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Merritt Personal Lines Manual: Chapter 8 Medical Savings Accounts

A new option, when it comes to specialty 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 who are self-employed or employed at firms with 50 or fewer employees. The accounts are part of a four-year pilot program of a health insurance coverage that was put in motion by the Kassebaum-Kennedy Health Insurance Portability and Accountability Act, passed in 1996. Policies are being sold on a first-come, first-serve basis to those who qualify. The pilot program allows no more than 750,000 policies to be distributed.

How do MSAs work? They're like a combination of a cafeteria contribution plan and an individual retirement account (IRA). You contribute a certain amount of money to the account each month. That money can be used to pay a variety of medical expenses - and it is not subject to income tax.

When you start an MSA, you also switch to a high-deductible catastrophic health insurance policy. (Both are 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; 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.

MSAs also allow you to use your money for a broader range of services than most health plans.

MSAs can cover small, everyday claims, as well as medical expenses that normally would not be covered by other insurance plans - such as dental care, eyeglasses, psychotherapy and home health care. MSAs also can be used toward payment of premiums for long-term care insurance or coverage upon leaving a job.

Money that you put into an MSA grows tax-free, like an IRA or a 401(k) retirement plan. When you turn 59 and 1/2, the money in the account becomes your property and is no longer restricted to use for health care. Prior to that time, the money can be withdrawn for non-health-related expenses, but you will have to pay ordinary income tax on whatever money you withdraw, plus a 10 to 15 percent penalty.

Premiums for MSAs will differ, depending on such factors as your age, the type of plan and your place of residence. But if the annual premium is not exhausted at the end of the year, this amount will roll over into the next year.

This is the big difference between an MSA and a flexible-spending health account, which some companies already offer. Flexible-spending health accounts also use pretax dollars for medical expenses not covered by insurance. However, the unused balance in a flexible spending account is forfeited at year end. MSA funds can accumulate over time.

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. Leftover money can be used for future health care expenses or be invested in stocks, bonds and money market accounts.

There are even managed-care MSAs. Kentucky-based Humana Inc. offers an MSA program through its wholly-owned subsidiary, Employers Health Insurance Co. Other insurers that are offering MSAs include Blue Cross/Blue Shield, Golden Rule, American Medical Security Group and Fortis.

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