Health Savings Accounts (HSAs); Flexible Spending Accounts (FSAs); Medical Savings Accounts (MSAs)

Medical Savings Accounts, often referred to as MSAs, are a variation of Flexible Spending Accounts (FSAs). Both MSAs and FSAs are similar to IRAs in the sense that each employee can make tax-free contributions to an account. But instead of withdrawing the funds at retirement as you would with an IRA, you withdraw them to pay for certain types of medical care. In effect, you're being allowed to pay some of your medical costs with pre-tax dollars, which is a heck of a lot cheaper than paying for it with post-tax dollars.

The newer kids on the block, Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs), tend to add to this confusing alphabet soup. HRAs must be funded by employers only and are fairly uncommon. HSAs are a fast growing choice with more pros and fewer cons that their earlier cousins.

MSAs that are exempt from federal income taxes are part of a demonstration project that began in 1997 and ended in 2007. This program has been replaced by HSA plans.

Health Savings Accounts. Starting in 2004, Health Savings Accounts (HSAs), approved as part of the Medicare Act of 2003, began replacing MSA programs. HSAs are very similar to MSAs, but they are less restrictive.

The deductibles for HSAs are lower than the deductibles for MSAs. For HSAs, a high-deductible plan is one in which the minimum deductible for 2014 is $1,250 for individuals and $2,500 for a family.

For 2014, the maximum annual out-of-pocket amount is $6,350 for individuals and $12,700 for families. These amounts may be periodically adjusted for inflation.

For 2014, the maximum contribution to an HSA is $3,300 for individuals or $6,550 for families. Catch up contributions for individuals who are 55 or older are increased by statute to $1,000 for 2010 and years going forward.

Individuals who are eligible individuals on the first day of the last month of the taxable year (December for most taxpayers) are allowed the full annual contribution (plus catch up contribution, if 55 or older by year end), regardless of the number of months the individual was an eligible individual in the year. For individuals who are no longer eligible individuals on that date, both the HSA contribution and catch up contribution apply pro rata based on the number of months of the year a taxpayer is an eligible individual.

In addition, a fiscal year plan that satisfies the requirements for an HDHP on the first day of the first month of its fiscal year may apply that deductible for the entire fiscal year.

HSA unused balances can be rolled over to subsequent years. HSAs are not to be confused with HCSAs (Health Care Spending Accounts) or DCSAs (Dependent Care Spending Accounts) both of which are just another form of FSAs.

The IRS has issued model forms for establishing HSAs. Form 5305-B, Health Savings Trust Account, and Form 5305-C, Health Savings Custodial Account, are used to establish HSAs and are not to be filed with the IRS. The forms and their instructions are available on the IRS website.

The key points to remember about HSAs are (1) that they are a special breed of accounts owned by an individual to accumulate funds for current and future medical expenses; (2) that they are used in conjunction with High Deductible Health Plans which don't cover first dollar expense; (3) that these HDHPs plans can be an HMO, PPO or indemnity plan as long as the plan terms meet the requirements and, (4) and most important.....the unused contents of the account can roll forward from one year to the next.

HSAs will undoubtedly become more and more popular as a form of consumer controlled medical expense reduction. To keep up with the ongoing evolution of this form of health care coverage, refer to this excellent IRS resource.