Health care options: Comparing MSA, HSA, and FSA
Putting money aside from each paycheck to spend on health care is a common practice for millions of American workers. Medical Spending Accounts (MSA), Health Spending Accounts (HSA) and Flexible Spending Accounts (FSA) are three of the main vehicles that help people contribute toward medical expenses for themselves and their family.
What does a Medical Spending Account include?
MSAs are tax-deductible savings accounts that may be used by participants who hold a high-deductible health plan for a range of medical expenses. They are limited to employers with fewer than 50 employees or workers who are self-employed. Also, MSAs can be funded by the employee or the employer, but not by both in the same year.
MSAs have a minimum deductible and contribution limits that are based on income and the percentage of the participant’s annual deductible. There is no end-of-year withdrawal requirement and participants can build up the account over time.
How do Health Spending Accounts work?
An individual tax-deductible, retirement savings account, an HSA holds pre-taxed money to be used for medical expenses. Participants need to hold a high-deductible health plan to qualify. An HSA can also receive contributions from the employer as well as the participant within the same year.
The IRS sets a maximum deductible amount for all participants. Money can accumulate year after year with no penalties or taxation on the interest. An HSA also has no “use it or lose it” feature so participants can accumulate savings year after year.
Benefits of a Flexible Spending Account for workers
Employees can contribute to an FSA set up by their employer even if they don’t have a high-deductible health plan. Self-employed workers cannot have an FSA as the account is managed by an employer. The employee maximum contribution limits are set by the IRS and are generally less than HSA or MSA amounts. Money in an FSA must be used by the end of the year or the employee forfeits it.
An FSA is more similar to a dependent care flexible spending account (DCFS), an account that helps workers with expenses for non-medical care for a dependent child or elderly adult.