Gazette Sherald

I remember sitting at my kitchen table a decade ago, staring at a stack of health insurance paperwork from my new employer. It was a small business, under 50 people, and among the options was something called an “Archer MSA” paired with a high-deductible plan. I had heard of FSAs and was starting to hear whispers about HSAs, but an MSA? I was completely lost. If you’re feeling that same confusion today, you’re not alone. Medical Savings Accounts (MSAs) are a bit of a relic, a precursor to the more common Health Savings Account (HSA), but they’re still out there, and for a very specific group of people, they can be relevant. Let’s untangle what an MSA is, in plain English, and figure out if it’s something you should even consider.

What is an MSA? A Simple Definition.

At its heart, a Medical Savings Account (MSA) is a tax-advantaged savings account created specifically for paying medical expenses. Think of it as a special bank account that gets a favorable nod from the IRS. You or your employer can put money into it, and that money isn’t taxed going in. It grows without being taxed each year, and when you take it out to pay for qualified medical expenses—things like doctor’s copays, prescriptions, glasses, or dental work—it’s not taxed coming out either. This “triple tax advantage” is the golden ticket.

The catch, and it’s a big one, is that you can only open and contribute to an MSA if you have a specific type of high-deductible health plan (HDHP) and you fall into certain categories, which we’ll get into. The most common type you’ll hear about is the Archer MSA, named after the Congressman who sponsored the bill. These were essentially the test model that later evolved into the HSA program.

How an MSA Actually Works (Step-by-Step)

Let’s make this practical. Imagine you work for a small local design firm.

1. Eligibility Check: Your employer offers a qualified high-deductible health plan (HDHP) that meets specific IRS deductible limits (these change yearly). The firm has 40 employees, which fits the “small employer” category for an Archer MSA.

2. Account Setup: You choose the HDHP + MSA option. Your employer might help you set up the MSA with a bank or custodian, or you may do it yourself.

3. Funding: Over the year, you decide to contribute, say, $2,000 to your MSA. Your employer might also contribute on your behalf. This $2,000 is deducted from your taxable income. If you’re in the 24% tax bracket, you just saved $480 on your tax bill right away.

4. Spending: You need a filling at the dentist, costing $200. You pay the dentist using a debit card linked to your MSA, or you pay out-of-pocket and reimburse yourself from the MSA. That $200 is tax-free.

5. The Rollover Magic: Unlike a “use-it-or-lose-it” Flexible Spending Account (FSA), any money you don’t spend in your MSA by December 31st doesn’t vanish. It rolls over, every year, indefinitely. It sits in your account, and if your MSA provider allows, it can even be invested in mutual funds or other assets to grow for future medical needs.

This rollover feature is critical. It turns the MSA from a simple spending account into a potential long-term healthcare nest egg. You’re saving for healthcare, not just setting aside money to be spent immediately.

Are You Eligible for an MSA? The Strict Rules.

This is where MSAs get narrow. You cannot have one just because you want one. The rules are strict:

1. You must be enrolled in a “qualified” High-Deductible Health Plan (HDHP). The IRS defines the minimum deductible and maximum out-of-pocket costs for these plans, and they adjust them annually. It’s not just any high-deductible plan.

2. You must be either:

   • A small business employee: Your employer must have 50 or fewer employees.

   • Self-employed: This includes sole proprietors and freelancers.

If you work for a large corporation with thousands of employees, you are almost certainly not eligible for an MSA. This is the primary reason HSAs have become far more popular—they opened up the high-deductible savings account model to everyone with a qualified HDHP, regardless of employer size.

MSA vs. HSA: The Critical Difference You Must Know.

This is the most important part of the conversation. HSAs didn’t replace MSAs; they succeeded and expanded upon them. If you have an old MSA, you can keep it and even roll it into an HSA. But for someone starting fresh, the HSA is almost always the better option, and here’s why.

• Eligibility: As mentioned, MSAs are for the small business/self-employed niche. HSAs are for anyone with a qualified HDHP.

• Contribution Limits: HSA contribution limits are significantly higher. For 2024, an individual can put up to $4,150 in an HSA, compared to an MSA where the limit is 65% of your plan deductible (individual) or 75% (family). This often results in a much lower cap for MSAs.

• Portability and Control: Both are portable (you own them). However, because HSAs are more common, they come with far better tools, investment options, and lower fees from a wide range of providers. Finding an MSA custodian today can be a challenge.

• Employer Contributions: Both allow them, but it’s far more standardized and common with HSAs.

In my opinion, unless you are grandfathered into an old MSA with great terms or have a very specific small business scenario, the HSA is the superior vehicle in almost every way. It offers more flexibility, higher savings potential, and is easier to manage.

The Real Pros and Cons from a User’s Perspective

Let’s be balanced. From my experience talking to people who’ve used them, here’s the real scoop.

Pros:

• Tax Shelter: The triple tax advantage is real and powerful for covering medical costs.

• Long-Term Savings: The annual rollover means you can build a substantial fund for future medical expenses, especially in retirement.

• You Own It: Like an HSA, it’s your account. Change jobs? The MSA comes with you.

• Niche Benefit: For a self-employed person in the early 2000s, it was a fantastic, unique tool.

Cons:

• Extremely Limited Access: The eligibility rules are a major barrier.

• Overshadowed by HSAs: HSAs do everything an MSA does, but better and for more people. Finding information or providers for MSAs is harder.

• Lower Contribution Potential: The formula-based limits are often less generous than the straightforward, high limits of an HSA.

• Complexity: Explaining the “65% of your deductible” rule to someone is more confusing than saying “the 2024 HSA limit is $4,150.”

How to Open and Manage an MSA (If You Can)

If you’ve checked the boxes and believe you’re eligible, the path isn’t as simple as going to a major bank’s website. Few large institutions actively promote new MSAs. Your starting point should be:

1. Talk to Your Employer: If they offer the qualified HDHP, they likely have a relationship with a custodian (often a local bank, credit union, or specialty insurer) that can set it up.

2. Consult a Tax or Financial Advisor: They can help navigate the specific rules and may know of institutions that still offer Archer MSA accounts.

3. Look for Specialty Health Insurance Providers: Some companies that cater specifically to the small business and self-employed health market may still offer MSA services.

Once open, manage it meticulously. Keep every receipt for medical expenses, even if you don’t plan to reimburse yourself immediately. You can reimburse yourself from the MSA for that expense at any time in the future, tax-free. Consider the investment options if your balance grows. The goal is to let this money grow for the long haul.

Conclusion

So, is a Medical Savings Account right for you? The honest answer is: probably not. For the vast majority of people, the Health Savings Account (HSA) is the modern, flexible, and more powerful version of this concept. However, understanding MSAs is important. It gives you context for how these tax-advantaged health accounts evolved. If you are self-employed or work for a very small business that has maintained an old Archer MSA program, it’s a legitimate tool that can provide real tax benefits and help you save for healthcare costs. But if you’re starting from scratch today, your energy is almost certainly better spent ensuring you have a qualified HDHP and opening an HSA. The principles are the same—save wisely, use tax advantages, and plan for future health needs—but the HSA simply gives you a bigger, better vehicle for the journey.

Frequently Asked Questions (FAQ)

Q: Are MSAs still available in 2024?
A: Yes, Archer MSAs still exist under the original legislation. However, new contributions can only be made if you are covered by a qualified HDHP and are either self-employed or work for a small business (under 50 employees) that offers one. It is a niche product.

Q: Can I have both an MSA and an HSA?
A: No, you cannot contribute to both an MSA and an HSA in the same year. However, you can own both accounts. For example, you might have an old MSA from a previous job and now contribute to an HSA with your new employer’s plan. You must stop contributing to the MSA to be eligible for the HSA.

Q: What happens to my MSA if I change to a job at a big company?
A: Your MSA money remains yours forever. You simply cannot make new contributions to it unless you again become eligible (e.g., return to self-employment). You can still use the existing funds for qualified medical expenses tax-free. You also have the option to roll the MSA funds into an HSA, which is often a good administrative move.

Q: What can I use my MSA money to pay for?
A: You can use it for a wide range of IRS-qualified medical expenses. This includes deductibles, copays, prescriptions, dental and vision care, certain over-the-counter medicines, and even some medical equipment. The IRS Publication 502 provides a full list.

Q: Is an MSA better than an HSA?
A: In almost all cases, no. The HSA has higher contribution limits, is available to a much wider population, and is supported by more financial institutions. The MSA’s main advantage is its historical existence for a specific group; for anyone newly eligible, an HSA is typically the better choice.