Medical Savings Accounts

Advantages of MSA’s

In comparing MSAs with traditional health insurance plans, MSAs offer the following advantages:

       a.         The use of a high deductible health plan may offer premium costs that are significantly less (as much as 50% lower) than premiums for traditional low deductible policies.

       b.         The possibility of economical coverage without managed care restrictions.

       c.          Distinct tax advantages (for contributions, withdrawals, and tax-free buildup of unexpended yearly contributions).

       d.         A chance to build up additional funds for use after age 65 (dollars that previously would have gone to an insurance company).

Disadvantages of MSA’s

One should consider the following disadvantages of an MSA:

       a.         Depending on local factors, including the strength of local HMOs, MSA policy premiums may not be the lowest cost alternative.

       b.         Policy exclusions, coverage, and treatment provisions may not be as advantageous as with more traditional policies.

       c.          Unexpected results may occur because what meets the qualified medical expense requirement under IRC Sec. 220 is broader than the coverage rules contained in most MSA policies. Thus, while under the tax rules, money can be withdrawn tax free from the MSA account to pay for eyeglasses and dental expenses, most MSA policies do not include these items as covered expenses. As a result, a noncovered withdrawal will still be tax free, but the insured’s payment of these expenses will not count toward satisfying the MSA policy deductible.

Observation:  This may lead to an unpleasant surprise if large medical expenses are incurred later in the year: the insured may think the policy deductible has been satisfied, only to find out that this is not the case, and that the amount left in the MSA account is not sufficient to reimburse these out-of-pocket expenses.

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       Bob Parrish CPA Engagement Manager