On the surface, a medical savings account (MSA) and a health savings account (HSA) are the same. They are both savings accounts into which you can make tax-deferred deposits that will then be used for qualified medical expenses. You have to use both in conjunction with a high-deductible health plan. In addition, you can invest the funds in both types of accounts, and any unused money will remain in the account.
Despite this shared, and simplified, definition, these savings accounts do have differences -- including who qualifies for each type, who is authorized to add money to the account and how much money can be added. But before we get into all those details, let's find out how each of these accounts got their start.
The MSA is the older of the two types of savings accounts. It was created in the 1990s
when health care analysts expressed concern about "overinsurance." The analysts feared that patients were overusing their medical benefits on trivial medical issues, which was causing health care costs to skyrocket. They believed that if patients
paid for their own health care, health care costs, along with "overinsurance," would decrease. Think tanks and insurance companies began to push for a law creating tax-free savings accounts, or MSAs, which would allow people to save for their own health care expenses. A federal MSA law didn't pass in the 1990s, but Congress passed an MSA pilot in 1996, and some individual states also passed their own MSA legislation. More than 25 states had MSA legislation by 1998.
The reign of the MSA was short-lived, though -- HSAs were created in 2003. MSAs are still available, but there are only a few financial institutions that will open new MSA accounts. Today, they are called Archer MSAs, after Congressman Bill Archer of Texas, who sponsored the MSA pilot in 1996.
In 2003, the HSA was born when the Medicare Prescription Drug, Improvement, and Modernization Act was signed into law by President Bush. Supporters touted HSAs as an improvement on MSAs.
Next, we'll discuss how these two types of accounts work. Let's start with the "ins," or how things get deposited into the accounts.