Medical Savings Accounts typically referred to as Health Savings Accounts or simply as an HSA, are a special type of savings account. As long as the money in such an account is used for an approved medically-related purpose, the funds remain untaxed. Approved medical uses include a wide variety of applications, including paying for health insurance under the COBRA plan.
Approved medical uses of an MSA include
- Health Insurance Premiums (even COBRA) for those drawing unemployment
- Long Term Care (insurance and approved expenses)
- Medicare and retired person supplements (but NOT supplemental Medicare premiums)
- Primary and Emergency care
- Vision and Dental care
It is up to the account holder to determine whether an application is approved under an HSA. If the IRS questions any expenses, it will be up to you to show reasonable proof that expense was medically related. If you are older than 65, there is no penalty for using HSA funds for non-medical purposes.
HSA funds can be withdrawn for any purpose. The catch is that funds used for non-medical expenses will be taxable by the IRS and you will have to pay a penalty, generally around 10% of the expense, for using the money in an unapproved manner.
MSA funds are easy to access. Some account holders will receive a debit card which can be used to deposit or pay medical bills from the account. Others will receive a book of checks for the account. Aside from the tax benefits and penalties for non-medical usage, an MSA performs just like any other savings account, including earning interest on the funds kept in the account. MSA debit cards do not work in traditional ATM machines and cannot be used to make direct purchases in non-medical situations. If your account contains more than $1000, you may be given investment options for maximizing the earnings on the savings account.