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MSA — Careful Planning for HDHP Participants

November 27, 2017 | Tina Pelland

High Deductible Healthcare Plans are great for small businesses or self-employed individuals to cut costs and increase profitability. Unfortunately, a common concern for HDHPs is that they do not provide enough coverage for upfront costs.  HDHP participants can address this concern by using a Medical Savings Account.

What is an MSA?

An MSA (Medical Savings Account) is a type of Medical Expense Account for individuals who are self-employed or work for a small company that consists of 50 or less employees. The purpose of an MSA is to help HDHP participants cover medical expenses before they reach their deductible. Not to be confused with an HSA, as the IRS only allows MSAs for individuals that meet the requirements mentioned above.

How do MSAs work?

Like other Medical Expense Accounts, MSA account owners must be a participant in a federally approved HDHP. Deposits are pre-tax, and withdrawals are tax-free, as long as the funds pay for pre-approved medical expenses. Luckily, almost any medical cost can fall into that category, even vision and dental. Keep in mind, MSAs are entirely self-directed. The account owner directs the setup, contributions, and compliance.

What are the benefits of having an MSA?

There is a bundle of benefits that come along with using an MSA. One naturally being the use of an HDHP, which decreases the cost of having medical insurance. Account owners also prepare for medical expenses that may occur before reaching their deductible. Also, deposits are tax-free, and at the end of the year, remaining funds roll over. The interest that has accrued is also tax-exempt, creating a source for tax-free income. Funds are even available for transfer to an IRA account once the account owner reaches the age of 59 and a half.

MSAs may require a little more attention and effort. However, if used correctly, they can be an excellent source for medical expenses and a smart investment for years to come. Learn more about MSAs and all medical expense accounts here