Americans need to protect their health, and that's all there is to it. As of 2023, the Milliman Medical Index estimates it would cost a family of four $31,065 for annual medical expenses, even if they have employer insurance coverage. That may only continue to rise as interest rates rise in the United States as well.
Yet Americans continue to push their health savings aside, with Health Savings Accounts (HSA) and Medical Savings Accounts (MSA) continuing to have low balances, according to the EBRI Education and Research Fund.
Of course much of this could be blamed on the pandemic. There has been high incidence of withdrawals over the last few years, with over half of accountholders withdrawing funds, according to EBRI in the 2021 report. What's more, very few invested the HSA balance, even though there are tax savings!
But what this comes down to isn't just saving for your future healthcare costs. After all, this should be a given, especially as healthcare costs are expected to rise by 5.6% in 2023 from 2022 levels, based on the Milliman Medical Index. No, this should already be on your radar. Now it's decision-making time.
So when it comes down to the HSA or MSA, which is the better option for Americans to save for their healthcare?
The Health Savings Account (HSA)
First up we have the HSA, which is a tax-advantage account for those who want to save for medical expenses, while also having the ability to invest those funds. It's owned by an employee, but can also be funded by the employee and their employer.
The key here is that Americans can open an HSA, but only if they have a High-Deductible Health Plan (HDHP), not enrolled in Medicare, is not a dependent, and has no other health coverage. There are also maximum contributions you can make to the HSA. As of 2023, the HSA maximum for an individual was $3,850, and $7,300 for a family, according to the Internal Revenue Service (IRS). If you don't meet those contributions, they can carry over to the next year. But as mentioned earlier, many Americans aren't coming close to reaching those maximums.
There are also minimum deductions for the HSA to consider, which sit at $1,500 for an individual and $3,000 for a family, as of 2023. Furthermore, there is a maximum deduction limit of $7,500 for individuals and $15,000 for families. So if you go over that amount in your medical bills, it's back to paying out of pocket.
All in all, there are a few advantages and drawbacks to the HSA. Sure, you and your employer can work together to put aside tax-free cash to be used for healthcare costs. However, if you can't set aside such an amount, then the payments needed to fund your HDHP deductibles might be more of a burden than a blessing. Furthermore, there's the fact that not everyone qualifies for the HSA in the first place, making it not the best plan for everyone from the get go.
The Medical Savings Account (MSA)
First off, it's important to note that most MSA's have morphed into HSA programs. However, new MSA programs have been created under Medicare, which is what we'll be discussing here. As mentioned, if you're enrolled in Medicare, then you cannot use an HSA, which is why the Medicare MSA might be an option instead.
The main points are similar to the HSA, with the MSA combining a HDHP with a medical savings plan to help pay for healthcare costs. That HDHP doesn't come automatically either, as you must meet a high yearly deductible, and that can vary by plan. Furthermore, you're responsible for handling the money in your account, and deciding when to use it.
Once you're eligible to have the MSA, Medicare gives the plan money each year that's based on your health care expenses and your plan. This amount will be put into the MSA at the beginning of each year. That cash can be used to cover costs before you meet the plan's deductible, and you can access it at any time.
But here's of course the biggest downfall. Any funds that are deposited by Medicare into your MSA are taxable and need to be counted on your tax return. However, there are options for plans such as the Secure Saver MSA, which provided a $1,920 tax-free deposit for medical expenses in 2022.
Finally, if you're looking to invest and make more cash to have on hand for expenses, the MSA is certainly not for you. There is no way to invest in the stock market, and instead you can merely collect interest.
Bottom line
Everyone is different. If you have a HDHP with an employer and want to invest your savings to create more healthcare savings, the HSA is certainly better for you. However, if you're enrolled in Medicare, then the MSA may be your only option. No matter what you choose, just always make sure to have emergency funds on hand for medical expenses. Because you never know when the worst-case scenario may happen.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
