach your deductible. Be sure to verify coverage details with your providers.
Archer MSA Highlights
HSAs have largely replaced non-Medicare Archer MSAs because HSAs are more flexible than Archer MSAs.
Availability
Archer MSAs were first available to small businesses with 50 or fewer employees and to self-employed people. New Archer MSAs are restricted after 2007, but it may still be possible to start a new account in some cases. It can depend on your situation.
Contributions
Archer MSAs also restrict who can contribute to an account. Either the account owner or the employer can contribute in the same year, but it can’t be both. You must be covered by an HDHP for the full year to be eligible, and you can only contribute up to 75% of your HDHP annual deductible. It’s 65% for self-only plans.
The Bottom Line
Keep in mind that the IRS may impose other restrictions on HSAs and MSAs that aren’t mentioned here, and tax laws can change often. The IRS or your insurance provider may handle your situation differently; consult a CPA or tax attorney before making decisions about your money. Also, it helps to talk to an insurance representative licensed in your area for details on health coverage before you choose a plan.
