Medical savings accounts still exist, but the landscape has narrowed

Medical savings accounts (MSAs) are still available, but not in the form most people remember. The original Medical Savings Account program, created in 1996, was replaced by Health Savings Accounts (HSAs) in 2003. A small number of people grandfathered into old MSAs can still use them, but new enrollments stopped years ago. If you are looking to set aside pre-tax money for medical expenses today, HSAs are the actual tool available to you—and they work differently than the original MSAs did.

The shift happened because HSAs were designed to work better with the health insurance market that emerged after 2003. MSAs required you to carry a high-deductible insurance plan and put money into a savings account; HSAs do the same thing but with more flexibility on how you spend the money and what happens to it if you do not use it in a given year. Understanding which account type you might have access to depends on your current insurance and employment situation.

Key Takeaways

  • The original Medical Savings Account program closed to new enrollments in 2003 and was replaced by Health Savings Accounts, which offer similar tax advantages with more flexibility.
  • A very small number of people who enrolled in MSAs before 2003 can still use them under grandfathered status, but they must maintain the same high-deductible insurance plan they had when they enrolled.
  • Health Savings Accounts are available now if you have a high-deductible health plan through your employer, the individual market, or Medicare, and you meet income and coverage requirements.
  • Money in an HSA rolls over year to year and can be invested, unlike the original MSAs where unused funds were forfeited or had strict carryover rules.

The original MSA program and why it ended

The Medical Savings Account was a pilot program that ran from 1996 to 2000, then was extended through 2002. It was designed for self-employed people and employees of small businesses (50 or fewer employees) who had a high-deductible health plan. You would contribute pre-tax money to an MSA, use it to pay medical expenses, and any unused balance stayed in the account. The catch: the program was capped at 750,000 enrollees nationally, and it never reached that number because the rules were complicated and the insurance options were limited.

When the Medicare Modernization Act passed in 2003, Congress replaced MSAs with HSAs. The new accounts were available to anyone with a high-deductible plan, not just small-business employees and the self-employed. HSAs also allowed the money to be invested in stocks and bonds, whereas MSAs had stricter rules about what you could do with the balance. The old MSA program was closed to new enrollments, though people already enrolled were allowed to keep their accounts.

Who still has an MSA and what the rules are

If you enrolled in an MSA before January 1, 2003, you can continue to use it under grandfathered status. The IRS does not publish how many people still hold these accounts, but the number is small—estimates suggest fewer than 100,000 people nationwide. To keep your MSA active, you must maintain the same high-deductible health plan you had when you first enrolled, or switch to another high-deductible plan that meets the MSA definition. If you drop the high-deductible coverage, your MSA is closed and you cannot reopen it.

The contribution limits for grandfathered MSAs are set each year by the IRS and are lower than HSA limits. For 2024, the maximum contribution was $3,850 for individual coverage and $7,750 for family coverage. Unused money rolls over year to year, and you can withdraw it tax-free for may have access to medical expenses at any time. If you withdraw money for non-medical expenses before age 65, you pay income tax plus a 20 percent penalty; after 65, you pay income tax only.

Health Savings Accounts as the modern replacement

Health Savings Accounts are the tool available to you now if you want to save pre-tax money for medical expenses. To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) as defined by the IRS. For 2024, that means a plan with a deductible of at least $1,600 for individual coverage or $3,200 for family coverage, and an out-of-pocket maximum of no more than $8,050 for individual or $16,100 for family. You cannot be claimed as a dependent on someone else's tax return, and you cannot have other health coverage like Medicare or a spouse's plan that is not an HDHP.

The contribution limits are higher than MSAs: $4,150 for individual coverage and $8,300 for family coverage in 2024. You can contribute through payroll deduction if your employer offers an HSA, or you can open one on your own through a bank or investment firm. Money rolls over year to year with no "use it or lose it" rule. After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals before 65 are taxed plus penalized.

How MSAs and HSAs differ in practice

The main difference between an MSA and an HSA is what you can do with the money if you do not spend it. With an MSA, unused funds had to be withdrawn or forfeited depending on the plan rules—some MSAs allowed carryover, but others did not. With an HSA, all unused money stays in the account forever. You can also invest HSA money in mutual funds and stocks, whereas MSAs had more limited investment options. This makes HSAs much more useful as a long-term savings tool, not just a year-to-year spending account.

The other difference is availability. MSAs were only for self-employed people and small-business employees. HSAs are available to anyone with an HDHP, whether you work for a large employer, a small employer, are self-employed, or buy insurance on the individual market. This broader access is why HSAs became the standard and MSAs faded out.

Where to open an HSA if you have a high-deductible plan

If your employer offers an HDHP, they usually offer an HSA as well—often through a specific bank or investment firm. You enroll during open enrollment or when you first become may be able to access. Your employer may contribute to your HSA as part of your benefits package, and you can contribute additional money up to the annual limit. Contributions through payroll are deducted before taxes are calculated, so you see the tax savings when ready on your paycheck.

If you buy an HDHP on the individual market or through the Healthcare.gov marketplace, you can open an HSA with any bank or investment firm that offers them. Common providers include Fidelity, Lively, HealthEquity, and many traditional banks. You will need to provide proof that you are enrolled in an HDHP—usually a copy of your insurance card or a letter from your insurer. You can contribute the full annual amount at once or spread contributions throughout the year.

What counts as a may have access to medical expense

Both MSAs and HSAs cover the same range of may have access to medical expenses: deductibles, copayments, coinsurance, and prescription drugs. They also cover dental work, vision care, mental health treatment, and medical equipment like wheelchairs or hearing aids. Over-the-counter medications are covered only if you have a prescription for them (this rule changed in 2020). You cannot use the money for health insurance premiums, except for COBRA continuation coverage, long-term care insurance, or health insurance while you are receiving unemployment benefits.

Keep receipts for all medical expenses you pay from your account. The IRS can audit your withdrawals years later, and you need documentation to prove the money went to may have access to expenses. If you withdraw money and cannot prove it was for a may have access to expense, the entire withdrawal is taxed as income plus penalized.

Frequently Asked Questions

Can I convert my old MSA to an HSA?

No, you cannot convert an MSA to an HSA directly. If you have a grandfathered MSA and want to switch to an HSA, you would need to close the MSA and open a new HSA separately. The money in your MSA stays in the MSA; you cannot roll it over. Talk to the bank or administrator managing your MSA about the rules for closing it without penalty.

What happens to my MSA if I change jobs or lose my high-deductible plan?

Your MSA closes if you drop your high-deductible coverage. You can withdraw the balance without penalty for any reason, but you cannot reopen the account later. If you move to a new job with a different HDHP, you would need to open a new HSA instead.

Do I have to use my HSA money every year or does it roll over?

HSA money rolls over year to year with no limit. There is no "use it or lose it" rule. You can let the balance grow and use it whenever you need it, even decades later. This is one of the main advantages over the original MSA structure.

Can I use my HSA to pay for my spouse's medical expenses?

Yes, you can use your HSA to pay for may have access to medical expenses for your spouse and any dependents you claim on your tax return, even if they are not covered under your HDHP. You just need to keep receipts showing the expenses were for them.

What if I have Medicare—can I still open an HSA?

No. Once you enroll in Medicare, you are no longer may be able to access to contribute to an HSA. If you already have an HSA when you turn 65, you can keep it and withdraw money for any reason without the 20 percent penalty, though non-medical withdrawals are still taxed as income.