HSA vs. MSA

Attribute	HSA	MSA
Tax Advantages	Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.	Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
Eligibility	Must be enrolled in a high-deductible health plan (HDHP) to qualify for an HSA.	Must be enrolled in a high-deductible health plan (HDHP) to qualify for an MSA.
Contribution Limits	For 2021, the maximum contribution limit is $3,600 for individuals and $7,200 for families.	For 2021, the maximum contribution limit is $3,600 for individuals and $7,200 for families.
Employer Contributions	Employers can contribute to an employee's HSA, up to certain limits.	Employers can contribute to an employee's MSA, up to certain limits.
Portability	HSAs are portable and can be carried over from year to year, even if changing jobs or health plans.	MSAs are portable and can be carried over from year to year, even if changing jobs or health plans.
Investment Options	HSAs may offer investment options to grow funds over time.	MSAs may offer investment options to grow funds over time.
Withdrawal Penalties	Withdrawals for non-qualified medical expenses before age 65 may incur taxes and penalties.	Withdrawals for non-qualified medical expenses before age 65 may incur taxes and penalties.

Introduction

Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) are both tax-advantaged accounts that allow individuals to save money for medical expenses. While they share some similarities, there are also key differences between the two. In this article, we will explore the attributes of HSAs and MSAs, highlighting their features, benefits, and limitations.

Eligibility and Contributions

Both HSAs and MSAs require individuals to have a high-deductible health plan (HDHP) to be eligible. However, there are differences in the contribution limits. For HSAs, the maximum contribution limit is typically higher than that of MSAs. In 2021, the maximum annual contribution for an individual with self-only coverage is $3,600 for HSAs, while for MSAs, it is $3,600 for individuals and $7,200 for families. Additionally, individuals aged 55 or older can make catch-up contributions to HSAs, allowing them to save even more for future medical expenses.

Tax Advantages

Both HSAs and MSAs offer tax advantages, but the way they work differs slightly. Contributions made to HSAs are tax-deductible, meaning they can be deducted from your taxable income, reducing your overall tax liability. The funds in the HSA grow tax-free, and withdrawals for qualified medical expenses are also tax-free. On the other hand, MSAs provide an above-the-line deduction for contributions, meaning you can deduct them from your income even if you don't itemize deductions. The earnings on the MSA are also tax-free, and withdrawals for qualified medical expenses are tax-free as well.

Portability and Rollovers

HSAs have a significant advantage when it comes to portability and rollovers. They are fully portable, meaning you can take your HSA with you if you change jobs or retire. The funds in the HSA can be rolled over from year to year, allowing you to accumulate savings over time. In contrast, MSAs are not as portable. If you change jobs or retire, you cannot contribute to the MSA anymore, and you may need to convert it to an HSA or withdraw the funds, which could have tax implications.

Investment Options

HSAs generally offer more investment options compared to MSAs. With an HSA, you can invest your funds in various investment vehicles such as stocks, bonds, mutual funds, and more. This allows your HSA to potentially grow at a faster rate. On the other hand, MSAs typically have limited investment options, often limited to low-risk options like savings accounts or certificates of deposit. While this may provide stability, it may not offer the same growth potential as HSAs.

Withdrawals and Qualified Expenses

Both HSAs and MSAs allow tax-free withdrawals for qualified medical expenses. These expenses include doctor visits, prescription medications, hospital stays, and more. However, it's important to note that non-qualified withdrawals from both accounts may be subject to taxes and penalties. Additionally, HSAs have the advantage of allowing withdrawals for non-medical expenses after the age of 65, although they will be subject to income tax. MSAs, on the other hand, do not allow non-medical withdrawals without penalties.

Employer Contributions

Employers can contribute to both HSAs and MSAs, but the rules and limits differ. For HSAs, employers can make contributions on behalf of their employees, and these contributions are excluded from the employee's taxable income. However, the total contributions from both the employer and the employee cannot exceed the annual contribution limit set by the IRS. In the case of MSAs, only self-employed individuals or small businesses with fewer than 50 employees can contribute to the MSA, and the contributions are limited to a percentage of the HDHP deductible.

Conclusion

HSAs and MSAs are both valuable tools for individuals looking to save for medical expenses while enjoying tax advantages. While they share similarities in terms of eligibility requirements and tax benefits, there are notable differences in contribution limits, portability, investment options, and withdrawal rules. Understanding these attributes is crucial in determining which account is the best fit for your specific needs and financial goals. Whether you opt for an HSA or MSA, both accounts can provide a valuable means of saving for future medical expenses and potentially reducing your tax burden.