MSA vs. HSA: What's the Difference? - SmartAsset

Medicare savings accounts (MSAs) and health savings accounts (HSAs) both give consumers tax-advantaged ways to fund the costs of healthcare. MSAs are only for people enrolled in high-deductible Medicare plans. HSAs are restricted to people in high-deductible private insurance plans. Medicare funds MSAs, while individuals make contributions to HSAs. Both allow for tax-free growth of funds in the accounts, as well as tax-free withdrawals when withdrawals are used to pay for qualified medical expenses. Here’s a breakdown of the key differences between MSAs and HSAs.

A financial advisor could help you create or adjust a retirement plan for your healthcare goals and needs.

HSA Basics

Essentially, an HSA is a form of self-insurance. That means it is more attractive for people who don’t use health insurance very often. It’s also widely used by self-employed people who don’t have the option of getting health insurance through an employer-sponsored plan.

You can only have an HSA if you have health insurance. And only high-deductible health plans (HDHPs) can offer their policyholders HSAs as options. The size of the deductible required to qualify as an HDHP – is set at a minimum of $1,500 for an individual and $3,000 for a family for 2023. In practice, HDHP deductibles often are much higher. There is a ceiling on how high the deductibles can be. That limit is the same as the maximum out-of-pocket cost, which for 2023 is $7,500 for individuals and $15,000 for families.

One major benefit of a HDHP is that the premiums are lower than for plans with lower deductibles. However, the ability to have an HSA is another important feature of HDHPs. That’s because HSAs have unique tax advantages. Individuals can put money into HSAs pre-tax, which means contributions are deducted from current taxable income. Plus, earnings contributions generate from interest or investments also are not taxed. Finally, the funds in an HSA can be withdrawn tax-free as long as the money is being spent on qualifying healthcare costs. Eligible costs include deductibles, copayments and coinsurance, although HSA funds can’t go to pay health insurance premiums. The triple tax-free feature of HSAs makes them attractive for people saving money.

The IRS limits the amount that can be deposited in an HSA. For 2023, the amount an individual can put in an HSA is capped at $3,850. Families can contribute up to $7,750. If you are age 55 or older at the end of your tax year, your contribution limit is increased by $1,000.

HDHPs arrange with banks to let their participants open HSAs. Participation ordinarily is optional for HDHP participants. However, some participants put the maximum amount in every year, because the triple tax-free features of the HSAs make it such a powerful saving vehicle.

MSA Basics

MSAs are like HSAs for Medicare enrollees. MSAs and HSAs offer similar tax benefits. However, MSAs are only for people enrolled in the government Medicare program. Medicare recipients have to be over 65 or be disabled. And MSAs are not available for all Medicare enrollees. Only people enrolled in high-deductible Medicare plans can have MSAs. That does not include most Medicare recipients.

MSAs take the place of HSAs for Medicare recipients, because Medicare recipients can’t have HSAs. Both plans offer significant tax advantages, including tax-free contributions and withdrawals. Medicare enrollees who want MSAs have to enroll in high-deductible Medicare Advantage plans run by private insurance companies. HSAs are also available only for members of private health insurance plans that have high deductibles.

Original Medicare, which consists of Medicare Part A hospital coverage and Medicare Part B coverage of outpatient and preventative care, have standard deductibles. Medicare Advantage plans, also called Medicare Part C, are offered by private insurance companies in place of Original Medicare.

Advantage plans cover the same things as Original Medicare, but there can be significant differences in costs and coverage between Medicare Advantage plans. Many Advantage plans cover dental and vision, for example. Some Advantage plans have deductibles that qualify them as HDHPs, using the same deductible requirements that are applied to private employer insurance plans. HDHP Advantage plans can offer Medicare MSAs to their members. Another type of MSA, the Archer MSA, was phased out for new enrollees in 2007.

Withdrawals from an MSA plan that aren’t used for qualified health expenses are subject to a penalty amounting to 50% of the amount withdrawn. Plus, income taxes at the MSA owner’s regular rate are also due.

A major difference between MSAs and HSAs is that Medicare, not the policyholder, contributes to the MSA. The amount Medicare deposits varies and depends on the individual plan. As with an HSA, deposits are not taxed, funds in the account grow tax-free and withdrawals to pay qualified expenses are tax-free.

Bottom Line

MSAs take the place of HSAs for Medicare recipients, because Medicare recipients can’t have HSAs. Both plans offer significant tax advantages, including tax-free contributions and withdrawals. Medicare enrollees who want MSAs have to enroll in high-deductible Medicare Advantage plans run by private insurance companies. HSAs are available only for members of private health insurance plans that have high deductibles.

Tips on Funding Healthcare

Selecting the best health insurance for yourself involves evaluating a number of variables, ranging from your age and personal health to your financial resources and lifestyle. A qualified and experienced financial consultant can help you cut through the complexity and make the right choice. SmartAsset’s free tool matches you with up to three vetted financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
There’s one type of healthcare that can present especially difficult funding challenges, long-term care. Companies like Nationwide and New York Life offer long-term care insurance policies. To help you sort through your options for long-term care insurance, SmartAsset has reviews of these companies and others.