HSA or MSA:
As healthcare premiums continue to rise, more and more people are turning to health savings accounts (HSA) to save tax-free money for out-of-pocket costs. But HSAs aren’t the only tax-advantaged healthcare strategy on the block.
For Medicare enrollees, there exists an option with all the same saving power. It’s called a medical savings account, or Medicare MSA, and if you’re currently enrolled in Parts A and B, you’re going to want to hear about it.
The basics: HSA or MSA
There are a lot of similarities between HSAs and MSAs, and only a few key differences that you need to be aware of.
Health Savings Accounts are available with high deductible health plans (HDHP) and are designed to help people cover their higher deductibles and out-of-pocket costs. These are tax-advantaged savings accounts that can be used to pay for all sorts of medical costs, and they are 100% controlled by the individual.
HSAs can be funded by the individual or by an employer as part of a benefits package. The money rolls over from year to year and is able to earn tax-deferred interest. As long as the money is spent on qualified medical expenses, it remains tax-free the whole time.
Medicare MSA overview
Medical Savings Accounts or Medicare MSAs work in the same way. These are tax-advantaged savings accounts that use the same basic model as an HSA, the only difference being that with MSAs, Medicare is the one funding the account.
MSAs are designed to work in conjunction with an MSA Plan, which is a special type of Medicare Advantage. In order to open and operate an MSA, it is necessary to enroll in an MSA plan.
After you are enrolled in a plan and your MSA is set up, Medicare will start making contributions towards your MSA account. The funds in this account can reimburse any qualified medical expenses you might have, entirely tax-free.
Meanwhile, your MSA plan will cover all the same expenses that are covered by original Medicare (once you’ve met your deductible). Note that the MSA contribution by Medicare will not cover your entire deductible, so you will have some out-of-pocket exposure for at least your first year.
HSA vs MSA similarities
HSAs and MSAs have quite a lot in common:
- Tax-advantaged: The money in HSAs and MSAs is allowed to grow on a tax-deferred basis. As long as the funds are used on qualified medical expenses, you do not need to pay any income tax on the amount you withdraw.
- “Roll-over” friendly: If there is money in your account at the end of the year, it stays there, and just keeps growing. In other words, there’s no “use it or lose it” clause to worry about.
- Owned & controlled by the member: HSAs and MSAs belong entirely to the member, including all of the funds associated with it. You can even spend these funds on non-medical expenses if you’d like, although the withdrawal may be subject to taxes and penalties.
- Designed to work with high deductible plans. HSAs require a high deductible insurance plan, and MSAs are a form of high-deductible Medicare Advantage. This means higher up-front costs and out-of-pocket expenses. However, it also means small or even $0 premiums.
- A valuable part of any retirement plan: The older you get, the more likely you are to incur significant medical expenses. A fully funded HSA or MSA is an effective way to protect yourself from those unexpected hospital bills.
HSA vs MSA differences
While they work in essentially the same way, HSAs and MSAs are different in the following ways:
- Medicare HSAs are funded by Medicare, not you or an employer. Because it’s actually a type of Medicare Advantage plan, you don’t have to contribute anything to an MSA. The annual contribution comes directly from your health plan.
- MSA Plans are a form of Medicare Advantage. You can only use a Medicare MSA if you are enrolled in a special high-deductible MSA-qualified Medicare Advantage plan (Part C).Once you’re enrolled, your MSA plan will pay for the costs that would be covered under Medicare Parts A and B.
- You can use the funds in your Medical Savings Account to pay Medicare premiums. You are not allowed to use HSA funds to pay health insurance premiums. But if you have Part D prescription plan premiums you can pay those from your MSA. You can even pay your Medicare Part B premiums with tax-free money from your MSA, something that most people pay with after-tax social security.
Call your Personal Benefits Manager to learn more about Medicare MSAs
Medicare MSA plans are an innovative and lucrative way to receive your Medicare benefits. Like HSAs, MSAs encourage enrollees to take more control of their health care decisions. In addition, they provide a valuable way to set aside tax-free cash for future health expenses.
If you’re enrolled in Medicare and interested in learning more about an MSA, give us a call. Your Personal Benefits Manager can walk you through the details, and provide a second opinion if you need it.
Wiley Long is founder and president of Medigap Advisors, and is passionate about helping people navigate the confusing waters of Medicare. He is the author of The Medicare Playbook: Designing Your Successful Health Coverage Strategy, a clear and simple explanation so you can make the most of your Medicare coverage.