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Tony Novak, CPA, MBA, MT
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20 Reasons why I love my Medical Savings Account
by Tony Novak, CPA, MBA, MT
, revised 11/16/11
Medical Savings Accounts might be the Corvair of the financial services industry –destined to be a collector’s item for a few small businesses and self-employedindividuals. When Congress and the IRSfirst authorized the use of tax-qualified Medical Savings Accounts in 1997,most commentators thought that the 750,000 authorized accounts would beimmediately snatched up by the public. MSAs were praised by physician groups, politicians, and the businesspress as the most likely solution for the cost and quality problems plaguingthe small business and individual health insurance market. Tax advisers were amazed by thealmost-too-good-to-be-true features of MSAs not available in any other taxshelter today.
Big institutions like Merrill Lynch and Mellon Bank geared up for the big onslaughtof MSA investors that might resemble the boom that IRA accounts brought ageneration ago.
But so far, MSAs have not caught on. Lessthan 300,00 MSA plans have been opened across the country, leaving manypoliticians wondering why. To me it’sno mystery, but simply a matter of money in a strictly regulated industry. MSA accounts are usually offered on ano-load basis with no financial incentive for investment firms to market themto the public. And because MSAs cut theinsurance premium in half, they also cut insurance agent compensation inhalf. Your employee benefits adviser orinsurance agent is thinking “Twice as much work, half the compensation….hmmm,do I really want to do this?” Of coursenot. But financial firms are restrictedfrom raising compensation be the myriad of laws regulating insurance in the 50individual states.
My firm offers MSAs to clients, but only as a “value added” free service. We don’t make a dime on any MSAaccount. But the few dozen firms whohave them would not give them up, so that makes for some very loyal clients. I guess this makes it a smart move for usover the long term. For the few individuals and small firms who have managed to open a Medical SavingsAccount (I am among this small group), here are the benefits we enjoy:
- Our health insurance premiums, on average, are generally half of what other small businesses pay in a similar circumstance. Of course, this varies from person to person.
- We estimate that our firm’s “benefits payout ratio” (that is the amount of actual cash received by the employees for every dollar that the firm pays out in benefits cost) is significantly higher than for others in similar circumstances.
- We don’t have to ask the insurance company “Is it covered?”. If we want it to be covered by the MSA, it is covered. The use of money in the accounts is at each employee’s discretion. (Of course there are tax consideration for using money for non-medical things like cosmetic surgery).
- We can cover dental, vision and other ordinary health expenses without buying additional insurance.
- We know that the underlying medical insurance is the best quality available with the widest allowances on treatment options in the event that we have a serious medical problem.
- We are free from the restrictions of managed care. We can use any doctor, any hospital and any normal procedure or physician recommends.
- We get VIP treatment from our personal physicians because they know that they are not under the restrictions of managed care plans.
- We can often squeeze into a doctor’s appointment schedule on days when the receptionist says that there are no openings just by mentioning that we are cash paying patient.
- We receive a cash benefit from our health plan even if we are perfectly health and do not have a medical claim all year.
- We are financially rewarded for being healthy by being able to keep more of the money paid by our employer!
- Our MSA accounts are private and self-directed, so we can choose our own investments, including a range of no-load mutual funds. Our employer has no access to information or control over our private MSA account.
- Our principal is guaranteed if we elect the fixed interest rate option in our MSA.
- Interest rates in our MSA account are higher than available in most other savings accounts.
- The investment returns are higher than most mutual funds. The net return for the accounts I opened for the 12 months ending June 30, 2000 was 68.56%, according to “Financial Planning Magazine”. (This is not a legally complete disclosure of investment data so always see a prospectus before you invest in any account).
- Our MSA accounts are no-load and no fees so money grows faster than in an IRA or other savings or investment account.
- Interest or investment gains are tax free. This is far better than the tax-deferred feature of IRAs or 401(k) plans.
- Self-employed individuals, partners and s-corp. owners can deduct 100% of their MSA contributions, compared to only a portion of their health insurance premiums.
- We can pay for our long-term care or long term insurance with tax-deductible payments or tax-free income.
- We can use our MSA money for extra retirement income.
- We can name our own beneficiary to receive the funds that we might not spend during our lifetime.
Ofcourse, medical savings accounts are not for everyone. Some states restrict these plans; they arenot available (or not attractive) in AK, HI, MA, NJ, NY, or VT. You may not start one if you have hadserious medical problems in the past or are currently under any medicaltreatment. You must show a permanentneed for this type of plan, so students and people “in transition” may notqualify. You must be self-employed, orthe employee of a qualifying small business. Finally, you must find a benefits firm willing to open a medical savingsaccount plan for you – they might have to dust off some seldom-used application forms and brush upon the plan procedures. In my opinion,it would definitely be worth the effort.
Medical Savings Accounts are largely replaced by Health Savings Accounts. A few old Medical Savings Accounts still exist, so we did not remove the article.
See “20 Reasons to love Health Savings Account” for current information.
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