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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-employed individuals. When Congress and the IRS first authorized the use of tax-qualified Medical Savings Accounts in 1997, most commentators thought that the 750,000 authorized accounts would be immediately snatched up by the public. MSAs were praised by physician groups, politicians, and the business press as the most likely solution for the cost and quality problems plaguing the small business and individual health insurance market. Tax advisers were amazed by the almost-too-good-to-be-true features of MSAs not available in any other tax shelter today.

Big institutions like Merrill Lynch and Mellon Bank geared up for the big onslaught of MSA investors that might resemble the boom that IRA accounts brought a generation ago.

But so far, MSAs have not caught on. Less than 300,00 MSA plans have been opened across the country, leaving many politicians wondering why. To me it’s no mystery, but simply a matter of money in a strictly regulated industry. MSA accounts are usually offered on a no-load basis with no financial incentive for investment firms to market them to the public. And because MSAs cut the insurance premium in half, they also cut insurance agent compensation in half. Your employee benefits adviser or insurance agent is thinking “Twice as much work, half the compensation….hmmm, do I really want to do this?” Of course not. But financial firms are restricted from raising compensation be the myriad of laws regulating insurance in the 50 individual states.

My firm offers MSAs to clients, but only as a “value added” free service. We don’t make a dime on any MSA account. But the few dozen firms who have them would not give them up, so that makes for some very loyal clients. I guess this makes it a smart move for us over the long term. For the few individuals and small firms who have managed to open a Medical Savings Account (I am among this small group), here are the benefits we enjoy:

1. 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.
2. 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.
3. 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).
4. We can cover dental, vision and other ordinary health expenses without buying additional insurance.
5. 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.
6. We are free from the restrictions of managed care.  We can use any doctor, any hospital and any normal procedure or physician recommends.
7. We get VIP treatment from our personal physicians because they know that they are not under the restrictions of managed care plans. 
8. 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.
9. We receive a cash benefit from our health plan even if we are perfectly health and do not have a medical claim all year.
10. We are financially rewarded for being healthy by being able to keep more of the money paid by our employer!
11. 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.
12. Our principal is guaranteed if we elect the fixed interest rate option in our MSA.
13. Interest rates in our MSA account are higher than available in most other savings accounts.
14. 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).
15. Our MSA accounts are no-load and no fees so money grows faster than in an IRA or other savings or investment account.
16. Interest or investment gains are tax free.  This is far better than the tax-deferred feature of IRAs or 401(k) plans.
17. 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.
18. We can pay for our long-term care or long term insurance with tax-deductible payments or tax-free income.
19. We can use our MSA money for extra retirement income.
20. We can name our own beneficiary to receive the funds that we might not spend during our lifetime.

Of course, medical savings accounts are not for everyone. Some states restrict these plans; they are not available (or not attractive) in AK, HI, MA, NJ, NY, or VT. You may not start one if you have had serious medical problems in the past or are currently under any medical treatment. You must show a permanent need for this type of plan, so students and people “in transition” may not qualify. You must be self-employed, or the employee of a qualifying small business.  Finally, you must find a benefits firm willing to open a medical savings account plan for you – they might have to dust off some seldom-used application forms and brush up on the plan procedures. In my opinion, it would definitely be worth the effort.

Status: Outdated

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.