MSAs Made Easy

Published March 1, 2001

The information on this page is drawn from two publications of the American Medical Association’s Center for Health Policy Research, Medical Savings Accounts: Why the American Medical Association Supports Medical Savings Accounts (2000) and MSAs Made Easy (January 2001). For more information, visit

What are MSAs?

A Medical Savings Account (MSA) is a vehicle for individuals to fund health care. It is a tax-deferred bank or savings account set up for individuals and families to pay for their health care expenses and medical insurance, and to allow them to accumulate savings to pay for future medical expenses and for more general uses after retirement.

Anyone would be eligible to choose an MSA as an alternative to current ways of funding medical care. For an employee choosing an MSA, the employer would purchase a high-deductible (catastrophic) insurance policy for the employee and deposit cash into an MSA each year in lieu of providing the employee low-deductible insurance or enrollment in a Health Maintenance Organization (HMO). The price of the catastrophic policy plus the cash deposit should equal the cost of the alternative coverage. The employee would then use the cash in the MSA to pay for ordinary health expenses until the deductible of the catastrophic policy is met. The unspent balances would be invested and accumulate earnings that are tax-free.

The self-employed and others would establish MSAs by purchasing a high-deductible policy and depositing the amount of the deductible in the MSA account. Like employee accounts, health expenditures from the self-employed MSA should be tax-free, and accumulated balances should earn interest that is also tax-free.

MSAs today

MSAs, under the pilot project authorized by the Health Insurance Portability and Accountability Act of 1996, are available to self-employed persons and to businesses with 50 or fewer employees. To be eligible for an MSA, an individual must maintain a high-deductible health insurance plan. There are two health plan options: individual and family. The allowable contribution to the MSA depends on the size of the health plan deductible chosen, as shown in the following table. The high-deductible health insurance plan must also limit total out-of-pocket (OOP) spending.

Health Plan Deductible $1,550 – $2,350 $3,050 – $5,600
Maximum MSA Contribution 65% of deductible 75% of deductible
Maximum annual OOP spending $3,050 $5,600

Allowable medical expenses

MSA balances can be used to pay for medical care allowed under Section 213 of the tax code. For this purpose, the term medical care means amounts paid “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” It also includes “transportation primarily for and essential to medical care,” and premiums for Medicare Part B, long-term care insurance, and certain other premiums related to COBRA continuation coverage or paid while individuals receive unemployment compensation

Establishing an MSA

An MSA must be established with a trustee. Any person, insurance company, bank or financial institution already approved by the IRS to be a trustee or custodian of an IRA is approved automatically as an MSA trustee. Others have applied and been approved under IRS procedures for MSAs. Contributions to an MSA must be made in cash either by an individual or employer.

Administering MSAs

MSA trustees are not required to determine whether distributions are used for medical care. Individual MSA holders, rather than MSA trustees, have the responsibility for determining qualified medical expenses and maintaining records of account distributions for qualified purposes.


A partial list of Web sites for MSA vendors appears on this page. Other vendors can be identified by contacting an independent insurance agent in your area.

Benefits of MSAs to consumers

Value: Consumers will get more for their money with high-deductible insurance. The first $1,500 to $2,000 of insurance benefits cost more in premiums than is returned to consumers in claims. By contrast, the money paid for health care from the MSA will be subject only to nominal administrative charges.

Choice: Better choice among therapies can be made based on their value to the patient. Equal tax treatment of out-of-pocket spending will reduce incentives to select among competing therapies solely on the basis of insurance coverage.

Patient-physician relationship: With consumers making their own health care spending decisions, the physician-patient relationship will be freed from the intrusion of third-party payers. Physicians will not face external pressure to withhold beneficial care or to obtain third-party authorization for proposed treatments, an often time-consuming process.

Increased access: MSAs place fewer restrictions on the range of medical services covered. Current benefit plans often limit certain services, products, or equipment. With MSAs, consumers have increased access to services not typically covered, including long-term care services, eye care services, and prescription drugs.

Portability: The individual ownership feature of MSAs enhances job mobility by removing the “job-lock” feature of traditional employment-based coverage. Furthermore, accumulated funds in MSAs would provide a source of funds for workers who become unemployed to purchase bridge insurance when they are between jobs. The current cost of continuation insurance is prohibitive for many persons.

Savings: Because funds deposited in MSAs will not be subject to a “use it or lose it” rule when federal legislation is passed, MSA balances can become an important savings vehicle and source of funds for purchasing long-term care insurance and other post-retirement needs not covered by Medicare.

Relief: Because most or all of the catastrophic insurance deductible will be funded by the MSA, consumers’ out-of-pocket expense will be minimized. these savings will be significant to those whose liability for deductibles and co-payment under traditional insurance is a heavy economic burden.

Why the AMA supports MSAs

MSAs are a market approach, rather than a regulatory approach, to our health system problems, particularly that of the rising cost of medical care.

Rather than achieving cost containment through government regulation of prices through price controls, and imposing arbitrary government-imposed ceilings or “global budgets” on expenditures as many have proposed, the AMA believes that it is better to let individuals decide what health care should be produced and how much health care is worth through their individual control over expenditures in the marketplace.

MSAs accomplish this by letting individuals determine the value of health care by spending their own money—rather than what they perceive as someone else’s money when they have traditional health coverage—on health care. American Medical Association

For more information . . .

about medical savings accounts, visit these Web sites.