How Much Will a Medical Savings Account Cost Me?

A doctor and his patient
A doctor and his patient

A medical savings account (MSA) is a tax-advantaged account in some Medicare Advantage plans with high deductibles. MSAs resemble the health savings accounts (HSAs) available to members of non-Medicare high-deductible health plans (HDHPs). Medicare funds MSAs with tax-free contributions, and interest earned by funds in the accounts is also not taxed. MSA owners can withdraw funds tax-free as long as the money goes to pay for qualified medical expenses. A financial advisor can help you assess your needs and plan for meeting those needs so find an advisor today. 

MSA Background

Medical savings accounts began appearing in the 1990s when states organized them to help people pay for medical costs with untaxed dollars. The federal Archer MSA came next. HSAs replaced Archer MSAs beginning in 2003, the same year Medicare MSAs became legal. Medicare MSAs were first offered to Medicare enrollees in 2007.

Medicare enrollees have been slow to sign up for MSAs. Of 64 million people on Medicare in 2019, 22 million were enrolled in Advantage plans, but only 5,600 were on MSA plans, according to the Kaiser Foundation.

Medicare MSA plans are not available at all in most places. At time of writing, only four companies offer MSAs, and the plans are for sale in only 29 states.

Requirements for an MSA

Medicare Advantage documents
Medicare Advantage documents

In order to have a Medicare MSA, enrollees must first join a Medicare Advantage plan with a high deductible. Medicare Advantage, also called Medicare Part C, is a health plan provided by a private insurance company that Medicare pays to insure members. Advantage plans cover the same health costs as Medicare Parts A and B, and many Advantage plans cover additional expenses, such as dental and vision.

Some Advantage plans have a deductible. This is an amount that enrollees have to pay from their own pockets before the insurance begins paying. Advantage plans with deductibles may offer expanded coverage or lower copays or coinsurance compared to no-deductible plans. However, enrollees in Advantage plans with deductibles are exposed to the risk of higher out-of-pocket costs.

To have an MSA, an Advantage plan must meet the requirements for an HDHP. For 2021, the IRS defines this as a deductible of at least $1,400 for an individual or $2,800 for a family. HDHP out-of-pocket costs including deductible, copayment and coinsurance, are capped at $7,000 for an individual and $14,000.

How MSAs Work

After enrolling in an HDHP Advantage plan with an MSA, the enrollee can open the MSA at a bank selected by the insurer. The plan makes an annual tax-free deposit of funds in the account. Deposits arrive in a lump sum at the beginning of the year. The insured individual can’t make deposits.

Money for the deposit comes from Medicare although the Advantage insurance company sets the amount. The deposit normally comes to less than the deductible. The Advantage plan documents will specify the amount.

Money in the MSA can go to pay healthcare costs for the insured person. The bank that holds the account may provide the account holder with a debit card for this purpose. Any money left in the MSA at the end of the year stays there. Earnings on the funds also accumulate, tax-free. Unlike HSAs, MSA account holders can’t invest funds in the stock market. MSA funds go into an interest-bearing account. The account holder can move the funds to a bank other than the one chosen by the insurance company, however.

Payments made with MSA funds count to fulfill the deductible, but the insurance will not begin paying for care until the deductible is met. Until then, the insured individual must use MSA funds or pay costs out of pocket.

MSAs and Taxes

MSA withdrawals for qualified medical costs are not subject to income taxes. Generally, costs that are deductible medical expenses on a federal income tax return are qualified expenses. MSA funds withdrawn for other than qualified medical expenses are subject to income taxes and a 50% penalty.

Enrollees in Medicare MSA plans have to file a Form 8853 along with their federal income tax returns. In addition, MSA Advantage plans may require receipts or other documentation to show that withdrawals paid only qualified medical expenses.

Bottom Line

Man and child holding a red heart
Man and child holding a red heart

MSA Advantage plans are special varieties of Medicare that combine high deductibles with savings accounts funded with tax-free contributions. MSA plans may offer expanded coverage and lower copays and coinsurance than other Medicare Advantage plans. However, with deductibles as high as $7,000 for individuals and $14,000 for families MSA plans are probably best for healthy Medicare enrollees who anticipate relatively low future medical expenses.

Tips on Healthcare and Retirement

  • Medicare MSA plans have yet to be widely adopted, but they can be helpful for some Medicare enrollees. To help choose health insurance wisely, the advice of an experienced and qualified financial advisor is invaluable. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.

  • Everyone’s retirement savings goal is different. SmartAsset’s free retirement calculator can help you determine how much you’ll need to have saved based on your current income, expenses in retirement and other inputs.

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