Health Savings Accounts (HSA) and Medical Savings Accounts (MSA)

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Health Savings Accounts (HSA) and Medical Savings Accounts (MSA)

For small businesses and the self employed, an MSA is a tax-exempt account established for the purpose of paying medical expenses in conjunction with a high-deductible health plan. Like an IRA, an MSA is established for the benefit of the individual, and is "portable". Thus, if the individual is an employee who later changes employers or leaves the work force, the MSA does not stay behind with the former employer, but stays with the individual.

• A small business for this purpose is defined as an employer who employed an average of 50 or fewer employees during either of the two preceding calendar years.
• A "high-deductible health plan" is a health plan that:
  1. has a minimum annual deductible of $1,100 for individual (self-only) coverage; or
  2. has a minimum annual deductible of $2,200, for family coverage (coverage of more than one individual).

In addition, for 2008, the annual out-of-pocket expenses under the plan cannot exceed $5,600 for individual coverage and $11,200 for family coverage. Out-of-pocket expenses include deductibles, co-payments and other amounts the participant must pay for covered benefits, but do not include premiums.

HSAs are similar to medical savings accounts (MSAs). However, MSA eligibility has been restricted to employees of small businesses and the self-employed while HSAs are open to everyone with a high deductible health insurance plan. Contributions to the HSA by an employer are not included in the individual's taxable income. Contributions by an individual are tax deductible. Individuals, their employers, or both can contribute tax-deductible funds each year up to the amount of the policy's annual deductible, subject to a cap of $2,900 for individuals and $5,800 for families. Individuals aged 55-64 can make additional contributions. The interest and investment earnings generated by the account are also not taxable while in the HSA. Amounts distributed are not taxable as long as they are used to pay for qualified medical expenses. Amounts distributed which are not used to pay for qualified medical expenses will be taxable, plus an additional 10% tax will be applied in order to prevent the use of the HSA for nonmedical purposes.

Like MSAs, HSA are portable. In addition, individuals over age 55 can make extra contributions to their accounts and still enjoy the same tax advantages. By 2009, an additional $1,000 can be added to the HSA.

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