MEDICAL SAVINGS ACCOUNTS : Overview & Eligibility

The concept of medical savings accounts (MSAs) is a method of reforming the nation's health care system. The use of MSAs has increased as a result of HIPAA. The act provides favorable tax treatment for MSAs established under a pilot project that began on January 1, 1997, as long as prescribed rules are satisfied. The project, which runs through the end of 2000, allows the establishment of up to approximately 750,000 MSAs. However, as of late 1999, fewer than 100,000 had been purchased. At the end of the four-year trial period, no more tax-favored MSAs can be established unless Congress expands the program, but existing MSAs can generally continue in force after that time under the current rules. During this four-year period, the act calls for two studies to assist Congress in making its decision regarding MSAs. First, the Treasury Department will assess MSA participation and its effect on tax revenue. Second, the General Accounting Office will assess the effect of MSAs on the small-group market by looking at such factors as the effect of MSAs on health care costs and the use of preventive care.

The following discussion is limited to MSAs that receive favorable tax treatment. It should be noted that many MSAs, which existed on a non—tax-favored basis prior to 1997, have been revised to meet the act's requirements and receive favorable tax status.

General Nature
An MSA is a personal savings account from which unreimbursed medical expenses, including deductibles and copayments, can be paid. Coverage can be limited to an individual or include dependents. The MSA must be in the form of a tax-exempt trust or custodial account established in conjunction with a high-deductible health (that is, medical expense) plan. An MSA is established with a qualified trustee or custodian in much the same way that an IRA is established. Any insurance company or bank (as well as certain other financial institutions) can be a trustee or custodian, as can any other person or entity already approved by the IRS as a trustee or custodian for IRAs. While there are some similarities between MSAs and IRAs, there are also differences. As a result, an IRA cannot be used as an MSA, and an IRA and MSA cannot be combined into a single account.

Even though employers can sponsor MSAs, these accounts are established for the benefit of individuals and are portable. If an employee changes employers or leaves the workforce, the MSA remains with the individual.

Eligibility for an MSA
Two types of individuals are eligible to establish MSAs:

1. An employee (or spouse) of a small employer that maintains an individual or family high-deductible health plan covering that individual. These persons will establish their MSAs under an employer-sponsored plan.

2. A self-employed person (or spouse) maintaining an individual or family high-deductible health plan covering that individual. These persons will need to seek out a custodian or trustee for their MSAs.

A small employer is defined as an employer who has an average of 50 or fewer employees (including employees of controlled-group members and predecessor employers) on business days during either of the two preceding calendar years. In the case of a new employer, the number of employees is based on an estimate of the reasonably expected employment for the current year. After the initial qualification as a small employer is satisfied, an employer can continue to make contributions to employees' MSAs, and employees can continue to establish MSAs until the first year following the year in which the employer has more than 200 employees. At that time, participating employees may take over contributions to their accounts, but no employer contributions can be made and nonparticipating employees may not start new accounts.

A high-deductible health plan, for purposes of MSA participation, is a plan that has the following deductibles and annual out-of-pocket limitations (These amounts are for 2000 and subject to inflation adjustments.):

In the case of individual coverage, the deductible must be at least $1,550 and cannot exceed $2,350. The maximum annual out-of-pocket expenses cannot exceed $3,100.

In the case of family coverage, the deductible must be at least $3,100 and cannot exceed $4,650. The maximum annual out-of-pocket expenses cannot exceed $5,700.

A high-deductible plan can be written by an insurance company or a managed care organization such as an HMO. Currently, the high-deductible plans are being written primarily by insurance companies in the form of traditional major medical products but possibly with the requirement that covered persons use preferred-provider networks. No HMOs have yet established high-deductible plans.

A high-deductible plan can be part of a cafeteria plan, but the MSA must be established outside the cafeteria plan.

With some exceptions, a person who is covered under a high-deductible health plan is denied eligibility for an MSA if he or she is covered under another health plan that does not meet the definition of a high-deductible plan but that provides any benefits that are covered under the high-deductible health plan. The exceptions include coverage for accident, disability, dental care, vision care, and long-term care as well as liability insurance, insurance for a specific disease or illness, and insurance paying a fixed amount per period of hospitalization.