Could MSA Mean My Savings Account?
In a flurry of year-end activity, the U. S. Congress and President passed the Community Renewal Tax Relief Act of 2000, which contained some important new tax breaks and maintained one tax break that was scheduled to end on December 31, 2000 – Medical Savings Accounts (MSA).
Ok, it wasn’t really that much of a flurry of activity, but Congress did manage to pass this important legislation that President Clinton signed on December 22, 2000.
While many people may look at MSAs as simply another way for banks, investment and insurance companies to get their hands on someone else’s money, this is not altogether true. Properly handled, and with a little luck, what starts out as a healthcare option may turn into a retirement option; turning the Medical Savings Account into another My Savings Account.
What is an MSA?
MSAs were established in 1997 as an alternative way for employers to offer affordable healthcare to their employees. The concept was simple – instead of paying the insurance company high premiums for first dollar of coverage, the employer would obtain high deductible insurance for its employees and then either the employer or employee would sock money into a Medical Savings Account to be used to pay eligible medical expenses.
The beauty of the plan is that the amount put into the MSA is not taxable. If the employer put the money into an account for the employee, the employee would not have to pay income tax on it. By the same token, if the employee made the contribution, it would be deductible just the same as an IRA. Then, as long as the employee used the amounts in the MSA for eligible expenses, any withdraws would be tax-free.
There were, of course, a few hitches. First, Congress placed certain restrictions on who would qualify to establish an MSA. Next, Congress dictated the minimum and maximum out-of-pocket costs qualifying policies could impose for medical expenses. Third, Congress limited how much an eligible person could put in the MSA to cover medical costs. Finally, Congress only allowed the creation of 750,000 MSAs and limited the time to establish an MSA to December 31, 2000.
Regarding the eligibility requirements, any employer with less than 50 employees could establish an MSA. This was the primary requirement. However, if the employer had no plan and did not intend on establishing one, an employee could obtain a high deductible plan and set up an MSA without the employer’s sponsorship. This was assuming the employee wasn’t covered under their spouses’ plan.
As we said, Congress established certain requirements for the “out-of-provisions” of eligible insurance policies. For single persons, the minimum deductible was indexed for inflation and will now be $1,600 in 2001 with maximum deductible being $2,400. For family coverage, minimum deductibles are $3,200 and $4,800. Maximum out-of-pocket costs are $3,200 for individual coverage and $5,850 for family coverage.
The maximum contribution that can be made for individual coverage is 65% of the maximum out-of-pocket coverage under the associated policy, but limited in all cases to $2,080. For family coverage, this amount is increased to 75% of the policy’s maximum out-of-pocket, but limited in all cases to $4,387.50
The exact reason for Congress limiting the availability of MSAs to only 750,000 taxpayers eludes this writer, but so far, that number has not been met.
Finally, we already know that the availability of MSAs has been extended to December 31, 2002.
So how can an MSA help me?
The primary reason MSAs were enacted was to provide a low cost alternative to employers and employees alike for health insurance. To accomplish this, the MSA alternative ties what is basically a savings account to a high deductible insurance policy. Typically, this can save anywhere between 20% to 50% in annual insurance premiums. Let’s take a real world example.
A small firm recently asked for proposals on its group. The quote it received from a PPO provider, with $500 deductible and a maximum family out-of-pocket of $6,000, came with an annual cost of $19,500. These rates really were not outrageous in the circumstances. The MSA option with a $2,250 deductible and a $4,500 maximum family out-of-pocket totaled $12,000. This $7,500 difference could be put in an MSA or pocketed by the participants, the company or both – within certain limitations.
While it is true that the initial outlay for each covered illness will be higher under the MSA option, if you look at the overall maximums, the coverage is not significantly different. This, coupled with the intention that the premium savings be placed in an MSA to pay for costs that are less than the deductible ultimately makes for two plans that are, in the end run, comparable.
The only real difference, then, is if you have a great year and have relatively few, or no, medical bills. If you are buying the traditional plans, at the end of the year, you have nothing left to show for your insurance investment. However, if you utilize an MSA, you have the original amounts you invested – without paying tax – and any interest earnings on those funds.
Again, let’s look at one of the members of the company we just talked about. The premium savings by going to an MSA was about $350 per year. Based on the various limitations, that employee would have been able to put up to $3,375 in an MSA. At the end of the year, that employee would have $3,453.62 if the account earned 5% per year. The employee could use that money on future expenses, or, if she has extraordinarily good luck, she has one other option.
Here’s the really good news!
Let’s assume our not-so-hypothetical employee has only minimum medical bills all the way until she retires. Let’s assume she retires exactly eight years from now, she invests her money at 5%, invests $281.25 per month and pays what little medical costs she has out of other assets.
On the day she retires, this employee will have approximately $41,200 in her MSA. She will be able to keep the money in the account and use it for any future medical costs, or she can use it as additional retirement savings.
Overall, using an MSA plan isn’t a bad way to enhance what can be saved for retirement, but it isn’t risk free. As with everything else in life, choosing the right insurance is difficult and not every person will benefit from an MSA. “The Devil,” as they say,” is in the details,” and while a high deductible policy may suit one person, it may be disastrous for another.
We are in the business of helping businesses and individuals. Health insurance is one of those products that have an equal impact on both. Higher premiums will hurt both the business and the employee in the same way. That’s why it is important to evaluate all your alternatives.
When evaluating health insurance, you have to look not only at the monthly premium cost, but also at the benefits offered. At best, this is a difficult task – one we can help you with. Give us a call and let us help you evaluate your healthcare alternatives before you make one of the most important decisions in your life, your family’s lives and your business’ life.