Montana Medical Savings Accounts

Save for medical bills. Reduce your taxes.

As medical costs continue to rise, more Americans are saving for upcoming and unexpected health care bills through a federal Health Savings Account. An HSA is a smart savings tool for many, used to pay for medical expenses that are not paid by a health insurance plan. However, some people, such as those covered by Medicare, don’t qualify for this program while others find its contribution limits insufficient to cover anticipated medical expenses.

For Montana residents there is another, and in some cases additional, option – a Montana Medical Savings Account. While similar to a federal HSA, an MSA has some unique benefits including broader eligibility and a potential state income tax reduction.

Who can have an MSA?

MSAs are available to Montana residents age 18 and older even if they have a health plan provided by their employer, a federal Health Savings Account, or are covered by Medicare. While MSAs cannot be established for minors under the age of 18, a parent’s MSA can be used for eligible medical expenses for a minor child or for a child over the age of 18. Joint MSAs are not allowed; each spouse must establish a separate MSA. Additionally, unlike a federal HSA, health insurance coverage is not required to establish or use an MSA.

How much can be contributed to an MSA?

For tax year 2019, the maximum contribution and related deduction for a Montana MSA is $4,000 per account. This limit is adjusted annually by the rate of the Consumer Price Index rounded to the nearest $500.

How does the MSA reduce state income tax?

The amount contributed to a Montana MSA can be used to reduce the amount of income subject to state income tax in the current year. The amount is subtracted from federal adjusted gross income to arrive at Montana adjusted gross income. The amount contributed in a calendar year can only be deducted once. Amounts not spent and rolled over to the following year cannot be deducted again.

What expenses are allowed?

After January 1, 2018, MSA funds can be used by the account holder and – and this is unique – to anyone the account holder chooses for eligible medical expenses.

Eligible medical expenses include the same medical expenses allowed as a federal itemized deduction as defined under the Internal Revenue Code. A listing of these is available in IRS Publication 502, “Medical and Dental Expenses.”

Starting in 2018, eligible expenses for MSA purposes also include long-term care expenses, bank fees related to the administration of the account, and family leave expenses. Family leave expense is an expense, calculated monthly, of approximate wages lost while caring for parents, a spouse, or children for the purposes allowed under the Family Medical Leave Act of 1993.

Taxpayers cannot claim an itemized deduction for medical expenses paid from the MSA.

What expenses are not allowed?

Funds held in an MSA may not be used to pay any medical expenses that have already been reimbursed under another type of pre-tax health savings account, health insurance plan or other insurance coverage including an automobile insurance policy, workers’ compensation or a self-insured plan.

What if funds are used for ineligible expenses?

When funds are withdrawn from an MSA for some purpose other than payment of eligible expenses, the amount of the nonqualified withdrawal must be included in income and taxed at ordinary rates. The nonqualified withdrawal is also subject to a 10% penalty unless it falls under one of these three exceptions:

  1. The withdrawal is made on the last business day in December. The amount withdrawn is included as ordinary income for Montana income tax purpose to the extent the funds were excluded on a prior tax return.
  2. The withdrawal is upon the death of an account holder. The withdrawal is added to the decedent’s Montana income for the tax year in which the death occurred unless the account passed to a beneficiary.
  3. The withdrawal is a transfer of funds from one MSA to another MSA, such as a different type of investment (from a savings account to a certificate of deposit within the same financial entity) or a different financial institution (from a savings account in a bank to a mutual fund company).

If a taxpayer moves from Montana to another state or country, any unused funds in the MSA are considered a nonqualified withdrawal and must be reported as income on the taxpayer’s final Montana tax return.

Medical expenses continue to be a significant part of the average American’s budget. For Montana residents, Montana MSAs provide an opportunity to save for those costs while providing a potential current year state income tax savings. To determine if a Montana MSA is a good and sound decision for you, please contact any of our tax professionals.

© 2019