• What is a Medical Savings Account?
• How an MSA Works
• Eligibility Requirements
• Tax Information
• To Request a Package

What is a Medical Savings Account?

Medical Savings Accounts was established by the Health Insurance Portability and Accountability Act of 1996. The law authorizes self-employed individuals and members of employer groups of 50 or less employees to use tax-advantaged MSAs combined with high deductible health insurance plans. The federal government will allow health plans who meet the criteria to establish a limited number of tax-advantaged MSAs beginning on January 1, 1997. The law places a limit of 750,000 individual MSA participants.

Medical Savings Account is a personal savings account with pre-tax advantages to pay for unreimbursed medical expenses. It is used to pay for health care not covered by insurance, including deductibles, co-payments, or other out-of-pocket expenses not covered by a health insurance plan.

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How an MSA Works

To participate in the MSA program, you must first have an MSA eligible high deductible health insurance plan in place. Once you have a high deductible health insurance policy you can then open an MSA account. You must continue your coverage in the high deductible health insurance policy in order to continue making deposits into your MSA account.

An individual deposits money into an MSA just as he or she would any other savings account. The money deposited is considered pre-tax dollars and is not subject to taxation.

The individual can withdraw money at any time from the MSA to pay for medical expenses without having to pay tax on the withdrawn amount.

Money withdrawn for other reasons is subject to taxation and a 15% penalty.

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Eligibility Requirements

To be eligible to establish an MSA, individuals must be covered by an MSA eligible high deductible health insurance program and no other insurance, with some exceptions such as long term care, Medicare supplemental insurance, insurance for specified disease or illness, insurance that pays a fixed amount per period of hospitalization and insurance related to workers’ compensation and other property policies.

You or your spouse must be either self-employed or an employee of a business with 50 or fewer employees which offers an MSA plan and not eligible for any other group health insurance plan.

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Tax Information

For tax year 2000, pursuant to Internal Revenue Code Section 162, self-employed individuals will be able to deduct 60% of the health insurance premiums.

All deposits and interest earnings on the MSA account balance are deducted from gross annual income before calculating the Form 1040 tax bill.

Employer contributions to an MSA are excludable from income.

Each year, the account balance can be carried forward without penalty.

Distributions made for non-qualified medical expenses are subject to taxation and a 15% penalty tax. Money can be withdrawn beginning at age 65 for any purpose without penalty but is subject to taxation at that time similar to a retirement account.

Upon death of an individual, an MSA may be passed on to the surviving spouse without having to pay any income tax. If an MSA is left to someone other than a spouse, the account balance is included in the gross income of the beneficiary or of the decedent on the filing of the final tax return.

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