The Insurance Buying Guide: Medical Savings Accounts
A new option, when it comes to health insurance, is the tax-free medical savings account (MSA). It combines a long-term savings account and a high-deductible health insurance policy.
As of January 1, 1997, these accounts could be offered to a limited number of individuals that are self-employed or employed at firms with 50 or fewer employees. The accounts are part of a pilot program that was put in motion by the Kennedy-Kassebaum bill, passed in August 1996. The pilot program allows no more than 750,000 policies to be distributed and is designed to offer consumers more choices in the health insurance market. Policies are being sold on a first-come, first-serve basis to those who qualify.
How do MSAs work? They're like a combination of a cafeteria contribution plan and an individual retirement account (IRA). As in a cafeteria plan, you contribute pre-tax dollars to the account. That money can be used to pay a variety of medical expenses. This is the premium for the MSA.
When you start an MSA, you also switch to a high-deductible health insurance policy. (Both are usually offered in tandem by the same insurance company.) The annual deductible for a single person must be between $1,500 and $2,250; for families, it must be between $3,000 and $4,500.
Individuals then can contribute up to 65 percent of the deductible into the MSA each year, and families can contribute up to 75 percent. The contributions are not subject to federal income taxes and are used to meet the deductible, until the insurance coverage begins to kick in, of course.
MSAs also allow you to use that money for a broader range of services than are covered by most health plans. The funds in an MSA can cover small, everyday expenses, as well as dental care, eyeglasses, psychotherapy and home health care. MSAs also can be used toward payment of premiums for long-term care insurance or COBRA coverage upon leaving a job.
Premiums for MSAs will differ, depending on such factors as your age, the type of plan and your place of residence.
Money that you put into an MSA grows tax-free, like an IRA or a 401(k) retirement plan. And unlike a cafeteria plan, MSA funds can accumulate over time. If the annual premium is not exhausted at the end of the year, this amount will roll over into the next year. When you turn 59 1/2, the money in the account becomes your property and is no longer restricted to use for healthcare. Prior to that time, the money can be withdrawn for non-health-related expenses, but you will have to pay ordinary income tax on whatever money you withdraw, plus a 10 percent to 15 percent penalty.
This is why MSA policies are being marketed as investment tools -- since the leftover money can be rolled over year after year and collect interest.
