In tough economic times, having a tax-free medical savings account can be a smart way to save money and ensure you have cash available to pay for uncovered medical expenses. However, there are different types of medical savings accounts – FSAs, HSAs, MSAs and HRAs – and they all have different features. It's important to understand how yours works so you can be sure to maximize its benefits.

Here are the main types of medical savings accounts, and how you can make the most of them:

Health Flexible Spending Arrangements (FSAs) – Probably the most common, this type of plan is funded by the employee with pre-tax dollars and does not have to be tied to a specific type of health insurance plan.  Your employer may also contribute to your health FSA. All reimbursements need to be for qualified medical expenses incurred during that plan year.

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An FSA is a “use it or lose it” plan, meaning you forfeit any unused contributions; i.e., you lose your own money. There is a $2,500 annual contribution limit (for 2011). Typically, contributions are taken out of your paycheck in equal installments throughout the year, yet you can be reimbursed for the full amount of any qualified medical expenses on day one. Employers may be at risk since they can be stuck funding the plan if you leave the job on day two.

Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) – These two plans are very similar, but the MSA is available only to self-employed individuals and “small businesses” – those with an average of 50 or fewer employees during either of the last two calendar years. Here, the employee funds the account on a pre-tax basis (you get a deduction on your tax return), but the employee must be a participant in a high-deductible health plan.

Your employer can also contribute to your HSA/MSA. It is not a “use it or lose it” plan, so you can roll over any unused balances to future years. For 2011, the maximum contribution is $3,050 for singles and $6,150 for families with an additional $1,000 for those age 55 or over. These accounts are portable so they stay with you if you change employers or leave the work force. HSAs/MSAs have thus been likened to IRAs, although one in which withdrawals are tax-free when used for qualified medical expenses. Some savvy employees have even used an HSA/MSA as a means of planning for medical expenses in retirement. If withdrawals are used for non-qualified expenses, the withdrawal is taxed as ordinary income and subject to a 20% penalty if you are under 65.

Health Reimbursement Arrangements (HRA) – Unlike the above accounts, these are funded only by the employer, not the employee. The employer can decide from year to year how much, if any, money they will contribute and there is no limit on the amount they can contribute. Contributions are not included in your income and any reimbursements for qualified medical expenses are tax-free. You do not have to be covered under any other health care plan to participate in an HRA.  They can even co-exist with an FSA plan.  So, as you can see, these types of plans offer the most flexibility to the employer and are a great benefit to the employee. Self-employed persons are not eligible for HRAs.

To learn more about medical savings accounts, check out IRS Publication 969.


Jerry A. Miccolis, CFA®, CFP®, and Fellow of the Casualty Actuarial Society (FCAS), is a senior financial advisor, Chief Investment Officer, and co-owner of Brinton Eaton, an advisory firm in Madison, N.J., serving individuals and institutions throughout the U.S.  He is also co-author of Asset Allocation For Dummies® (Wiley 2009). Mr. Miccolis is a member of the American Academy of Actuaries (MAAA). Contact him at