From Health Plan to Nest Egg


Calling all self-employed and small-business workers: Why haven’t you applied yet for a medical savings account?

Perhaps it’s too much effort to shop for health insurance when you already have health insurance, or perhaps it’s too hard to find these products. Whatever the reason, get cracking.

These plans can easily save you thousands of dollars every year, and if you are a little bit crafty about administering your plan, they can give you an additional tax-free pot of money for your retirement.

Despite those great deals, we are halfway through the first year of the federal government’s medical savings account pilot program and the response has been almost negligible.


The Internal Revenue Service, required to stop authorizing new accounts if 375,000 were set up by April 30, 1997, reports that only 7,383 such accounts were set up. (An additional 2,337 were set up by previously uninsured people or account-holding spouses and thus don’t count against the IRS targets. Big deal.)

That’s not much response for a program that allows anyone who is self-employed or who works for a company with fewer than 50 employees to set up an account that allows tax deductions for money they spend on medical care. Not only that, but these accounts also allow you to amass that money from one year to the next, invest it as you will, and never pay taxes on the accumulated earnings as long as they are spent on health care. And that’s a very broad definition of health care, including eyeglasses, dental work, orthodontia as well as more mainstream health services.

Why haven’t people been buying into these programs?

B. Ray Helton, founder of Medical Savings Advantage, a Peachtree City, Ga., consortium that offers medical savings accounts, believes that most providers have been slow to develop these plans because they can be expensive to set up and administer, and their status as a pilot plan has scared off some insurance and financial companies.

Now that their benefits are apparent and more policies are in place, however, he expects a boom.

The benefits are considerable, said Robin Potter, head of MSAver Resources, an account provider in Overland Park, Kan.

If your employment status qualifies you for one of these accounts, you must have a compatible high-deductible health insurance policy to go with it. Then you can shelter as much as $1,462.50 a year for individuals, or $3,375 for families, in a tax-free medical spending savings account. If you use money in this account for your health care, it’s permanently tax-free. If you don’t use it, it accumulates until you retire--and beyond.

After that, you can continue to use it for health care or take the money out for other retirement expenses and pay income tax on it. Even if that happens, you’ll receive the benefit of many years of tax deferral.


It’s more likely, noted Potter, that you’ll have enough medical expenses in retirement to use your MSA money tax-free forever.

Here’s the newest wrinkle. Smart folks have figured out that they can set up MSAs and not use them for medical expenses, but as tax shelters instead. It may not be what Congress intended, but there’s no law that says you can’t leave the money in your MSA while you pay your doctor bills out of pocket.

Leave $3,375 accumulating every year in a tax-free account and after 25 years you’ll have more than $200,000, even at modest returns. That’s better than the newfangled Roth IRA that will come on market next year. Think long term, and a solid MSA can replace a nursing home insurance policy.

How much do MSAs cost? So far, competitive programs seem to be charging less than $30 for a one-time setup fee and $5 a month for management expenses until the accounts accumulate sums of money large enough to invest. That seems worth it.


The pilot program ends in 2000, unless Congress votes to continue it, but anyone who has an MSA by then can keep feeding it and using it.

The moral of the story: Set one up soon, even if you don’t decide how to use it until later.

How can you shop for an MSA? You could try your local bank, but most banks are behind the curve on these accounts. Ask your insurance agent or try one of the two providers cited here. Contact Medical Savings Advantage at (888) 672-9800 or MSAver at (888) 367-6727.



Freelance writer Linda Stern covers personal finance issues for Reuters.