Medical Savings Account (MSA)

Medical Savings Account (MSA)

A medical savings account (MSA) is a savings account used to pay health care expenses that works in combination with a high-deductible health insurance policy. The self-employed individual or small employer purchases a high-deductible policy, which usually costs significantly less than that for a lower deductible policy. The individual or employer, on behalf of the insured, establishes an MSA with a designated trustee, such as a bank or insurance company.

An MSA is different from an Flexible Spending Account (FSA). With an FSA, the employee must declare prior to enrollment how much money to earmark for contribution to the account. If the employee does not use all of the money, he or she forfeits the remainder, and there is no incentive to spend wisely. With an MSA, the money is set aside tax-free as in an FSA, but if there is a balance left in the account at the end of the year, the money rolls over with interest to the following year. This creates a savings for future expenses if the participant does not incur high medical expenses during a year. Additionally, FSAs are not available to self-employed persons, whereas a medical savings account is designed especially for small employers and the self-employed.

This program is currently set to expire on December 31, 2002. Unless Congress acts to change the law, no new MSAs may be established after this date.

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