“Medical Savings Account or Super IRA?”		«BACK
	by Scott Husaby
	from Krass Monroe, P.A.

MSA’s are only available to self-employed individuals and employees of firms with no more than 50 employees. For a self-employed individual to be eligible to contribute to an MSA, he or she must be covered under a high deductible health plan (and generally no other health plan). Similarly, for an employee of an eligible employer to be eligible to make MSA contributions (or have employer contributions made on his or her behalf), the employee must be covered under an employer-sponsored "high deductible" health plan (and generally must not be covered under any other health plan). For these purposes, a high deductible health plan is one, which has a deductible of from $1,500 to $2,250 for individual coverage, and from $3,000 to $4,500 for family coverage.

Personal contributions to an MSA are deductible and employer contributions to an MSA on behalf of an employee are excludible from the employee’s income (and wages for social security purposes). Accumulated earnings in the MSA are not taxed. Subject to restrictions, distributions for medical expenses are neither taxed nor penalized. Withdrawals prior to age 65 for any reason other than to pay medial expenses are includible in income and are subject to an additional 15% penalty tax. Distributions after age 65, death, or disability for reasons other than to pay medical expenses are not penalized, but are subject to income tax. Annual deductible MSA contributions are limited to 65% of the policy deductible for individuals, and 75% of the policy deductible for family coverage. For example, a self-employed individual who has a $4,000 deductible health insurance policy for his family could deduct annual MSA payments of up to $3,000. If withdrawals are made from this account in the current or any subsequent year, such withdrawals are not includible in income and are not subject to any penalty tax (including the earnings on the original MSA contributions).

While MSA’s can be an effective tool for deducting otherwise non-deductible health expenses, there is an interesting twist you can put on your MSA that will further increase the after tax return on your MSA contribution. The theory of the MSA is that you make annual deductible contributions to your account which appreciate until they are needed to pay medical expenses. However, there are no provisions in the law that require medical expenses of an MSA participant to be paid out of the MSA. In other words, a savvy investor would make the maximum annual deductible MSA contributions, but when the medical expenses arise they would be paid with non-MSA funds. This practice will allow the MSA balance to grow much faster as it continues to compound tax-free. The resulting nest egg can be used for a variety of sources later in life, ranging from paying medical expenses at that time to funding grandchildren’s college expense.

As indicated above, the MSA’s are part of a pilot program. The Internal Revenue Service intends to monitor participation in MSA’s and will limit their use to no more than 750,000 taxpayers on an annual basis. If this level is exceeded for a year, in general, for succeeding years during the four-year pilot period of 1997-2000, only those individuals who had started participating in the program would be allowed to continue. Under the law as currently drafted, after December 31, 2000, no new contributions may be made to MSA’s except by or on behalf of individuals who previously had MSA contributions and employees who are employed by a participating employer. Self-employed individuals who made contributions to an MSA during the period 1997 through 2000 also may continue to make contributions after 2000.

If the MSA sounds like a new "super IRA" that allows deductible annual contributions in excess of $3,000 to certain participating individuals (regardless of whether the individual also claims deductible regular IRA contributions), you are correct. If you want to reserve your place in this pilot program, you should act soon. Once people get a better understanding of how to use the MSA as a supplemental IRA, it is likely that the program’s quota will fill quickly.