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Tony Novak, CPA, MBA, MT
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Medical savings accounts
An overview of consumer features and benefits
by Tony Novak, CPA, MBA, MT
, revised 9/20/2003 and 11/30/2011
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 benefits advisers thought that the 750,000 authorized accounts would be immediately snatched up by the public. 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. 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.
But so far MSAs have not caught on. Less than 400,000 MSA plans have been opened across the country. I am one of these MSA owners. For the relatively few of us who have opened a Medical Savings Account, here are the benefits we enjoy:
- Our health insurance premiums, on average, are generally half of what others pay in a similar circumstance. Of course, this varies from person to person.
- The “benefits payout ratio” (that is the amount of actual cash received for every dollar that the business pays for health benefits) is significantly higher than others types of health plans.
- We don’t have to ask the health insurance company “Is it covered?”. All legitimate medical expenses are 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 also cover dental, vision and other ordinary health expenses without buying additional insurance.
- The underlying medical insurance allows liberal treatment options worldwide 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. Physicians tend to find more time to hold discussions with cash paying patients.
- We can often squeeze into a doctor’s appointment schedule even on days when the receptionist says that there are no openings just by mentioning that we are a 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 balance 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-corporation 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 to cover the cost of post-retirement medical costs or insurance on a tax-free basis.
- We can name our own beneficiary to receive the funds that we might not spend during our lifetime.
Medical savings accounts are not for everyone. Some states restrict these plans; they are not available (or not priced attractively) 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.
Although some medical savings accounts may still exist, most were replaced with health savings accounts in 2004.
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