The Jacobs Company
Employee Benefit Plans & Services
Medical Savings Accounts

Key Points About MSA'S

Employee contributions to an MSA are deductible from adjusted gross income.  Employer contributions to a MSA are not taxable income to the employee (except for Sec. 125 Cafeteria plans), but must be reported on the employee's W-2 form.  Contributions may be made at any time, up to the due date of the return (not counting filing extensions).  Earnings on funds in the MSA are not currently taxable.

Limit on Contributions:
Contributions to an MSA are limited, based on the dollar amount of the health policy's deductible.  For single coverage, the annual contribution limit is 65% of the deductible amount.  For family coverage, the annual limit is 75% of the deductible amount.  The Act sets limits for minimum and maximum deductibles, as well as the maximum "out-of-pocket" expense:
Coverage Type
Minimum Deductible
Maximum Deductible
Maximum "Out of Pocket"
These limits will be indexed for inflation after 1998,

Distributions from an MSA:
Funds distributed from an MSA to pay for qualified medical expenses (unreimbursed expenses that would otherwise qualify for the medical expense itemized deduction) are generally tax free.  No itemized deduction is allowed for medical expenses paid from the MSA.  Funds distributed for other purposes are taxed as ordinary income.  A 15% penalty tax would also apply, unless a distribution is made because of death, disability, or the MSA owner has reached age 65.

Tax Savings:
The tax benefits of paying medical expenses through an MSA are significant.  The ability to deduct contributions to the MSA "above-the-line," amounts to a dollar-for-dollar reduction in taxable income.  Otherwise, unreimbursed medical expenses are deductible as an itemized deduction only to the extent that they exceed 7.5% of AGI, an amount which many taxpayers never reach.


Please refer to our Health Insurance Section as we are developing the Employee Benefits Section Please refer to our Health Insurance Section as we are developing the Employee Benefits Section


This document was last modified on July 26, 1999

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