The MSA Page


Medical Savings Accounts

(Title III, Subtitle A)

Effective date: January 1, 1997 (tax years after 1996)

Scope

  • The MSA demonstration project caps the number of taxpayers to 750,000. Those eligible are employees covered under a small employer-sponsored high deductible plan and self-employed individuals. Any individual who was uninsured during the previous six months is eligible and will not be counted toward the cap.

Small employer

  • On average, no more than 50 employees during either the preceding or the second preceding year.

Employer/employee eligibility for contributions

  • The employee must be covered under an employer-sponsored high deductible health plan and must not be covered under any other health plan (other than a plan that provides certain permitted coverage).
  • Contributions can be made either by the individual or by the individual's employer. However, an individual is not eligible to make contributions to an MSA for any year in which employer contributions are made.

Self-employed eligible for contributions

  • Must be covered under a high deductible health plan and no other health plan (other than a plan that provides certain permitted coverage).
Other permitted coverages

  • In addition to the high deductible plan, permitted health insurance coverages are:
  1. Medicare supplemental insurance;
  2. Insurance if substantially all of the coverage provided under such insurance relates to:
    • liabilities incurred under worker's compensation law;
    • tort liabilities;
    • liabilities relating to ownership or use of property (e.g., auto insurance); or
    • such other similar liabilities as the Secretary may prescribe by regulations;
  3. Insurance for a specified disease or illness; and
  4. Insurance that provides a fixed payment for hospitalization.

Tax treatment of and limits on contributions

  • Individual contributions: Are deductible (whether or not individuals itemize their deductions) in determining adjusted gross income on individual tax returns.
  • Employer contributions: Are excludable except made through a cafeteria plan.
  • Self-employed individual contributions: The deduction cannot exceed the individual's earned income from the trade or business with respect to which the high deductible plan is established.
  • Maximum annual MSA contribution:
    • Individual coverage: 65 percent of the deductible under the high deductible plan.
    • Family coverage: 75 percent of the deductible under the high deductible plan.
    • The annual contribution limit is the sum of the limits determined separately for each month, based on the individual's status and health plan coverage as of the first day of the month.
    • Contributions for a year can be made until the due date for the individual's tax return for the year (determined without regard to extensions).
    • Reporting for the MSA participation cap: The employer is required to report employer MSA contributions, and the individual is required to report such employer MSA contributions on the individual's tax return.

Comparability rule for employer contributions

  • If an employer provides high deductible health plan coverage coupled with an MSA to employees and makes employer contributions to the MSAs, the employer must make available a comparable contribution (either the same amount or the same percentage of the deductible) on behalf of all employees with comparable coverage during the same period.
  • The comparability rule is applied separately to part-time employees. No restrictions are placed on the ability of the employer to offer different plans to different groups of employees.
  • If employer contributions do not comply with the comparability rule during a period, then the employer is subject to an excise tax equal to 35 percent of the aggregate amount contributed by the employer to MSAs of the employer for that period.

Definition of high deductible plan

  • Individual coverage: Annual deductible of at least $1,500 and no more than $2,250 with the maximum out-of-pocket expenses no more than $3,000.
  • Family coverage: Annual deductible of at least $3,000 and no more than $4,500 with the maximum out-of-pocket expenses no more than $5,500.
  • For both individual and family coverage:
    • Beginning after 1998, the high deductible dollar amounts are indexed for inflation in $50 dollar increments based on the consumer price index.
    • State insurance commissioners would have oversight over high deductible plans issued in conjunction with MSAs and could impose additional consumer protections. The National Association of Insurance Commissioners ("NAIC") will develop model standards for high deductible plans that individual states could adopt.

Tax treatment of MSAs

  • MSA earnings are not included in taxable income.

Taxation of distributions

  • Medical expense withdrawals are excludable from income. However, this applies only if the individual for whom the expenses were incurred was eligible to make an MSA contribution at the same time the expenses were incurred.
  • Medical expenses are defined under §213d of Internal Revenue Code ("IRC"), except that medical expense withdrawals do not include payments for insurance other than long-term care insurance, premiums for health care continuation coverage, and premiums for health care coverage while an individual is receiving unemployment compensation under federal or state law.
  • Non-medical distributions are includible in income and are subject to an additional 15-percent tax unless made after age 65, death, or disability.

Estate tax treatment

  • Upon death, any balance remaining in the decedent's MSA is includible in his or her gross estate.
  • Surviving spouse is beneficiary: The MSA balance may be deducted in computing the decedent's taxable estate, pursuant to the estate tax marital deduction provided in §2056 of the IRC.
  • Beneficiary other than surviving spouse:
    • The MSA ceases to be an MSA as of the date of the decedent's death, and the beneficiary is required to include the fair market value of MSA assets in gross income for the taxable year that includes the date of death.
    • The amount includible in income is reduced by the amount in the MSA used, within one year of the death, to pay qualified medical expenses incurred prior to the death.
  • No named beneficiary: The MSA ceases to be an MSA as of the date of death, and the fair market value of the assets in the MSA as of such date are includible in the decedent's gross income for the year of the death.

Scope of demonstration project

  • Participation capped at 750,000 taxpayers with no limit on individuals who were uninsured for the previous six months. In a nutshell, the cap (threshold) is:
    • 375,000 by April 30, 1997
    • 525,000 by June 30, 1997
    • 600,000 by June 30, 1998
    • 750,000 by June 30, 1999
    • For the year 2000 and thereafter, only active MSA participants and employees of participating employers would be eligible for an MSA contribution.
  • If the threshold is exceeded for any given year, the IRS will issue guidance providing that only active MSA participants and employees of participating employers would be eligible for an MSA contribution for the next year. If the threshold is not exceeded, all qualifying participants would be permitted to have an MSA for the next tax year.
  • Or more specifically:
    • If more than 375,000 is reached by the end of April 1997, enrollment will cease on September 1, 1997 and the IRS will issue guidance providing that only active MSA participants and employees of participating employers would be eligible for an MSA contribution for 1998 and thereafter.
    • If the 375,000 threshold is not exceeded, then on or before August 1, 1997, each MSA trustee or custodian must report to the IRS the total number of MSAs established as of June 30, 1997 including those established for qualified uninsured individuals and provide the MSA owner's name and social security number.
    • If the 1997 threshold of 525,000 is exceeded on or before October 1, 1997, the IRS will issue guidance providing that only active MSA participants and employees of participating employers would be eligible for an MSA contribution for 1998 and thereafter. If the 1997 threshold is not exceeded, all qualifying participants would be permitted to have an MSA for the 1998 tax year.
    • In 1998 and succeeding years, on or before August 1st of the year, each MSA trustee or custodian must report to the IRS the total number of MSAs established as of June 30th for the current year, including those established for qualified uninsured individuals and provide the MSA owner's name and social security number.
    • For 1998 and succeeding years, the threshold is exceeded if either of the following limits are exceeded. The numerical limit is exceeded if:
      1. the number of MSA returns filed on or before April 15th of the year, plus the estimate of the number of MSA returns for such year that will be filed after such date exceeds the threshold; or
      2. 90-percent of the amount determined under "(1)", plus the product of 2.5 and the number of the MSAs established for the year before July 1st exceeds 750,000.
    • If the IRS determines from MSA returns filed on or before April 15, 1998 that the 1998 threshold of 600,000 is exceeded then they would publish guidelines on or before October 1, 1998 advising taxpayers that only taxpayers who are active MSA participants and employees of participating employers would be eligible for an MSA contribution for 1999 and thereafter.
    • If the IRS determines from MSA returns filed on or before April 15, 1999 that the threshold of 600,000 is exceeded then they would publish guidelines on or before October 1, 1999 advising taxpayers that only taxpayers who are active MSA participants and employees of participating employers would be eligible for an MSA contribution for the year 2000.
    • In the event that the threshold level had not been exceeded, all taxpayers in the qualifying eligible group would be permitted to establish MSAs during the 2000 tax year.

End of demonstration project

  • After December 31, 2000, no new contributions may be made to MSAs except by or on behalf of individuals who previously had MSA contributions and employees who are employed by a participating employer. An employer is a participating employer if:
    1. the employer made any MSA contributions for any year to an MSA on behalf of employees; or
    2. at least 20-percent of the employees covered under a high deductible plan made MSA contributions of at least $100 in the year 2000.
  • Self-employed individuals who made contributions to an MSA during the period 1997-2000 also may continue to make contributions after 2000.

Measuring the effects of MSAs

  • During 1997-2000, the Treasury Department will evaluate MSA participation and the reduction in federal revenues and report to the Congress.
  • The General Accounting Office is directed to contract with an organization to conduct a study regarding the effects of MSAs in the small group market on:
    • selection (including adverse selection);
    • health costs, including the impact on premiums of individuals with comprehensive coverage;
    • use of preventive care;
    • consumer choice;
    • the scope of coverage of high deductible plans purchased with an MSA; and
    • other relevant issues, to be submitted to the Congress by January 1, 1999.
  • The study should be:
    • broad in scope;
    • gather sufficient data to fully evaluate the relevant issues;
    • be adequately funded;
    • should measure the impact of MSAs on the broader health care market, including in-depth analysis of local markets with high penetration; and
    • should evaluate the impact of MSAs on individuals and families experience high health care costs, especially low- and middle-income families.

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