Make MSAs Permanent? Its On The 107th Congress’ Agenda
They say hindsight is 20-20 vision. But the savvy financial advisors who first promoted individual retirement accounts in the mid-1970s didnt need it. They sold IRAs, despite the rest of the worlds initial lack of understanding of the new retirement accounts.
Today, many experts equate that IRA story with another smart money management tool. Its a little-known tax-advantaged health insurance program called a Medical Savings Account. With standard health insurance premiums on the rise and congressional interest in improving MSAs, agents and brokers–along with business owners and consumers–are taking a closer look at the value of MSAs.
The original intent of MSAs was to keep health care costs down, improve access to medical care, and provide incentive for individuals and small groups to purchase health insurance.
Congress established a temporary pilot program in the mid-1990s and access to MSAs was restricted to employees of small companies with 50 or fewer workers and the self-employed.
Near the pilots expiration date and after its modest success, Congress renewed the program last December.
Unfortunately, although the heart of todays MSA has remained unchanged, limitations within the law have complicated it. The result? Many agents and brokers find MSAs difficult to explain and, coupled with the programs temporary nature, they have little incentive to do so.
This leaves consumers unaware of the programs existence and benefits.
The good news is that industry experts agree potential customers would most certainly be interested in purchasing more flexible and better-structured health insurance plans like MSAs. Discussions to do just that–and to make MSAs permanent–are set to take place early next year in the 107th Congress. (See chart on some of the proposed changes.)
Even as MSAs exist today, however, the products provide a cost-effective health care financing option, complete with tax advantages and long term savings rewards for participants.
How so? An MSA health plan consists of a savings account coupled with a high-deductible insurance policy. The insured person pays for routine, covered medical expenses through the account; the insurance policy covers more substantial costs.
The cost of the policy is significantly less than the cost of a traditional low-deductible policy, but it provides comparable protection from catastrophic illness, long hospital stays or an unusually unhealthy year in general. The money saved from buying this less expensive coverage is used to make contributions to the savings account. Any dollars left unspent at years end, including interest or investment earnings, carry over to the next years expenses.
It is this combination of lower premiums, tax advantages, and accumulated savings in the account that makes MSA plans more affordable than traditional health insurance.
As for benefits to consumers, they are substantial. For example:
Pre-tax contributions to an MSA reduce annual taxable income.
Health plan premiums are substantially lower than premiums for traditional $500 deductible/$20 co-pay plans.
Money in the MSA not used to pay medical expenses accumulates tax-deferred until retirement.
Most plans also offer investment options providing significant capital appreciation potential for unused funds.
At retirement, the individual can continue to use MSA funds tax-free for medical expenses, or withdraw the funds and pay ordinary income tax.
MSA owners choose the providers and services they want. Many services not covered by other insurance (i.e., eyeglasses, contact lenses and orthodontic treatment) can be paid with the MSA.
Generally, MSAs provide easy access to funds through debit cards and check-writing privileges, or through written or phone-requested disbursements.
MSAs belong to the individual (even those funded by an employer), and thus, the deposited funds are portable.
Today, 30-plus years after people began envisioning how to give consumers more health care financing options, the White House administration has made a commitment to turning this vision into reality–by making MSAs permanent, more attractive, and available to a greater number of people.
Even without a crystal ball, it is easy to see why MSAs could be as common as IRAs in the not-so-distant future.
is vice president and product manager for individual medical products at Fortis Health, Milwaukee, Wis. He can be reached via e-mail at email@example.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.