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MSA’s Save you Money

Posted on Monday, September 2nd, 2002 by

NOTE: MSAs have been supplanted by the HSA. Click Here

Park a few thousand dollars in a Medical Savings Account to cover routine expenses and the savings are huge: Contributions and income are tax-free — and cheaper premiums can cover your investment. But not everyone can sign up.

If you’re one of the estimated 45 million Americans who are not covered by Health Insurance , maybe you should take the time to take a look at Medical Savings Accounts. MSAs are available to small businesses and self-employed people who want complete insurance coverage, with a choice of health-care providers, at a low and predictable annual cost.

Why haven’t you heard of MSAs? Probably because this revolutionary insurance program has been offered only on a trial basis, and only since January 1997. Congress has renewed the program through Dec. 31, 2003, and renamed the plans Archer MSAs in honor of Rep. Bill Archer, R-Texas, who has long supported the program.

The Bush administration is promoting the accounts as a tool to fight rising health-care costs. Insurance companies and financial institutions are now starting to climb on the bandwagon to provide the combined coverage of a tax-free savings and investment account with a high-deductible, complete-coverage health-insurance policy. That’s the essence of an MSA, and here’s how the idea works.

The concept

Let’s start with the typical Health Insurance plan offered by a small businessto its employees. It probably offers a choice between an HMO (with limited medical options and provider choices) and a more traditional health insurance policy that has a $250 deductible and an 80/20 co-payment. (That means the employee pays the first $250 of medical costs during the year and 20% of subsequent bills up to a certain amount. Families sometimes pay a higher deductible — perhaps three times the individual deductible.)

Most of these policies cap the employee’s out-of-pocket expenses at $1,250 per person. The HMO is cheaper to operate, which is why a lot of workers with families use them. The deductible and co-payments are low and sometimes non-existent. Physicians and patients alike often find an HMOs bureaucracy extremely frustrating to deal with, which is a major reason why Congress is now debating the pros and cons of a patients’ rights bill.

The traditional health policy costs the employer what can seem like a small fortune. And, as we know, rising medical costs push an employer’s health insurance premiums higher every year. As a result, many small businesses don’t offer any medical coverage to employees. And many self-employed people can’t afford coverage.

But just as with your homeowners insurance, one way to save money on your medical insurance is to increase your deductible — the amount you agree to pay. If you increase the deductible on your homeowners or auto -insurance policy, the premium drops substantially. That’s because not only does the insurer have less exposure, but because the cost of processing small claims is a big part of your insurance premium. That leads us to the first half of the medical savings account concept.

The high-deductible Health Insurance policy

Let’s suppose you increase the deductible on your Health Insurance policy. You might not mind doing that — if you knew that every single medical expense above that deductible would be paid in full by the insurance company, with no co-payments required. And if you knew your premiums would drop by as much as 50%! That’s the first step in creating an MSAt.

The employer, or sole proprietor, signs up for a high-deductible health insurance plan — with perhaps a deductible of $4,500 for a family or $2,250 for an individual. The monthly premium cost for that high-deductible medical insurance plan might be $377 for a family of four, versus $729 for the traditional plan. That means a savings of $4,224 annually on insurance premiums — more than enough to fund an MSA, as I’ll explain in a minute. Not only is the annual cost lower, but the choices are greater.

Under this high-deductible plan, the family gets to choose its own doctors, hospitals and medical procedures. After all, the first $4,500 a family spends comes out of its own medical savings account. If that $4,500 first-dollar exposure sounds scary, don’t forget that under the traditional plan, the family might have to meet the $250 deductible for at least three family members before the 80/20 payments would kick in. So they’d be exposed for $750 in out-of-pocket expenses, plus another $1,000 per person in co-insurance expenses — the 20% for which the individual is responsible. So if the family incurred significant medical expenses in one year under the traditional plan, they’d be paying $3,750 anyway. And those payments would be made with after-tax dollars, not the pre-tax dollars growing in their MSA.

Still, it sounds frightening to be exposed for $4,500 of medical costs — until you realize that 70% of insured Americans don’t even meet or exceed a $500 deductible in one year. And the real fear with medical expenses is not the deductible amount, but the really huge medical costs that can completely devastate a family. Those are fully covered with the high-deductible insurance coverage in an MSA. The tax-deductible, tax-free savings account Even so, that $4,500 for a family or $2,250 for an individual is a steep burden for many people to contemplate.

So here’s the second part of the medical savings account plan, which makes whole concept revolutionary. The government is giving you — or your employer — a tax deduction to set money aside in a special tax-free savings account to pay for some of that $4,500 in medical-expense exposure. Where will that money come from? Well, the employer is going to save so much money on his annual insurance costs that he may be willing to fund a part of this MSA.

The incentive: The money the employer puts into each employee’s account produces a tax deduction for the business . The employer’s contribution to the MSA does not count as income for the employee, so there’s no need for either boss or worker to pay taxes on that benefit. And if the boss sets up the plan, but doesn’t make a contribution, the employee can take a tax deduction for the entire amount he puts into the medical savings account.

There’s a limit to how much can be put into the MSA account each year. It’s 75% of the deductible for a family, or 65 percent of the deductible for an individual. That means in our example, the employer or employee could set aside $3,375 for a family of four, or $1,462 for the individual, as a tax-deductible contribution that will grow tax-free inside the MSA. Now, here’s the best part. If you don’t spend all that money on medical expenses this year, the balance will roll over into the subsequent years. (This is not like a medical savings account you see in big company’s cafeteria benefits plan. Those are a use-it-or-lose-it proposition.)

The money can be withdrawn at any time tax-free to pay for medical expenses. After a few years, you’re likely to build up enough savings in your MSA to cover any year in which you have an unexpected medical expense that requires you to pay the first $4,500. Remember, all the money comes out tax-free at any time to pay for qualified medical expenses. And with an MSA, those qualified expenses include things like glasses, laser eye surgery, dental fees, teeth implants, hair transplants, and a host of other “medical expenses” that would not be covered under a traditional plan! (Money withdrawn for other than medical purposes is considered taxable ordinary income, plus a 15% federal tax penalty.)

The incentives

Let’s take a look at how this medical savings account concept changes the incentives throughout the entire Health Insurance system: The employer can offer a health-care benefit to retain valued employees — at a reasonable cost that’s tax deductible. The employee — or sole proprietor — has an incentive to keep health-care costs down. Since the first dollars spent by the employee are his own — and could have been growing inside the MSA — he or she will have the incentive to stay healthy through preventive medicine and become cost-conscious in choosing providers. After all, money not spent grows tax-deferred inside the MSA account. The health-care system benefits through less costly claims processing. Individuals will pay their own small health-care bills out of their MSA, with no multiple insurance claims to file. Pressure to hold prices down will come from consumers who have an incentive to spend less.

Why you don’t hear about these accounts?

In a word, politics. Congress started the program and capped the allowable total enrollment at 750,000. Fewer than 200,000 Americans are actually enrolled in plans, largely because they’re limited to such a small group – the self-employed and employers with fewer than 50 workers. And when your company hires its 51st worker, it can’t offer the program. Large companies still can’t offer them, and some states actually had laws that prevented their establishment. Medical savings accounts have some severe critics, including Consumers Union, the parent of Consumer Reports. They believe the accounts help the healthy and the affluent will drive up health care costs for those who can’t afford the high deductibles. The program looked like it would die last year until Congress renewed it. As Congress wrangles over new patients’ rights legislation, Republicans are trying to get provisions put into the legislation to expand MSAs.

How to get started on an MSA

The MSA package requires two ingredients: the high-deductible insurance policy and a custodian for the tax-free savings/investment account that goes with it. Plus, there has to be an easy way to access the money in that savings account to pay for the employee’s medical bills. That trio of requirements has complicated the growth of the entire MSA concept. So where do you turn for help in getting this plan started? The industry has set up a Web site created by the National Association of Alternative Benefits.

It has a somewhat dated list of providers, listed by state. Other Web sites have been created by individual insurance agents and by private companies, including Golden Rule Insurance and Fortis.

One enterprising company has managed to make an easy link between these high-deductible insurance policies and the approved custodians for the actual savings or investment account. FlexMSA (owned by Flexible Benefits Service Corp.) has created a turnkey plan and offers a MasterCard that can be used to pay for medical services right out of your MSA savings account. That makes paying claims and bookkeeping easy chores.

FlexMSA works with major insurance companies, such as Blue Cross/Blue Shield, Fortis and Golden Rule, and with Mellon Bank as custodian of the saving account portion of the plan. In fact, under the plan, once the unspent assets in the MSA reach $3,500, they can be invested in a choice of mutual funds offered through Dreyfus.

What to do now

Check it out. Show this article to your boss. Or if you’re self-employed, set up a plan on your own. If you’re paying too much money for restricted coverage under a traditional plan, the MSA might be the perfect answer to your Health Insurance needs.

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