Topics covered in tax bulletin articles:

1 Deductions

This may be the least-known tax benefit generally available to the self-employed and to owners and employees of small businesses. You should consider it under the following circumstances: 

1. You are an employee or owner/employer of small firm and do not otherwise have health or medical benefit coverage. Using an MSA could be your key to affordable health benefits.                                                                                      2. You are not a Kaiser plan participant or if you are, you would rather not be.  A high-deductible health/medical plan is in general not so much cheaper than Kaiser participation that it makes sense to switch if you like Kaiser. This is not necessarily true with other H.M.O.'s. 

3. You consider yourself and your dependent(s) in relatively good health.  I would not recommend this for a family with children unless there were no other affordable alternatives.   

     If you have health problems, you will probably want to continue as high a level of employer coverage as you can get as long as it is available.  If it ceases to be available, then you should consider an M.S.A. 

4. You have several thousand dollars of eligible medical expenses such as acupuncture or other alternative medicine that is not covered by the medical insurance available to you.  These costs could be paid out of your M.S.A.  

     Having an M.S.A. actually means having two things from typically two different providers: 

     1. A high-deductible health or medical benefit plan, which can be obtained from a health or medical benefits insurer such as Blue Cross or Blue Shield. 

     2. A medical savings account which, like an individual retirement account (I.R.A.), is established at a banking institution, e.g., Glendale Federal Savings or Wells Fargo Bank. 

     Eligible high-deductible plans typically have individual deductibles of $2,250 and family deductibles of $4,500.  The out-of-pocket maximum is $3,000 for an individual and $5,500 for a family. Note that although the annual deductibles are very high, the maximum out-of-pocket is not that much higher. There is no 20% co-payment above a $5,000 or $10,000 extending up to $50,000 or $100,000. 

     If you are going shopping for a high-deductible policy that qualifies for an M.S.A, tell your insurance agent or broker that is what you want and ask him or her what he or she has that qualifies. 

     Clearly what you are insuring against is catastrophic illness.

But what do you do about the small stuff?  The small stuff you pay out of your M.S.A. 

     You can make an annual contribution to your M.S.A. of up to 65% of the annual deductible under your high-deductible plan for an individual or 75% for a family plan ($ 1,463 or $3,375, respectively). This contribution cannot exceed the self-employment income of the participant or his or her spouse (whichever is greater), or the compensation of the participant from the employer sponsoring the plan. This contribution can be made by one payment before the April 15 following the year of deduction, or by monthly payments, or by anything in between.  Wells Fargo Bank provides for withdrawals from your checking account. 

     The tax benefits of M.S.A.'s are :

a. Contributions are excludible from income if you are an employee, or, if you are self-employed, a deduction in computing Adjusted Gross Income (like an I.R.A.).

b. Earnings on an M.S.A. are not currently taxable (like a regular I.R.A.).

c. Distributions from an M.S.A. for medical expenses are not taxable. Distributions from an M.S.A. that are not for medical expenses are taxable, just like a regular I.R.A., except that the penalty for early-withdrawal stays in place until you reach age 65.                                                                          Thus the general scheme is that you get your high-deductible plan, and establish your M.S.A. and make your maximum annual contributions.  After a couple of years, you should have more than the maximum out-of-pocket in the account to cover your deductible in case of a catastrophic illness. If you do not have such an illness, then when you reach age 65, you can treat your  M.S.A. as a type of retirement account.                          

     Although you cannot have another "regular" health or medical benefit plan in addition to your high-deductible plan and have an M.S.A., you can have coverage for accidents, disability, dental care, vision care or long-term care. 

     Where you only have your high-deductible plan for part of the year, then your maximum contribution to your M.S.A. is adjusted downward, and you are only allowed 1/12th the maximum deduction times the number of months that you had a high deductible plan. 

     I do recommend that if you fit the profile presented at the start of this article, that you take the time to look into an M.S.A. It could be well worth your time.