Anyone who is enrolled in a high-deductible health plan (HDHP) may be eligible to contribute to a savings account that offers valuable tax breaks.

A health savings account (HSA) is the most popular type of savings account for people enrolled in a high deductible health plan (HDHP). Before HSAs were launched in 2003, people who were self-employed or worked for a small business were able to contribute to a similar type of savings account, called an Archer Medical Savings Account (MSA), if they were enrolled in an HDHP.

The HSA has largely replaced the MSA. Self-employed workers who had an MSA before 2008 can continue to contribute to the account, but if you aren’t grandfathered in, your only option is an HSA.

Yet certain small businesses can offer an MSA to employees who are enrolled in a HDHP. A small business that has averaged fewer than 50 employees over the past two calendar years is allowed to offer an MSA. As companies grow they can continue to offer an MSA as long as they don’t have an average of more than 200 employees.

There are important differences in the mechanics of an HSA versus an MSA, but the most important thing they have in common are the unparalleled tax breaks.

Like an HSA, money contributed to an MSA is not taxable income. If the employer makes the contribution it is not reported as income to the employee. If the employee makes the contribution, it is made from pre-tax dollars. There is no tax on money while it remains in an MSA account, and when MSA funds are used to pay for a qualified expense, the withdrawal is tax-free.

Money in an MSA does not need to be used up in a calendar year; unused funds can be saved and used for future medical expenses. When an employee leaves a company, they retain ownership of their MSA.

There are key differences in the rules for MSA and HSA eligibility.

Annual Deductible Required

MSA:

In 2020, an individual with a HDHP must have a deductible of at least $2,350 and no more than $3,550 to be eligible to save in an MSA. For family coverage, the deductible must be between $4,750 and $7,100.

HSA:

An individual HDHP must have an annual deductible of at least $1,400 in 2020 for the participant to be able to contribute to an HSA. For family coverage, the deductible must be at least $2,800.

Annual Out-of-Pocket Limit

MSA:

An individual HDHP must have an annual out-of-pocket maximum of no more than $4,750 in 2020. For family coverage, the limit is $8,650.

HSA:

The maximum annual out-of-pocket expense for an individual policy in 2020 can’t exceed $6,900. For family coverage, the maximum is $13,800.

Annual Contribution Limit

MSA:

The contribution limit is tied to the annual deductible. For an individual policy, the employer or employee can contribute up to 65% of the annual deductible. For family coverage, up to 75% of the deductible can be saved in an MSA. For example, if a family policy has a $5,000 deductible, up to $3,750 can be saved in an MSA. ($5,000 x .75).

HSA:

For 2020 the maximum contribution is $3,550 for individual coverage and $7,100 for family coverage. Employees at least 55 can contribute an additional $1,000.

Who can make a contribution?

MSA:

In any given calendar year the employer or the employee can contribute to an MSA. Contributions can’t be made by both parties in a given calendar year.

HSA:

Contributions can be shared by employer and employee up to the annual total contribution limits.