MSA might benefit small groups, self-employed

Staying Ahead

February 03, 1997|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

YOU MAY have seen ads for the new types of health plans known as medical savings accounts (MSAs). They can help small companies that want to offer their workers low-cost health insurance. If you meet the requirements of individual buyers, check them out if you're healthy and have money to spare. In general, here's how they work:

You qualify for an MSA if you or your spouse is self-employed; or if you or your spouse works for a company with 50 or fewer employees and you're not covered by group insurance. You can set up the plan yourself or your company can provide it.

There are two parts to the MSA -- health insurance and a tax-free savings account. The insurance carries a high deductible, which will be indexed to inflation. This year, it's $1,500 to $2,250 for individual plans and $3,000 to $4,500 for families. (The lTC deductible is the amount you pay in medical bills before your policy kicks in.)

Insurers may also require you to pay a percentage of each medical bill. But there's a cap on your out-of-pocket costs for illnesses that the policy covers. For individual plans, you can't be asked to pay more than $3,000 a year; for family plans, no more than $5,500.

The savings part of the MSA is held by a custodian -- the insurer, a bank, a mutual fund. Every year, you can deposit, tax free, up to 65 percent of the deductible for individual plans, or 75 percent for family plans.

Alternatively, your employer can deposit money on your behalf -- in which case, it's free of Social Security tax. If your employer deposits less than the maximum, however, you can't top it up.

Whenever you have a medical expense, you can write an MSA check to cover it. Some MSAs let you pay by debit card. Any money not spent within the year carries forward to future years. Earnings also accumulate tax free.

You can use your tax-free MSA for expenses not covered by your insurance, such as eyeglasses and cosmetic surgery. But the money you spend on uninsured expenses doesn't count toward your deductible.

Two other kinds of expenditure also don't count toward your deductible: Any portion of a doctor's bill the insurer deems unreasonably high; and part of the bill from a non-network doctor, if you're in a managed-care MSA.

Ask how your plan keeps track of the bills that count toward your deductible. You may have to keep the records yourself.

You're allowed to use MSA money for nonmedical expenses. When that happens, however, you're supposed to report the expenditure as taxable income. You also owe a 15 percent penalty if you're under 65.

Talk about a loophole. Some people will spend their tax-free money on nonmedical expenses, and who will know? There's no 1099 reporting. You're subject to IRS auditing, but audits are rare.

MSAs are dandy for healthy people with plenty of money. You might even pay small medical bills out of pocket, to let more of your savings accumulate, tax deferred.

The plan is risky, however, for people on tight budgets. You get high-deductible insurance, to protect you from catastrophic medical bills. But the savings part is another matter. What if you need the MSA money for a nonmedical emergency? There's a stiff penalty on withdrawals.

MSAs will be a plus, if they encourage employers to offer health insurance to employees. A generous company might even cover your savings deposit.

A stingy company, however, might drop its current, low-deductible plan, substitute a high-deductible MSA and let you shoulder the extra costs.

Here's a risk to consider. Say you have an MSA and take a job with a larger company, where MSAs aren't allowed. You'd no longer be able to use your MSA tax free. Nevertheless, the money could build until retirement, tax deferred.

MSAs can also work for people with high medical bills, says MSA consultant Stephen Barchet of Issaquah, Wash. But that depends on the plan's design.

Any would-be buyer needs to look at all the options. Read the competing policies, not just the sales material, to see what's covered. Compare the MSA's "worst-case" out-of-pocket expenses and premiums with what's offered in other plans. You might do better with more traditional insurance, especially a group plan sold through an association.

Small employers interested in these plans can call the Employers Council on Flexible Compensation in Washington, D.C. (202-659-4300), to find out which insurers offer it in their states.

Pub Date: 2/03/97

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