For simplicity, the following questions/answers assume an Ohio employer, with 2-50 employees, and a 100% employer paid tax-favored plan. Your business' structure may be different. Use the email link to contact us for a revision applicable to your business.

What makes an MSA tax-favored?
MSA's have been in existence for over 4 years. On August 22, 1996, the president signed into law the Health Insurance Portability & Accountibility Act of 1996 effective 1/1/97.

The good news is that:

• Yearly deposits into a MSA are 100% Tax-Deductible. Up to $3375 per year can be sheltered from taxes.
• Deposits may also be deductible from the employee's or self-employed person's state taxes.
• Qualified medical expenses can be paid from an MSA Tax-Free.
• Compounded interest accumulation is tax-deferred. If used for medical expenses it will be tax-free.

The bad news is that congress has capped the number of MSA policies at 750,000. One insurance company had 150,000 non-tax favored plans in place even before the law went into effect. Many of these will be converted. Given that impetus, it appears that the door of opportunity is closing fast. Top

Are other employers interested in an MSA plan for their company?

Since, the benefits are clearly an advantage and the cost is less, yes. However, employers and the self-employed are moving quickly to reserve their place before the 750,000 cap is reached. We hope that this cap will be removed. Top

Will a tax-favored MSA plan increase company costs?

In our three years of experience, we reduced the premium cost to all employers. The remaining savings was used to fund the employee's MSA account. In a some instances, there was still an overall savings.

However, if an employer has a 100% employer paid plan currently, is very reasonable to expect the cost to the employer to either remain the same or decrease.

Furthermore, those employees viewed an MSA as increased pay or an additional fringe benefit. Top

Will the MSA contributions increase employment taxes?

NO! Top

How do MSA funds accumulate?

We will determine together a monthly MSA contribution for families and for singles. The employer will send the MSA contribution with the monthly premium to the insurance company. The insurance company will deposit the MSA dollars into an account for each employee. Top

How are MSA dollars disbursed?

We propose that the insurance company provide each employee with a checkbook and monthly account statement. Since, the employee controls the disbursement of MSA dollars, they are more conscious of the cost of healthcare. It gives each employee a financial incentive to control spending, since they can see that it is their money that they are spending.

(One insurance company gives each employee a checkbook and a monthly account statement. Another insurance company disburses MSA dollars on a reimbursement basis direct to employee/doctor.) Top

What if a large claim occurs before a full year of MSA contributions have accumulated?

For example, three months into the plan, the MSA plan simply hasn't had the time to reach its full potential. Whereas, as small claim would cause no harm, a large claim early in the policy year could leave the employee in a financially difficult situation. This possibility has already been foreseen. Therefore, an arrangement is already in place wherein the employer can authorize the company to advance the remaining MSA dollars to the employee's account. Top

What is a tax-favored MSA plan?
Health Insurance. Part of the premium is placed in a fund (Medical Savings Account) that earns tax-deferred interest. Each employee has a separate MSA account.
If the employee makes a claim - the fund provides first dollar coverage - TAX FREE!
If the employee has a large claim - the fund still provides first dollar coverage. Once the fund is exhausted, the employee must meet the deductible requirements, then the insurance policy pays 100%. However, as the fund accumulates year after year, the employee may not have any out of pocket expense in future years.

If the employee make few or no claims: the fund contributions accumulate, including compounded tax-deferred interest, very similar to an IRA. Top

What questions/answers would you like to see here? E-Mail the author.
Author: Bob Peace Co-Author Allan Peace Page updated 1/31/97, 3/18/97, 11/22/97

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