Medical Savings Accounts

by Dave Blackmon

daveblackmon@lifeinsurance.net - CA Lic. #0B89710

If you are self-employed, or work at a business with 50 or fewer employees, and don't have a health plan, you need to know about MSAs. When you consider what they can do and the tax advantages, there is little that can touch them. Medical Savings Accounts have two parts.

First, you contribute to a high deductible health insurance program. Those premiums (after January 1, 1999) are 60% deductible. The highest deductible for singles (meaning the lowest premium) is now $2300 per year, and $4,500 for families. This is the amount you pay per year out of your pocket, or the money in your MSA account, for medical care, before the insurance kicks in (which covers everything from acupuncture to X-rays).

The second part is the MSA account, which is 100% deductible. In this you put up to 65% for singles and 75% for families, of the amount of your deductible. With a $2300 deductible, you can put in $1,495. With a $4,500 deductible, you can put in $3,375. But here is the interesting part. You don't have to make that MSA contribution until April 14 of the following year.  You can invest the MSA contribution in any investment vehicle you wish, including mutual funds, etc. So what happens when you need hospitalization or medical care? You pay for the services out of your pocket or out of the accumulated MSA "savings" account until you reach the deductible portion, and then the insurance takes over, paying the rest. If you don't use any money out of your MSA savings the amount rolls over to the next year, continuing to be invested and earning as you go. If you use the money in any year before 65 for non-medical purposes, there is a 15% penalty. But after age 65, withdrawls for non-medical purposes is taxable, but no penalty pplies. And assuming you are healthy and don't use any of your savings (although that is far-fetched), $1,500 per year in tax-advantaged savings could be worth almost $1 million in 25 years, assuming a 10% rate of return.  This "super-IRA," as Forbes calls it, is a lot different than the old Flexible Spending Accounts (FSAs) that many corporations offered. In an FSA, you either "use it or lose it."

That is not the case with an MSA. Rates for the insurance portion of an MSA are based on geographic location (at least in California), as well as age and smoking status. An example would be a 35 year-old male non-smoker living in Northern California. His rate on the $2,300 deductible policy would be $53 per month (60% deductible), and his MSA savings portion would be $1,495 per year (100% deductible), investible monthly at $124.58, or in a lump sum by April 14 of the next year. Assuming a 28% tax bracket, the monthly premium would cost $44.10 per month after taxes, and the yearly MSA contribution would represent a cost of $1076.40 after-tax. For me, an MSA lets me save in addition to the Self-Employed IRA I already have. In a SEP IRA you can only contribute up to 15% of your profit. With the MSA, I can boost the amount of my savings way beyond that in another tax-advantaged fashion, as well as control the doctors I see and the hospitals I use. I can pay for everything from reading glasses to lead-based paint removal through my MSA. And if medical expenses get really out of hand, like a terminal illness or major disease, my MSA insurance policy pays for it. If you qualify, be sure to get a quote from an MSA agent. Paying your medical costs with pre-tax dollars may be the best step you'll take since starting your own business.