Not well known… even less well understood.

Medical Savings Accounts—often abbreviated MSAs—are one of the most overlooked tax-advantaged health tools in the entire Internal Revenue Code. Most people know about HSAs. Some know about FSAs. But MSAs? They’re basically the tax code’s forgotten cousin.

And yet, for those who qualify, MSAs can deliver large tax deductions, tax-free growth, and tax-free withdrawals for medical expenses—making them surprisingly powerful if used correctly.

Here is what you should know.

1. What Exactly Is an MSA?

A Medical Savings Account (MSA) is a tax-advantaged account designed for self-employed individuals or employees of small businesses (generally those with 50 or fewer employees) who are enrolled in a High Deductible Health Plan (HDHP) specifically structured for MSA purposes.

Congress created MSAs in the 1990s as a pilot program to encourage consumers to take greater control over healthcare spending. They were effectively replaced by HSAs in 2003, but many MSAs still exist—and remain fully valid and usable.

Only two groups may contribute to an MSA:

• Self-employed individuals, or
• Employees of small employers who offer an MSA-compatible HDHP.

No Fortune 500 MSAs. No big-company plans. No double-dipping with HSAs.
Just a narrow, niche tool—one with very real tax benefits.

2. How Contributions to an MSA Are Treated for Tax Purposes

This is where MSAs shine.

✔ Contributions are tax-deductible

If you contribute to your own MSA, those contributions are above-the-line deductions. You don’t need to itemize.

✔ Employer contributions are excluded from income

If your small employer contributes, the amount is:

• Not taxable to you, and
• Not subject to payroll taxes.

✔ Contribution limits depend on your HDHP coverage

• Self-only coverage: Up to 65% of the annual health plan deductible
• Family coverage: Up to 75%

These percentages are unique to MSAs—they don’t function like the standard statutory caps you see with HSAs or FSAs.

3. The Tax Treatment of Earnings and Withdrawals

✔ Earnings grow tax-free

Interest and investment gains inside the MSA are never taxed while they accumulate.

✔ Withdrawals for qualified medical expenses are tax-free

Just like an HSA, as long as the distribution is used for IRS-qualified medical expenses, you will never pay income tax on it.

✔ Non-qualified withdrawals are taxable plus a penalty

If you use MSA funds for something unrelated to healthcare:

• You pay regular income tax, and
• A 15% additional tax penalty, unless an exception applies.

4. Who Should Consider an MSA?

MSAs make sense for a very specific group of taxpayers:

• Self-employed professionals with high-deductible plans
• Small business employees whose employer still offers an MSA-compatible health plan
• Individuals who prefer lower premiums, higher deductibles, and have the discipline to save for medical expenses

An MSA is not something you “stumble into.” If you have one, it’s because you or your employer deliberately set it up. And if you do have one, understanding its tax treatment can save you significant money.

5. Why MSAs Are Rare Today—but Still Valuable

MSAs were effectively frozen when HSAs were introduced. No new MSAs are created unless they meet the original pilot rules, and many large institutions no longer support new MSA accounts.

However:

• Existing MSAs are still valid
• They still receive favorable tax treatment
• They still operate under Publication 969 rules
• And they offer HSA-like advantages to a narrower set of taxpayers

For those who qualify, they remain a legitimate tax planning tool—just one that lives in the shadows.

6. Key Differences Between MSAs and HSAs

Understanding these differences is crucial—many people mistakenly assume MSAs work exactly like HSAs. They don’t.

Conclusion: A Forgotten Tax Tool With Real Benefits

If you are one of the relatively few Americans who qualify for and maintain a Medical Savings Account, you possess a surprisingly powerful instrument:

• Tax-deductible contributions
• Tax-free growth
• Tax-free withdrawals for medical expenses

The problem isn’t the benefits—they’re excellent.
The problem is awareness.

MSAs may be uncommon, but for the self-employed or small-business employee with the right high-deductible plan, they remain one of the most tax-efficient ways to manage out-of-pocket medical costs.

At David C. Barsalou, Attorney at Law, PLLC, we help clients navigate business, family, tax, estate planning, and real estate matters ranging from document drafting to litigation with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call us at (713) 397-4678, email barsalou.law@gmail.com, or reach us through our Contact Page. We’re here to help you take the next step.