What is a Medical Spending Account?

C. Mitchell
C. Mitchell
Woman holding a book
Woman holding a book

A medical spending account, also referred to as an MSA, is a tax-free medical savings account available under some United States health insurance plans. Employees who participate in health plans with medical spending accounts are permitted to contribute a certain amount of money to the account with pre-tax dollars: that is, with money that has not been subjected to either federal or state income tax. That money can be withdrawn to cover approved medical expenses that are not covered by insurance. A medical spending account is typically regarded as a way for participants to take certain medical expenses into their own hands, and to have some flexibility in choosing medical products and services.

Medical spending accounts are typically only available under employer-sponsored health plans, and even then, only in certain situations. To be eligible to participate in a medical spending account, an employee must typically be enrolled in a high-deductible health insurance plan. He must usually also work for a company with 100 or fewer employees. Medical spending accounts are always offered on an opt-in basis, and an employee can choose whether or not to open an MSA. The benefits allowed with the accounts make them generally desirable, however, and the majority of eligible employees participate.

Even with the best of insurance policies, out-of-pocket medical and health expenses can be quite high. Prescription drugs and over the counter medications, medical supplies, and urgent care hospital visits can add up dramatically over time. This is particularly true for individuals enrolled in high-deductible insurance plans. A high-deductible policy is one that requires the individual to pay out-of-pocket for all treatments up to a certain amount; once that amount has been reached, then the insurance plan will kick in and start paying.

One of the primary goals of the medical spending account is to encourage individuals in high deductible situations to set money aside to use for medical expenses incurred while waiting to reach the deductible. Most of the time, employees enrolled in high-deductible plans have the option to automatically divert some of the money from their paycheck into the medical spending account. Medical spending accounts are managed by third-party banks, and are permitted to accrue interest tax-free.

The accounts can only be used for certain recognized expenses. The specifics of what the account will or will not cover is generally included with the plan information, and can vary. Using an MSA responsibly requires participants to understand the allowable expenses, and to use the account only for those purposes. Use for unapproved expenses requires the funds used to be converted back into taxable income, and usually also incurs a fee.

Most of the time, medical spending accounts roll over from year to year, and they remain with a person even after retirement or resignation. The permanence of the medical spending account is one of the ways that the account is different from either a flexible spending account or a medical reimbursement account. Flexible spending accounts and medical reimbursement accounts are MSA alternatives that employees in health plans that do not qualify for an MSA can enroll in to receive similar pre-tax health savings benefits. The contours, requirements, and longevity of these alternative accounts vary from plan to plan.

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