Open Enrollment for the nonwealthy. Does an MSA make sense?
September 26, 2017 8:01 PM   Subscribe

Does the MSA mainly make sense for people richer than me?

So, I'm a government employee in the US. I make less than six figures. I'm in my 30s, no kids, no chronic conditions, no plans for major surgery.

It's now open enrollment time. I'll be staying on the High Deductible Health Plan.

I'm reading through the paperwork, and it seems to pitch the Medical Savings Account (MSA) as some kind of wonderful privilege that I can sign up for because I'm on the HDHP.

But when I look in detail at the MSA, it doesn't seem great. The big draw is that I can pay with pre-tax dollars, but my tax rate is probably 25% based on the IRS table. So if I put $1000 in this year, I'd be saving $250.

The only MSA offered has fees of $3/month ($1.50 to the bank, and $1.50 to the administrator). That's $72/year.

So I'm really only saving $178 instead of $250 compared to putting it into a no fee savings account. If I count the 1% ($10) interest it could earn in a no fee account, that brings it to only $168 savings.

I've never had a MSA before, and the paperwork doesn't explain this part, but isn't there some kind of way that I'll have to prove that what I spend the money on is a legit health expense? So if my time is worth about $28/hour, and I spend about 6 hours per year in paperwork headaches putting money into and out of the MSA, tracking it, being ready for an audit, correcting an error that the bank or administrator makes...then this MSA isn't worth it to me. Am I overestimating how much of a hassle it would be to save receipts? I used to have an FSA, I know they're different, but I absolutely hated trying to stay on top of what I could use that money for, and sending in my receipts, and having to argue with the company, and discovering too late that their rules had changed.

Am I missing something? If I'm doing a reasonably good job saving for emergency expenses and retirement, is there a compelling reason that I shouldn't just put my savings for medical emergencies into my general emergency fund accounts (no fee savings with 1% interest)?

Does the MSA mainly make sense for people richer than me?
posted by Former Congressional Representative Lenny Lemming to Work & Money (12 answers total) 2 users marked this as a favorite
In my opinion tax advantaged health savings accounts are a joke, because, like you said: for a middling amount of headache you can save whole tens, even dozens, maybe a hundred dollars!

Of course they're mathematically advantageous, just of questionable practical value. There are some nice things: MSA contributions for example are tax deductible (meaning the contributions are pre-tax, and reduce your taxable income) and if your employer contributes, it's also tax advantaged for them in a similar way. But, again, all this is capped at a rather low amount of money and restricted very much in how you can use it (see: use-it-or-lose-it FSAs).

Big ole 'MEH'.
posted by so fucking future at 8:22 PM on September 26, 2017 [1 favorite]

>So if my time is worth about $28/hour

Unless the time you’re spending on paperwork can be directly exchanged for $28/hr., your time isn’t worth $28/hr.

>The only MSA offered has fees of $3/month ($1.50 to the bank, and $1.50 to the administrator). That's $72/year.

Isn’t $3/month only $36/year?
posted by paulcole at 8:25 PM on September 26, 2017

As long as you have the structure to save for the deductible of your health plan (because no matter how healthy you are, you can still be hit by a car) it isn't really worth it.

If your someone who needs the structure it would be okay, because it forces you to have that money for your health. But, you should look into what happens to the money if you change jobs, or just don't need it for a long period of time (say 10 years)
posted by AlexiaSky at 8:27 PM on September 26, 2017

Look at the plan terms carefully...sometimes, you can't take the money out except to pay medical bills, and sometimes they steal whatever you have left at the end of the year (which explains all those spams in the last quarter about spending down your MSA by stocking up on vaguely health-related stuff that you don't really want or need, but at least it's better than losing the money.)
posted by spacewrench at 8:38 PM on September 26, 2017 [1 favorite]

Being frank: If you can't afford a proper health care plan, then you must be in a financial situation where saving (in your example) approx. $200 should be worth it to you. I gross nearly six figures and I consider $200 a meaningful amount of money.

And if you are in such a financial situation, then your time isn't worth $28/hr. Because no one is willing to pay that on an hour-by-hour basis.

If your marginal tax rate is 20%, you will need $125 of pre-tax income to yield $100 post-tax to put in a savings account. Then at the end of a year you have...$100.80 for medical expenses (you have to pay taxes on interest). But you only need $100.80 of pre-tax income deposited in an HSA to get you the exact same amount of money for medical expenses. This is just basic math. Yes, any sort of tax-advantaged savings scheme benefits the high-income more, but they also need the money less than you do.

Suck it up, file the forms. Don't toss money down the drain. You don't have to go nuts: choose your contribution based on historical and/or anticipated expenses. (And remember that contributions roll over year-to-year.) But don't be silly about it.
posted by praemunire at 8:49 PM on September 26, 2017 [1 favorite]

(Sorry, in case it's not clear, you do have to contribute enough for the savings to cover the fixed expenses of the MSA. But, as noted, saving $1000 will more than do it.)
posted by praemunire at 8:51 PM on September 26, 2017

sometimes they steal whatever you have left at the end of the year (which explains all those spams in the last quarter about spending down your MSA by stocking up on vaguely health-related stuff that you don't really want or need, but at least it's better than losing the money.)

You are thinking of FSAs. This does not apply to MSAs/HSAs.
posted by praemunire at 8:53 PM on September 26, 2017 [6 favorites]

I'm a bit surprised you are using the term MSA (medical savings account) because all the literature on savings accounts for medical expenses geared towards federal employees describe HSAs (health savings accounts). (For example, the OPM web site has a page on HSAs, but not MSAs.) MSAs are very similar to HSAs generally I understand, but HSAs, which must be associated with a high-deductible plan, have largely supplanted MSAs since they were introduced. Were you using MSA as a generic term?

Assuming you are talking about an HSA, you should be given the option of investing the money you put in the account. Therefore, the 1% you could earn with the money in the bank shouldn't dissuade you from contributing. In fact, the interest on the investments in an HSA is tax free, meaning your return will likely be greater in the HSA than in your bank account over the long-term. It would be worth investigating the investment options that come with this account. Also, I think you are overestimating the time it will take to handle the account and the financial value of that time (have you taken into account how much your earnings are reduced net taxes, for one thing?), though how much your time is worth to you is a personal matter, and I don't want to belittle the potential awfulness of medical-related paperwork. Finally, I want to underline that an MSA/HSA is different than an FSA. You can keep the money year-to-year -- it will not disappear.

This article is a helpful description of how HSAs work, and the OPM page I linked to above is also a good resource.
posted by reren at 9:24 PM on September 26, 2017 [2 favorites]

In a previous world I was on the government worker offered high deductible plan. All the HSAs came with a debit card that you use to pay for medical expenses, meaning no form filing. If you don't use the card, then there is some process in getting reimbursed, but it's just a matter of keeping copies of medical expenses. My preference is to use the HSA as a tax advantaged account anyway so I don't really plan to do withdrawals for many years, preferring to pay out of pocket now - even if I lose those records, knowing that I will naturally have medical expenses in the future just means I'll get reimbursements with those records instead.

I recall also that my employer would also kick in money into the account on top of my contribution, so you should verify that as well.
posted by Karaage at 1:44 AM on September 27, 2017 [1 favorite]

Yes, HSAs are with it for virtually everyone who can afford to contribute to one. Lots of folks over on bogleheads and places like it advise that people contribute the max in an HSA before maxing out a 401k, simply because it's the only savings vehicle out there that lets you both put in and take out money tax free.

A couple points you might have missed in your research:

Your HDHP is affiliated with an HSA provider, but if they have high fees and/or poor investment options, you are free to roll that money over to another provider. Mine, HSABank, has much much lower fees once you hold a certain balance with them, and allows you to invest through TDAmeritrade which has a good variety of commission-free ETFs with negligible underlying fees, much better offerings than the vast majority of 401ks.

Adding to that, since you can invest the money in the HSA, you have to take into account that those earnings are also tax-free if you use them for health expenses. If you put he money in that savings account, you're paying taxes on the earnings every single year, which adds up over time.

You aren't just saving the 25% marginal income tax rate. You're also saving whatever your marginal state tax rate is, plus Medicaid and SS taxes, another 7.65%. This is another difference/advantage HSAs have over other retirement accounts, which don't exempt payroll taxes.

I keep comparing HSAs to retirement accounts because if you don't use the money in them for health expenses (though I'd guess the majority of folks will, given the amount we spend on healthcare), when you turn 65, you can start withdrawing the money in the same way you would a traditional IRA or 401k, paying taxes but using the funds for for regular living expenses.

Like Karaage points out, most of these come with a debit card you use to pay expenses hassle-free. I personally don't use my debit card and instead save the receipts for reasons, but all I do is take a picture of the receipt, upload it to my HSA account, categorize it, and the acccounting is taken care of for me.
posted by exutima at 4:27 AM on September 27, 2017 [4 favorites]

(though I'd guess the majority of folks will, given the amount we spend on healthcare)

The line I heard a lot when I was working for small CPA firms what that if you had healthy non-elderly clients, you should encourage them to max an HSA account every year, but then pay their actual medical bills with cash and then keep the receipts. Because, and here's the notable bit: There is no time limit on reimbursement. If you need it, you can get to the money whenever, but you want to get a bunch of money into the account early so it can start compounding, and the presumption with the sort of clients who ask their CPAs for tax advice is that these people will probably be in a higher tax bracket later than they are right now. At which point it is basically another IRA purely for people who can afford to go without ongoing health care. Which is terrible, but if it applies to you, you might as well take advantage of it.
posted by Sequence at 8:47 AM on September 27, 2017

Many thanks for all the answers, including the arithmetic correction. Marked as best those that pointed out things I actually had missed in my research and that explained how the wealthy and healthy make this work to their advantage (I knew there must be a way).

I'm a government employee, but not federal. I promise the paperwork I'm asking about says MSA--medical savings account. (I also read the stuff about FSAs--flexible savings accounts.)
posted by Former Congressional Representative Lenny Lemming at 10:59 AM on September 27, 2017

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