Once the plan deductible is met in a given year, the HDHP will pay any remaining covered medical expenses in that year. If there are funds remaining in the MSA at the end of the year, the funds can either roll over for the following year or can be withdrawn as taxable income.
MSAs have been superseded by Health Savings Accounts (HSAs), were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Existing MSAs were grandfathered, however.
The idea of the MSA appears to have come from health care analysts that were concerned about the problem of "overinsurance." They reasoned that overinsurance was raising the cost of health care expenses. They further reasoned that if patients (as opposed to third-party payers) paid their own medical expenses, then the cost of health care would decrease.
During the early 1990s, think tanks such as the National Center for Policy Analysis and insurance companies such Golden Rule Insurance Company began to promote passage of a law that would allow for tax-free contributions to a medical savings account. Even though the US Congress was under Republican control and the MSA concept was central to the Republican Party's health care agenda, a federal MSA law failed to materialize during the 1990s. However, Congress did pass an MSA pilot as a part of the Health Insurance Portability and Accountability Act (HIPAA) in 1996. In the meantime, some states also pass MSA legislation. Missouri was the first state to do so in 1993. By 1998, 25 states had some form of MSA legislation offering a state tax break to those who open MSAs.
The MSA for the self-employed person or business is now called an 'Archer MSA' by the Internal Revenue Service (IRS). The 'Archer MSA' term refers to the sponsor of the HIPAA amendment creating the accounts in 1996, Congressman Bill Archer of Texas. The Archer MSA is considered an IRS pilot program that must be extended by the US Treasury Department on a periodic basis.
The plan enables a participant dual to fund a tax-exempt account for medical expenses incurred before an associated 'high deductible' insurance plan begins to cover those expenses. The individual pairs the MSA with a 'catastrophic insurance' plan, which has lower premiums than plans with lower deductibles.
The individual deposits funds in the MSA to cover medical expenses; these deposits are exempt from income tax. Any money added to the account can roll over to another year if unused. MSAs are investment accounts, they can accumulate over the deductible level, can be used for qualified investments, and grow tax free. The MSA account may be convertible into a standard IRA savings plan after a specified age threshold is reached. The amounts contributed for medical savings do not impose a cap on standard IRA contributions.
Among the medical expenses that can be paid out of an MSA account are premiums for long-term care coverage, health care coverage paid while receiving unemployment benefits, or any form of health care continuation coverage required under any federal law.
The risk is that an MSA account holder may find that their medical expenses outstrip the contributions they can afford to make.
Since the Archer MSA is a pilot program, it must be extended periodically by the US Treasury Department. The present extension of the program ended December 31, 2007. The US Treasury did not extend the program beyond this point, and as a result no new Archer MSA's may be opened. Current accounts can either be left open as is or converted to an HSA.
At this time there are no financial institutions opening new MSAs. This is because of the creation of the Health Savings Account (HSA) in 2003. The HSA is available to everyone who participates in a qualifying High Deductible Health Plan (HDHP), not just the self-employed or small corporations.