The Fall 2000 Connections discussed medical savings accounts (MSAs), which were scheduled to phase out December 31st .

But now, last minute legislation has extended this federal program for another two years. In addition, the program has been renamed Archer MSA’s, to recognize the vital role that Ways and Means Committee Chairman, Bill Archer, played in supporting the MSA concept.

Medical savings account plans allow a small business person to pay for specified medical expenses with income tax free dollars. MSA plans are composed of a specially designed, high deductible major medical insurance policy, and the medical savings account itself.

Present law provides self-employed persons a 60% partial write-off of their health insurance premiums for years 2000 and 2001, increasing to 70% in 2002, and 100% in 2003. The writeoff for the savings account element of an MSA plan is 100%. Example: premium for the high deductible major medical insurance policy, $100.00... write off $60.00, in 2001; contribution to savings account element, $100.00...write off $100.00, in 2003. Self-employed persons take these write-offs on lines 25 and 28 of IRS Form 1040.

There are limits on the amounts that can be contributed to MSAs, and annual deductibles on their major medical insurance elements are indexed to medical inflation. To qualify for the major medical health insurance policy, applicants must be in excellent health because these plans are fully underwritten. This is a federal program, and doesn’t fall under Florida’s guaranteed issue mandate for small business. Without the health insurance, the savings account can’t be established. As the ballad from the 1940’s says, “All or nothing at all...”

Once established, MSAs may be tapped to cover a broad range of medical bills, including dental and vision expenses. When used to pay for appropriate medical expenses, amounts taken from the savings account are income tax free (tax free going in, tax free coming out). After age 65, amounts accumulated in MSAs may be used for any purpose, subject to ordinary income tax just like an IRA. Meanwhile, the major medical insurance policy hedges out potentially large medical expenses in excess of its annual deductible.

For many business owners the MSA concept makes sense: set up a tax favored fund from which to pay everyday medical bills and maintain a high deductible health insurance policy to avoid a catastrophic loss. The savings account dollars will accumulate tax free interest if used to pay qualified medical bills, or tax deferred interest if used to supplement retirement funds after age 65. And business owners recapture premium dollars that otherwise would have gone down a one way street to the Impersonal Noservice Health Insurance Company of the Northern Hemisphere.

For more information, see the insurance section of the Small Business Resource Network directory for names of qualified insurance professionals.

Ken Smith, CLU, FLMI, owns Insurance Planning Services, and
specializes in life, medical and liability insurance, and pension plans.
He can be reached at (904) 285-5255 or emailed at ksmith6288@aol.com.