Q. Are Medical Savings Accounts new? A. Yes. Medical Savings Accounts (MSAs) were authorized by House of
Representatives Bill 3103 (H.R. 3103) -- the Health Insurance Portability and Accountability Act of 1996. This legislation is commonly known as the Kassebaum-Kennedy health insurance reform bill. That bill authorized a
demonstration project on Medical Savings Accounts (MSAs) involving up to 750,000 MSA accounts. The MSAs would be available to self-employed individuals and small employers -- those with 2 to 50 employees.
Q. What is a Medical Savings Account?
A.
A Medical Savings Account, or MSA, is a savings account which can be used to pay medical expenses not covered by insurance. Contributions to the plan are deductible from an accountholders' federal income tax and, where permitted, from state income tax. Self-employed individuals can accumulate funds in the account from year to year. Self-employed individuals with individual MSAs can make contributions themselves. Employers with small group MSAs may make contributions on behalf of employees, or employees may make the entire contribution.
Q. Do I still need medical insurance?
A.
Yes. Under the legislation passed by Congress, the MSA must be coupled with a high-deductible medical insurance plan, sometimes known as a "catastrophic" plan. Under such plans, individuals pay small medical bills out of their own pocket up to the deductible but have medical coverage in case of serious illness or accident.
Q. For the purpose of MSAs, what is a high deductible plan?
A.
$1,500 to $2,250 deductible plan with a total out of pocket maximum of $3,000 per individual and aggregate deductibles of between $3,000 and $4,500 with a maximum of $5,500 out-of-pocket for families. This is true for both self-employed individuals and small groups.
Q. What is the maximum MSA deposit amount?
A.
A maximum is a percentage of the annual deductible you pay for the insurance plan, with a top amount of $1,462 for an individual or $3,375 for family coverage. If you have an individual policy covering only yourself, you can contribute up to 65% of the deductible per calendar year. So, for example, on a $1,500 deductible plan, you could contribute 65% of $1,500 or $975 per year. For a family covered by an individual plan, up to 75% of the family deductible per calendar year can be contributed. For example on a $1,500 deductible plan where the family deductible for the year is $3,000, 75% of $3,000 or $2,250 could be contributed to the MSA.
Q. What happens if I don't use all the money in the account in a year?
A.
The money can be carried over for medical expenses the following year, and you can continue contributing up to the maximum deposit each year.
Q. Can I withdraw funds from the MSA for non-medical expenses?
A.
Yes. However if you want to withdraw funds for another purpose prior to age 65 or becoming Medicare eligible, a 15% penalty will apply in addition to ordinary income tax. After you turn 65 or become eligible for Medicare, the funds can be withdrawn with no penalty, but ordinary income tax must be paid on the withdrawal.
Q. What happens to the MSA funds at retirement?
A.
MSA funds can be used to pay post-retirement healthcare expenses not covered by employers or by Medicare, or to purchase long-term care insurance.
Q. How much money will this save me on taxes? Is
an MSA preferable to just deducting medical expenses on my income tax?
A.
Many individuals can save on taxes using MSAs because of the IRS limits on deducting medical expenses. However, the exact answer to that question will depend on your income bracket, any state taxes in your area, whether your state allows the tax-free treatment of such funds, and whether you are a self-employed individual or work for a small employer. You may want to work with a tax or financial adviser to review your own tax situation before making a decision.
Q. If I buy a medical insurance plan with an MSA now, can I start depositing money immediately?
A. Yes.
Q. Can the MSA deposits be made as a lump sum at the beginning
of the year or do they have to be paid at regular intervals such as monthly?
A.
Both options are available. Check with the company you are buying from to see if they offer one or both. Some companies have set the plans up so that MSA deposits can be made at the same time the medical premium is paid.
Q. What is the cost to have an MSA? Are there administration fees, or do the accounts pay interest?
A.
This can vary from company to company. MSAs are available with no administration fee; some companies also offer accounts that pay interest if a certain minimum balance is in the account. This is something you should check when you are making a decision about an MSA.
Q. How will claims be paid, and how often?
A.
This will vary from company to company, and may vary by the size of the claim. Some companies will require a claim form; others may combine the processing with insurance claims processing, automatically paying eligible expenses not covered by insurance with MSA money. Check with your employer or, if you are an individual, with the companies you are thinking of buying from to see how claims are handled, and how often reimbursements are made.
Q.The Kassebaum-Kennedy Bill limits the total of MSAs to be issued over the next 4 years to 750,000 by all carriers nationally, is this true? If so, why is that?
A.
Yes, the federal government will announce the first count September 30, 1997. (This count will include all MSAs issued as of April 30, 1997. If at this time, there are over 375,000 MSAs issued, the Government will stop allowing MSAs to be sold.) Other cutoff times are also established in the bill. Congress debated over whether MSAs would have a positive or negative impact on overall healthcare costs, and compromised by setting up this demonstration project. There is pending legislation to remove the cap of plans. The federal government will also be offering this option to all federal employees.
Q. How do I go about buying an MSA if I'm interested and eligible?
A. Call us - 847-559-8100
