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Virginia Cooperative Extension -
 Knowledge for the CommonWealth

What About Medical Savings Accounts?

Farm Business Management Update, December 1997

By Barbara J. Newton and David Kohl of the Department of Agricultural and Applied Economics, Virginia Tech

Lately we have heard a lot about this new thing called a Medical Savings Account (MSA), but not much information is available. Who can get one? Where do you get one? Do you even want one?

MSAs (also called Medical IRAs and Medisave Accounts) are accounts used to pay medical expenses. A new tax law passed in 1996 provides IRA-like tax treatment for deposits on MSAs. This plan allows uninsured and self employed individuals and employers with 50 or fewer employees to make contributions to a savings account with pre-tax dollars.

Congress has set a limit on the number of qualified MSAs that can be purchased. Only 750,000 people can enroll for 1997 and 1998. Those people enrolling before the deadline remain tax-advantaged indefinitely. As of September, only about 17,000 new MSAs were opened. The problem is that many small businesses and individuals are unfamiliar with what MSAs are or how they work. Consequently, they have not been asking health insurers about them.

How Does It Work?

The higher the deductible, the lower the insurance premium. Individuals can purchase a policy with $1,500 to $2,250 deductible; families purchase a policy with $3,000 to $4,500 deductible. The difference in premium between a traditional policy and a higher deductible one is deposited into a tax-favored savings account. That money will grow or be used to pay for medical bills not paid due to the high deductible. Usually, a bank affiliated with the insurance company provides administrative services like the checks. Money remaining in an account at year's end may be saved for future health-care expenses, or may be withdrawn to spend it on other things. These withdrawals, however, are subject to income tax.

The intent of MSAs is to encourage you to reduce health care expenses by managing your money. Through MSAs the incentive exists to choose health care services rather than automatically accept many unnecessary services and allow insurance companies to worry about the expense.

What Are the Advantages?

What Are the Disadvantages?

Tips for Picking a Plan

Summing It Up

To start an MSA or not to start an MSA, that is the question. The best person to help you decide is your financial advisor. Whatever your decision, you should be an informed consumer of health care services.

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