MSAs, HSAs, and FSAs: Comparing the differences

Let’s discuss how we pay for health care and differentiate the types of medical savings accounts (MSAs) offered today. Perhaps you’ll spot the one that’s right for you. Then again, maybe you don’t need one at all.

Active ingredients

There are differences between a medical savings account and a health savings account. That is, all HSAs are MSAs, but not all MSAs are HSAs.

“MSA” is a fairly generic term, meaning any account into which income can be deposited, tax-deferred, to offset medical expenses qualifies. They are utilized not only in the U.S. but also in China, Singapore, and South Africa.

To add to the confusion, there is a U.S.-only plan that’s called an Archer MSA. This type of account was launched in 1993 and is generally associated with self-employed individuals or Medicare recipients. It offers tax-free withdrawals if the money is used to pay for qualified medical expenses.

The Archer MSA served as the template for the HSA, which resulted from the passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

Take as directed

Health savings accounts (HSAs) let you set aside pre-tax money to pay for qualified medical expenses. These include deductibles and copayments to medical, dental, chiropractic, and psychological practices. They also cover anything you get with a doctor’s prescription– drugs, of course, but also things like eyeglasses and hearing aids. If you have a medical necessity to install an elevator or a pool in your home, that’s allowable too. You can also use an HSA to pay for travel to and from your appointments, so save those receipts and log those miles.

Just don’t use these funds for over-the-counter drugs, a health club membership, or non-injury related cosmetic surgery. You also can’t use an HSA to pay your health insurance premiums. If you do any of these things, you stand to lose the key benefit: tax-free withdrawal from the account.

The HSA is only one half of a healthcare payment cocktail, the other being your insurance plan. You can only contribute to an HSA if you’re a participant in a High Deductible Health Plan (HDHP). To be an HDHP, a plan must cover only preventive services before a deductible. The deductible must be set to a point where the consumer has to consciously decide to pay for medical help rather than just make the appointment because it’s already included in the buffet.

For 2020, the minimum deductible for an HDHP is $1,400 for an individual or $2,800 for a family; that “or” is important – only one condition needs to be met. If your deductible is less than that, though, you’re not eligible to open an HSA. If you do have access to an HDHP, you can contribute up to $3,550 for self-only coverage and up to $7,100 for family coverage into an HSA.

There’s a further $1,000 per year catch-up contribution limit for those over 55. In fact, many of the 22 million Americans who’ve opened HSAs are using them as a secondary retirement savings vehicle, according to CNBC. That’s in part because, unlike with other MSAs, HSA funds roll over year-to-year if you don’t spend them. Also, they’re portable so, if you retire or change employers or find yourself out-of-work, the money goes where you go.

Any interest earned is non-taxable. These accounts are usually offered in tandem by the insurers, which underwrite the HDHPs. They can also be set up through banks, investment companies, and any other institutions licensed and insured to receive deposits.

While it’s legal to open multiple HSAs, there’s no reason to because those maximum contributions are per-individual or per-family, not per-account.

Stop taking if …

There are other tax-advantaged MSAs, although most of them are utilized less often than HSAs are.

Flexible Spending Arrangements (FSA) are employer-sponsored plans usually funded through pre-tax paycheck deductions. Unlike HSAs or Archer MSAs, there are no income tax reporting requirements for FSAs. Also, you can use an FSA to pay qualified medical expenses even if you haven’t yet placed the funds in the account.

For 2020, salary reduction contributions to an FSA can’t exceed $2,750, although the employer can contribute more.

The HSA restrictions extend to FSAs, but there are some additional caveats. With FSAs, in most cases, contributed amounts that aren’t spent by the end of the plan year are forfeited. Even so, the plan can provide for either a grace period of up to two-and-a-half months or up to $500 could be carried over into the following year. Again, note the “or”.

FSAs are not to be confused with Health Reimbursement Arrangements, which must be funded entirely by the employer, although many companies offer FSAs and HRAs in tandem. HRAs similarly have no tax reporting requirements and can have limits imposed on highly compensated participants. But the real attractive part of benefiting from an HRA is that there is literally no limit on the amount of money the employer can contribute, and any balance remaining at the end of the year can be carried over.

Talk to your doctor

This might sound like a thorough discussion of MSAs, but honestly, it isn’t. What if both spouses work and you have two different insurance plans? Can you do a rollover from one kind of MSA to another? Are there any provisions made for reservists called up to active duty?

And suppose you’re thinking of opening an HSA, is it really advisable? To start with, an HDHP might not be the best insurance option for you based on prescriptions you and your family members take, as well as other overall health issues and concerns. Even when advisable, HSAs add another level of financial record keeping to the picture. And, rather than collecting tax-free interest as the law allows, you might find yourself paying monthly maintenance fees – which the law also allows. For some, it’s best to just pay out-of-pocket expenses straight out of their own pockets.

This is complicated stuff. Your current choice of MSA – or to be without one – might not be the option that yields you optimal benefits.

There are so many factors to include in a discussion with a qualified financial advisor. Ultimately, your decision about MSAs – like your decision about so many other things – is driven by your state of health.

And if there’s one thing that’s more crucial than financial wellbeing to your quality of life, that’s it.