Medical savings accounts (MSAs) are savings accounts used to pay for unreimbursed health care expenses. There are two types: Archer Medical Savings Accounts and a Medicare Advantage MSA.

New MSAs cannot be opened. MSAs created before December 31, 2008 can continue to exist. MSAs have been replaced by Health Savings Accounts (HSAs).

MSAs are basically for employees of small businesses or people who are self employed.

MSAs only work with high deductible health plans (HDHPs).

Interest and earnings in MSAs can accumulate tax-deferred similar to Individual Retirement Arrangements (IRAs).

Contributions are generally exempt from taxes. So are withdrawals if used to cover your qualified medical expenses, or those of your spouse or dependents. If you withdraw funds for any other reason, withdrawal is taxable. In addition, there is a penalty of 15% of the amount of the withdrawal, unless made:

• After age 65.
• In the event of disability.
• In the event of death.

Money is controlled and owned by the account holder. Either the employee or the employer (never both) make contributions.

Savings are rolled over each year and are portable, regardless of employment status.

There is no tax on earnings unless funds are withdrawn for nonmedical expenses. If withdrawn for nonmedical purposes, savings are considered to be taxable income and are subject to income taxes in addition to a 15% penalty tax. If you become disabled or reach Medicare eligibility age, distributions for nonmedical expenses from the account are subject only to ordinary income tax, not the penalty.

Maximum contribution from the employee for single coverage is 65% of the deductible on the employee's health plan, and 75% of the deductible for family coverage.

All contributions, distributions, and return of excess contributions are reported to the IRS.

Employees may take funds with them when they leave, including going on disability, or change jobs.

There are new Medicare Medical Savings Accounts.

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