MSA vs. HSA: What’s the Difference?
by Mark Henricks | Originally posted on Yahoo!
Medicare savings accounts (MSAs) and health savings accounts (HSAs) both give consumers tax-advantaged ways to fund the costs of healthcare. MSAs are only for people enrolled in high-deductible Medicare plans. HSAs are restricted to people in high-deductible private insurance plans. Medicare funds MSAs, while individuals make contributions to HSAs. Both allow for tax-free growth of funds in the accounts, as well as tax-free withdrawals when withdrawals are used to pay for qualified medical expenses. Here’s a breakdown of the key differences between MSAs and HSAs.
HSA Basics
Essentially, an HSA is a form of self-insurance. That means it is more attractive for people who don’t use health insurance very often. It’s also widely used by self-employed people who don’t have the option of getting health insurance through an employer-sponsored plan.
You can only have an HSA if you have health insurance. And only high-deductible health plans (HDHPs) can offer their policyholders HSAs as options. The size of the deductible required to qualify as an HDHP – is set at a minimum of $1,400 for an individual and $2,800 for a family for 2021. In practice, HDHP deductibles often are much higher. There is a ceiling on how high the deductibles can be. That limit is the same as the maximum out-of-pocket cost, which for 2021 is $7,000 for individuals and $14,000 for families.
One major benefit of a HDHP is that the premiums are lower than for plans with lower deductibles. However, the ability to have an HSA is another important feature of HDHPs. That’s because HSAs have unique tax advantages. Individuals can put money into HSAs pre-tax, which means contributions are deducted from current taxable income. Plus, earnings contributions generate from interest or investments also are not taxed. Finally, the funds in an HSA can be withdrawn tax-free as long as the money is being spent on qualifying healthcare costs. Eligible costs include deductibles, copayments and coinsurance, although HSA funds can’t go to pay health insurance premiums. The triple tax-free feature of HSAs makes them attractive for people saving money.
The IRS limits the amount that can be deposited in an HSA. For 2021, the amount an individual can put in an HSA is capped at $3,600. Families can contribute $3,650. The caps go up in 2022 to $3,650 for individual and $7,300 for families.
HDHPs arrange with banks to let their participants open HSAs. Participation ordinarily is optional for HDHP participants. However, some participants put the maximum amount in every year, because the triple tax-free features of the HSAs make it such a powerful saving vehicle.
MSA Basics
MSAs are like HSAs for Medicare enrollees. MSAs and HSAs offer similar tax benefits. However, MSAs are only for people enrolled in the government Medicare program. Medicare recipients have to be over 65 or be disabled. And MSAs are not available for all Medicare enrollees. Only people enrolled in high-deductible Medicare plans can have MSAs. That does not include most Medicare recipients.
MSAs take the place of HSAs for Medicare recipients, because Medicare recipients can’t have HSAs. Both plans offer significant tax advantages, including tax-free contributions and withdrawals. Medicare enrollees who want MSAs have to enroll in high-deductible Medicare Advantage plans run by private insurance companies. HSAs are also available only for members of private health insurance plans that have high deductibles.
Original Medicare, which consists of Medicare Part A hospital coverage and Medicare Part B coverage of outpatient and preventative care, have standard deductibles. Medicare Advantage plans, also called Medicare Part C, are offered by private insurance companies in place of Original Medicare.
Advantage plans cover the same things as Original Medicare, but there can be significant differences in costs and coverage between Medicare Advantage plans. Many Advantage plans cover dental and vision, for example. Some Advantage plans have deductibles that qualify them as HDHPs, using the same deductible requirements that are applied to private employer insurance plans. HDHP Advantage plans can offer Medicare MSAs to their members. Another type of MSA, the Archer MSA, was phased out for new enrollees in 2007.
Withdrawals from an MSA plan that aren’t used for qualified health expenses are subject to a penalty amounting to 50% of the amount withdrawn. Plus, income taxes at the MSA owner’s regular rate are also due.
A major difference between MSAs and HSAs is that Medicare, not the policyholder, contributes to the MSA. The amount Medicare deposits varies and depends on the individual plan. As with an HSA, deposits are not taxed, funds in the account grow tax-free and withdrawals to pay qualified expenses are tax-free.