The Truth About Medical Savings Accounts
If you're overwhelmed by the cost of providing health insurance for your employees, check out this underused alternative
Jim Molidor's problem was far from unique. As the co-owner of a successful young art gallery, Chicago-based Vedanta Gallery, Molidor simply could not afford to both pursue his company's growth opportunities and provide costly health-insurance coverage for his six employees.
"When I started investigating our benefits options, I had just two employees and was relying for my own insurance on my wife's coverage," he recalls. "But I wasn't satisfied to leave it at that, in part because my employees didn't have any coverage at all." Nor was he willing to follow the most obvious course, which was signing up for a pricey small-company plan, since he aimed to invest spare cash in the purchase of additional galleries and real estate that could add revenues to his business, which has not yet reached $1 million in sales.
Thanks to a new health-care initiative launched in late 1996 as part of the Health Insurance Portability and Accountability Act, Molidor was able to provide his employees, and himself, with coverage known as medical savings accounts (MSAs). If you haven't heard of them, you're not alone. Despite the fact that they haven't been well publicized--and that their complexity can be off-putting at first--MSAs may offer the best combination of cost-control advantages and benefits enhancements that very small companies have seen in years. "It seems to me like the government has finally put together something that makes sense," Molidor says.
First, the bad news. MSAs are more complicated than old-style health-insurance plans or HMOs. "These plans were slow to take off, and I really do believe it's because people need to be educated about them in order to understand just how good they can be," says Kelly Ann Boyce, president of Boyce Financial Solutions, in Purchase, N.Y.
According to Boyce, there are two types of small businesses that MSAs can be right for: self-employed individuals (who often simply cannot find coverage at any price) and those with up to 50 employees (companies that have coverage options, but often only expensive ones).
The main point to keep in mind when thinking about MSAs is that they consist of two different plans that work together.
The first component is a health-insurance policy with a high deductible. In fact, it's probably a higher deductible than you ideally would have asked your employees to cover. "The business owner makes the choice about how high a family deductible to choose, but typically it's between $3,000 and $4,500," explains Allen Wishner, chief executive officer of Flexible Benefit Service Corp., an employee-benefits company based in Des Plaines, Ill. He adds, "We usually advise our clients to sign up for the highest possible deductible, because that keeps insurance costs low."
Aside from the low cost and the high deductible, this part of the plan is no different from any other insurance policy: companies usually buy it with the assistance of an insurance broker, employees file their medical-insurance claims the way they would with any other benefits plan, and each year the employer makes a decision about whether to renew the coverage or shop around for a better deal.
What's different relates to the second part of these plans, which is the piece that's known as the medical savings account. Uncle Sam permits participating families to save and invest up to 75% of their deductible through an investment account that's not very different from an IRA plan. If your company's deductible is $4,500 per family, each family can invest up to $3,375 in their MSA. (For single employees, the contribution limit is 65% of the deductible.) Your employees can use that $3,000-plus to help pay for most of their family's health-care deductible, or they can leave the money in the investment account and let it accumulate interest income on a tax-free basis until they're ready to retire.
That's one reason Jim Molidor loves these plans. "We didn't have the cash to pay for a lower-deductible plan," he admits. But, he adds, "I'm also the kind of guy who hates to waste money. I absolutely hated the thought of paying for more health-care coverage than my employees really needed, and since they, and I, are pretty young, we didn't need much. This way, anybody who doesn't need to spend the money in his or her MSA investment account gets to save it for the future."
Indeed, flexibility is the name of this game. For one thing, the money that goes into each employee's MSA investment can come either from the company (if it's well-heeled enough to support the contributions) or from the employee. Whoever funds the plan qualifies for a tax deduction based upon the full amount contributed each year. (There's only one caveat: Funding is an either-or decision. Although the contributor can change on a yearly basis, the cash paid during any one year into an MSA must come from either the employer or the employee. It cannot come from both.)